Sunrise Market Commentary

Global bonds consolidate
Bonds lingered in a tight range on Monday. In the EMU area, bumper demand for Greek 5-year bonds narrowed intra- EMU spreads versus Germany. Asian equity weakness help bonds higher at the onset of European trading, but uncertainty about the direction of equities in the European session is high following good results of Apple and Siemens.
Euro fails to profit from succesful Greek bond auction
On Monday; EUR/USD basically held a sideways trading pattern. However, given the intrinsically euro supportive news from the successful Greek bond auction, yesterday's price action can only be seen as a sign of a poor euro momentum. Several euro cross rates are again close (EUR/USD, EUR/GBP) or even at (EUR/JPY) key support levels. In this context, there is not much room for any euro negative surprise (eg from the Ifo).

The Sunrise Headlines

Calmness returned to US Equity markets at the start of the new week. Dow/S&P rose by 0.23% / 0.46%. This morning however, Asian shares trade in negative territory on fears of further clampdowns in lending in China.
Strong demand for a sale of Greek bonds eased investors' immediate concern over Greece's ability to raise funds. The Public Debt Management Agency announced Greece issued €8.0 billion of the benchmark 5-year bond with final pricing set at mid-swap plus 350bps. Today, the Portuguese minority government presents its budget before parliament, while a vote will follow on March 12 at the latest.
Rating agency Standard & Poor's this morning cut Japan's sovereign rating outlook to negative citing diminishing policy flexibility. The yen weakened significantly.
The Bank of Japan decided this morning to keep interest rates unchanged at 0.1% and held off on new policy initiatives as widely expected. In its new forecasts, the BOJ predicted milder deflation in the new fiscal year starting in April.
Pressured by deficit hawks, US President Barack Obama will seek a three-year freeze on domestic spending in his 2011 budget that would save $250 billion by 2020, according to administration officials.
Chinese banks extended 1.45 trillion yuan in new local currency loans in the first 19 days of the year as they scrambled to front-load lending before policy tightening shuts the door on them. This morning, banking sources said that the Chinese central bank has told banks that they need to raise their reserve ratios.
S&P downgraded its rating in Dubai Holding Commercial Group to B from BB+, adding to investor's anxiety about the Gulf Arab state.
Today, the eco calendar contains the German IFO, UK Q4 GDP, US consumer confidence and the Richmond Fed index, while the US auctions a 2-year T-Note

Currencies: Euro Fails To Profit From Succesful Greek Bond Auction

EUR/USD

On Monday, EUR/USD developed a rather boring, sideways trading pattern. However, the euro hardly gaining any ground on the successful 5-year Greek bond auction only can be considered as an indication that sentiment toward the single currency is still fragile. The pair performed a temporary spike higher around noon in Europe on indications that the book building of the Greek auction was flying. However, the gains were very short-lived and EUR/USD had to return those gains as soon as US traders got involved. The weaker than expected US existing homes sales had no impact on EUR/USD trading. The pair closed the session at 1.4151, little changed from the 1.45139 close on Friday evening. Greece being able to print €8 billion of new bonds obviously was not enough to euro to recoup any of its recent (Greece-driven) losses. So, Monday was quite an uneventful session for EUR/USD trading, but after all a still contained quite a clear message. Euro weakness is here to stay.

Overnight, the euro indeed faces quite a forceful downleg. The reason for the move is not that obvious to find. Yesterday's disappointing performance obviously was no encouragement for euro bulls. The risk appetite/risk aversion theme has lost a part of its impact on EUR/USD trading. Nevertheless, recently, the euro obviously had become the preferred victim among the big three (USD,JPY and euro) in case of a popping up of market uncertainty. EUR/JPY dropping below the key 127 mark through the crosses is weighing on the overall euro picture, too.

Today, calendar contains the German IFO indicator, the US CS house prices, consumer confidence and the Richmond Fed manufacturing survey. Recently, the reaction of the currency market to the IFO most often was rather limited. However, in the current euro-skeptical environment, there might be somewhat of an asymmetric risk. A stronger figure probably won't be much of a help for the euro. A weak figure might be enough for the market to try some stop tripping. Any impact of the US consumer confidence release most probably will go via the reaction on the stock markets. To be honest, we doubt also that the euro will be able to take much advantage, even in case of stock-market supportive outcome. Markets will also take a look at the Portuguese budget proposal. To summarize. The euro had an opportunity to regain some ground yesterday. The single currency was not able to use this window of opportunity. With key support levels in several euro cross rates under test or within striking distance, this leaves the euro highly vulnerable to new attempts of stop-tripping

Global context. The swings in risk appetite were the key factor for trading on currency markets since March of 2009. The improvement in global risk appetite, together with exceptionally low US interest rates, both were a good reason for investors to hold back on safe haven dollar long positions, even more as the US dollar became a funding currency for setting up carry trades. However, the power of this trading paradigm faded at the end of last year. Amongst other evidence, the better than expected US payrolls report published early December fuelled market speculation that the era of close-to-zero US interest rates might not last till eternity. Markets contemplating that the Fed might reduce policy stimulation sooner than expected triggered a USD short-covering move. Euro negative headlines (Greece) reinforced the EUR/USD correction. EUR/USD dropped from levels above 1.51 at the end of November to reach a correction low in the 1.4220 area in the second half of December. Some consolidation kicked in. From that point we were looking for clues whether the US economy was/is improving at a pace strong enough for the Fed to scale down policy stimulation in a not-that-distant future. The softer than expected December US payrolls report published early this month pulled some cold water on the hopes for a quicker than expected rebound and cooled down expectations for the Fed to raise rates anytime soon. This was the reason why we kept a cyclically inspired sell-onupticks approach in EUR/USD, but why we advocated not to front-turn on forceful break lower in EUR/USD. However, over the past weeks, the Greece saga (and other intra-EMU tensions) became the most influential factor for EUR/USD trading, rather than the global cyclical picture and its policy implications. So, one could not ignore the strong technical signal of the break below the 1.4220 level. Over the previous days, the EUR/USD sell-off slowed temporary. However, yesterday's price action clearly indicates that the era for euro weakness is far from over, even as the Greek drama is moving to the backstage. The Q4 US GDP figure is still the key factor this week to see whether there is any room for a cyclically inspired USD rebound. However, we wouldn't be surprised to see EUR/USD already testing the lows ahead of this report.

Looking at the (technical) charts, EUR/USD last month faced quite a forceful correction on the longstanding rally from March. The pair lost several important support levels, including the longstanding uptrend line. The drop below these levels was a strong indication that the EUR/USD bull-run has run its course and that EUR/USD trading is entering a new era. We started the new year with a sell-on-upticks approach for EUR/USD aiming for return action to the bottom of the 1.4626/1.4220 range bottom. The break below this range bottom triggered a new EUR/USD downleg, making the picture for the pair outright negative. The 1.3748 June reaction low is the next high profile target/support level on the charts. At the end of last week, there was some temporary slowdown in the EUR/USD sell-off, but a real rebound didn't occur. Yesterday, we maintained a sell-on-upticks approach and we advocated that return action to the previous range bottom 1.4220 (ore higher) was a good area to consider adding/reinstalling EUR/USD short positions. However, at this stage, this looks far from evident. A break below the 1.4029 range bottom could trigger a new wave or euro selling bringing the 1.3748 June low again in the picture. Short-term players can look to jump on the bandwagon in case of a break below this key support area.

EUR/USD: euro fails to gain on Greek bond sale

Support comes in at 1.4066/63 (Break-up daily/Daily envelope), at 1.4048/46 (Boll Bottom/weekly envelope), at 1.4029 (Reaction low), at 1.4000 (psychological), at 1.3977 (Daily channel bottom of Dec), at 1.3903 (Starc bottom) and at 1.3748 (June low). .

Resistance stands at 1.4158 (Breakdown hourly), at 1.4195 (Reaction high, at 1.4220/39 (Reaction high/38% retracement), at 1.4252/66 (Break down daily/hourly), at and 1.4313/27 (Broken 200 d MA/MTMA).

The pair is in oversold territory.

USD/JPY

On Monday, USD/JPY developed a lackluster sideways trading pattern. Trading was confined to a very tight sideways range between 89.82 and 90.37. Stock market sentiment turned less negative after the sell-off on Friday evening in the US, but after all, the move failed to support USD/JPY. The pair closed the session at 90.28 compared 89.82on Friday.

This morning, the Japanese central bank was less negative on deflation, but pledged to keep monetary policy conditions easy. Asian stock markets were again under pressure. Markets comments explain the move as the result of China implementing the higher reserve requirement measures for banks. However, this is a bit strange as those measures were announced last week. USD/JPY initially drifted lower in step with the stock market correction. At the moment of writing, a message is flickering on the news wires that S&P has revised the outlook on Japan's AA rating from stable to negative. In a first reaction, USD/JPY returned above the 90.00 mark. The budgetary situation in Japan is of course an important policy issue. However, we doubt whether it will become a key factor for currency trading going forward. In a first assessment, we expect the impact of this rating outlook change to remain rather limited.

Global context: USD/JPY reached a correction low in the 84.83 area at the end of November. During the month of December, the pair staged a remarkable rebound. Improved USD/JPY sentiment after the better than expected US payrolls early December was enough of a reason to take profit/scale down USD/JPY short exposure. End December, the pair even temporary regained the 92.50 resistance area. The new Japanese Fin Min softening its tone on the yen added to the USD/JPY supportive picture, but early January the weaker US payrolls blocked the rebound. In a medium term perspective, the December USD/JPY rebound called off the MT downtrend of the US dollar against the yen. Since the start of the new year, the USD/JPY rebound shifted into a lower gear. Recently we took a cautiously positive bias for USD/JPY. In a broader perspective, we especially see USD/JPY longs as a good trade to play the global recovery story. The recent loss of momentum on global equity markets didn't really support our case. However as we hold on to our global positive eco view medium term, we don't change tactics. The most recent developments caused the pair to test the 90.00 supported area. This morning, it looked as if a break was in the making, but the move was blocked by the S&P outlook change. The picture is still fragile for USD/JPY longs, but we still hope to muddle through as soon as global sentiment turns a bit more constructive again. Of course, in a day-to-day perspective, the risk for additional follow-through losses still persists.

USD/JPY: test of the 90.00 area continues

Support is seen at 89.53/48 (Reaction low/Boll Bottom), at 89.37/30 (Envelope Monthly/50% retracement, at 88.83 (18 Dec low) and at 88.24 (62% retracement).

Resistance comes in at 90.56/58 (Reaction high/daily envelope) at 90.77 (Breakdown hourly), at 90.98(MTMA) 91.25 (Weekly envelope), at 91.88 (Last week high

The pair is in oversold territory

EURGBP

On Monday, sterling recouped part of the Friday's losses against the euro. So, the euro didn't gain from the easing tensions on Greece. We didn't see much eco or other news to explain the sterling outperformance against the single currency. Probably, investors still had some positioning to do going into today's UK Q4 GDP release. EUR/GBP close the session at 0.8713, compared to 0.8775 on Friday.

Today, the UK calendar contains the first estimate of the UK Q4 GDP. This release could be quite important for EUR/GBP trading, even as only few details on the structure of growth will be available. The consensus expects a 0.4% Q/Q growth. A decent (consensus-like) or a better-than-expected figure will most probably be a good reason for EUR/GBP to test the recent lows in the 0.8650 area. On the other hand, it will be interesting to see whether (an how much) the euro will be able to regain in case of a weaker than expected figure. The testimony of King and fellow MPC members is always a wild card.

Global context: During the August/mid October period, sterling showed additional losses against the euro as the BoE extended its policy of quantitative easing through a rise in its program of asset purchases. This policy was maintained going into the end of the year, but the UK currency entered calmer waters. EUR/GBP settled in a 0.8830/0.9154 sideways trading pattern. Recently, there were some cautious signs that the UK economy is leaving recessionary territory, too. From a market point of view, the question is whether the UK economy has already reached the point where sterling could become some kind of a recovery play. Until now, we considered it is too early to conclude that recent signs of improvement will be enough for the BoE to scale down policy stimulation (or raise interest rates) in the foreseeable future. We also didn't see any signs yet that the BoE will be more proactive in scaling back exceptional policy measures/policy stimulation compared with the ECB (or the Fed). The February BoE policy meeting (when a new inflation report will be available) will be the next point of reference for BoE policy.

We started the year with a neutral bias for this pair with range trading in the established 0.8834/0.9155 preferred. Global euro weakness due to worries on the Greek budgetary situation, has overthrown this strategy. The pair dropped below several key support levels, forcing us to leave our longstanding EUR/GBP positive (de facto sterling cautious) attitude. At the end of last week, we indicated that the case for the some consolidation on the recent EUR/GBP building. A nice EUR/GBP rebound occurred on Friday, but the important technical area of 0.8834 (previous low) stayed out of reach and the correction/slide over the last 24 hours only confirms that the picture remains heavy for this euro cross rate, too. A break below the recent low at 0.8650 (e.g. due to a better than expected GDP release) might bring the 0.8400 August reaction low again in the picture.

EUR/GBP: rebound very short-lived

Support comes in at 0.8650/49, (Reaction low/2nd target off 0.8852) and at 0.8639/33 (76% Retracement/Boll Bottom), at 0.8613 (1st target triple top) and at 0.8514 (2nd target triple top).

Resistance is at 0.8723/33 (reaction high/Breakdown hourly), at 0.8760 (daily envelope), at 0.8796 (Week high), and at 0.8820/30 (MTMA/23% retracement).

The pair is in oversold territory.

News

US: existing home sales show record decline

After an impressive rebound in the previous three months, US existing home sales fell sharply in December. On a monthly basis, existing home sales fell by 16.7% M/M to 5.45 million, while a figure of 5.90 million was forecasted. Looking at the details, both sales of single family homes (-16.8% M/M) and condo's (-15.4% M/M) dropped significantly in December. Month's supply rose from 6.5 to 7.2 in December and price data showed a rise in both median and average prices. This was the biggest decline in existing home sales since records started in 1968 which was at least partially due to the government's tax credit programme which was originally due to expire in November. So, buyers rushed in to close purchases before the end of November, pulling forward demand at the expense of December sales (and probably of sales in the next few months too). However, demand is expected to pick up again in the spring due to the extension of the $8 000 government incentive decided some time ago

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Disclaimer: This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.