Sunrise Market Commentary
- German bonds supported by safe-haven flows
Yesterday's session was dominated by geopolitical concerns in the Middle East. Risk aversion prevailed and supported German bonds. Stronger than expected eco data, near and above record levels, were not able to push bonds lower. US markets were closed in observance of President's Day.
- Risk aversion returns as a driver for currency trading
Of late, the tensions in the Middle East had only a limited impact on currency trading. Currency investors were mostly focused on interest rate differentials. However, overnight, another spike in the oil price and a sell-off in riskier assets caused a safe haven run on the USD. EUR/USD nosedived, while USD/JPY was slightly higher, too. However, for now it is unclear which currency will be the ultimate safe haven if tension would continue to mount.
The Sunrise Headlines
- US markets were closed yesterday in observance of President's Day. This morning, Asian shares trade significantly lower on rising tensions in the Middle-East.
- Libyan leader Muammer Gaddafi was clinging to power with brutal force yesterday after protest against his regime hit the capital Tripoli. Gaddafi appeared briefly on television, denying he had left the country.
- ECB policymaker Axel Weber said on Monday that high debt countries have run halve of the marathon, but warned that the most painful part still has to come.
- Moody's Investors Service warned this morning it may cut Japan's sovereign rating if government policies fall short of a comprehensive tax reform needed to bring ballooning public debt under control. Moody's changed the outlook on Japan's Aa2 rating to negative from stable.
- Rating agency Fitch cut its credit rating of Libya by one notch to BBB yesterday and said it may reduce it further if oil production in the country was disrupted. Standard & Poor's lowered its long- and short-term sovereign credit ratings for Bahrain over concerns that the political unrest and demonstrations will persist.
- Portugal's core state sector deficit narrowed 31.4% to €787 million in January from a year ago, as spending fell by 2.6% and revenues grew 14.4%. The prime minister added this was a sign of confidence that the country would meet its ambitious deficit reduction targets.
- Brent crude oil prices ($180.15) hit a 2.5-year high on increasing concerns that violence in Libya could cut more of OPEC's output.
- Today, the eco calendar contains the UK public finance data, US S&P Case Shiller home prices, Conference Board's consumer confidence and the Richmond Fed manufacturing index.
Currencies: Risk Aversion Returns As A Driver For Currency Trading
EUR/USD
On Monday, EUR/USD drifted slightly lower after reaching a correction high above 1.3700 in 'overnight' trading. On Friday and on Monday morning in Asia, the euro was supported by the hawkish comments from the ECB of late. EUR/USD was seen in the 1.3670 area at the open of the European markets. The advance EMU PMI's and the German Ifo indicator came out well above the market consensus reaching multi-year or even all time highs. EUR/USD briefly returned to the 1.3700 area after the publication of these data. However, the gains could not be sustained. Global sentiment on risk crumbled as the unrest in Libya and other countries in North Africa and the Middle East caused investors to scale back holdings of riskier assets. Ongoing market talk on potential problems in the EMU banking sector might have played a role, too. Until now, the impact of the tensions in countries like Egypt or Libya on global markets had been very limited. The euro even draw support from a rising interest rate differential at the end of last week. However, yesterday the unrest was a good enough excuse to cash in profits on the recent rally in several categories of riskier assets and in EUR/USD. So, EUR/USD reached new intraday lows at around 1.3650 during the afternoon session in Europe. EUR/USD closed the session at 1.3678, compared to 1.3693 on Friday evening.
Overnight in Asia, the sell-off in riskier assets due to the unrest in the Middle East accelerated and this time the euro was hit quite hard, too. EUR/USD lost one big figure dropping from the 1.3680 area to below the 1.3600 mark. The US dollar was the outperformer across the board. So, the idea that it would be less easy for the USD to play its safe haven role as the US is heavily involved in the region is not confirmed
Today, the calendar of eco data is thin in Europe, but after recent ECB talk, markets will keep a close eye at the speech of ECB's Bini-Smaghi. US traders return from a long weekend. Trading in the US might be inspired by the CS house prices, consumer confidence and the Richmond Fed manufacturing index. Later in the session, the US Treasury will auction 35B of 2-year bonds. The consumer confidence indicator and the Richmond Fed survey might cause some intraday volatility, but the are no trendsetters. So, global factors might drive EUR/USD trading. In the current environment, it will be interesting to see whether currency traders will in the first place continue to look at interest rates and interest rate differentials or whether global sentiment on risk will again become more important. In the first case, the damage for the euro will probably remain limited. In case of the second scenario, a more pronounced correction of the EUR/USD might be in store.
We don't fully play the card of risk aversion yet, but there is at least some good reason to take further profit on the recent rally in riskier assets. In a day-to-day perspective, this might cause a further scaling down of EUR/USD long positions.
Recently, there was not really one dominant theme to drive the EUR/USD price action. Trading is mostly driven by 'small', separate stories, without a clear overall trend. Interest rate differentials are becoming more important for currency trading. However, for most of last week, the relative changes between US and European yields were not that significant. Hawkish speak from ECB's Bini-Smaghi at the end of last week gave the euro a boost.
Of late, we advocated that a sustained break above the 1.3745/1.3862 resistance wouldn't be easy. So, we preferred to sell EUR/USD into strength. The pair extensively tested the 1.3570/00 support (Neckline/Reaction low) last week, but there was no follow-through price action. Friday's move improved the short-term picture in this cross rate, but the overnight correction already neutralized this move. So, for now, the pattern of lower highs and (potentially) lower lows remains intact. In this context, we put the short-term risk for EUR/USD to drift toward the recent lows (1.3428) or even a bit further.
Will risk aversion again become the dominant factor for EUR/USD trading?
Support comes in at 1.3564/60 (Break-up hourly/reaction low + weekly envelope), at 1.3545/37 (Reaction lows), at 1.3502 (LTMA), at 1.3457 (Daily Boll bottom) and at 1.3428 (Reaction low).
Resistance stands 1.3649/87 (Breakdown hourly/reaction high hourly), at 1.3727 (Reaction high), at 1.3745 (09 Feb high + daily downtrend line), at 1.3767 (MT breakdown) and at 1.3821 (Daily Boll top).
The pair is in neutral territory.
USDJPY
On Monday, USD/JPY extended, the lackluster, directionless trading pattern that is already in place for more than week. The pair was blocked in a 20-ticks trading range just above the 83.00 big figure. Investors and traders kept sidelined as US markets were closed in observance of President's day. The pair closed the session at 83.14 compared to 83.18 on Friday evening.
Overnight, there were some 'strange swings' in the USD/JPY cross rate. The pair moved temporary higher, just to reverse the earlier gains. Even more, heavy selling pressure from EUR/JPY pushed the pair finally (but temporary) below the 83.00 mark. However, gradually the dollar attracted safe haven bids across the board and USD/JPY returned to 83.25/45 area. Moody's changed the outlook on Japan's Aa2 credit rating from stable to negative, which might have been slightly negative for the Japanese currency, too.
Recently we favoured range trading in the 81.00/84.50 sideways pattern. Early this month, a correction bottomed out in the low 81.00 area and the cross rate reached a correction high just below 84.00 last week. However, the rebound did run out of steam as the rise in US interest rates slowed. An unexpectedly sharp rise in US bond yields will probably be needed to push USD/JPY beyond this range top. However, of late, US data were unable to inspire such a move. So, we expect the above mentioned range to hold for now. In a day-to-day perspective, we see the risk for USD/JPY to drift further south after last week's rejected test of the topside. At least for now, rising global risk aversion is not providing a clear sign for USD/JPY trading
USD/JPY: correction slows.
Support is seen at 83.17 (Breakup hourly), at 82.82 (Reaction low + Daily envelope), at 8271/68 (LTMA/Break-up daily + Daily Boll midline) at 82.45 (Break-up hourly) and at 81.96 (Break-up hourly).
Resistance comes in at 83.72 (Reaction high), at 83.87/98 (Weekly envelope/ reaction high), at 84.11 (Daily Boll top), at 84.51 (Reaction high) and at 84.91 (200d MA).
The pair is slightly overbought territory.
EURGBP
On Monday, the price charts in EUR/GBP showed a picture the was similar to the one of EUR/USD. The intraday changes were limited after all as the pair drifted sideways between 0.8445 and 0.8410. The pair filled offers beyond the 0.8440 area after the publication of strong EMU/German confidence data and reached a minor new high around noon in Europe. Early in the afternoon, the headlines from a an interview of BoE's Weale hit the screens of the financial newswires. He advocated that a small rate rise now might prevent a larger one later. Sterling gained a few ticks against the euro after Weale's comments, but after all the impact was negligible. EUR/GBP traders in first place looked for guidance in the EUR/USD price moves. EUR/GBP closed the session at 0.8431, little changed from the 0.8425 close on Friday evening.
Today, the monthly UK public finance data will be published. A small monthly surplus is expected. However, we don't expect this to be a key release for markets. Overnight, EUR/GBP joined the broader correction/profit taking move on the euro overall. However, if risk aversion would become the driver for markets short-term we don't see why sterling should continue to outperform the euro.
We expect a bumpy road for the UK economy in 2011. The BoE faces a big policy dilemma. Inflation remains much too high, but the real economy will most probably require ongoing policy support. Since early January, the pair moved up and down within a range of 0.8285 and 0.8672. Since early February, investors started taking into account the scenario of an early UK rate hike. This supported sterling. At the same time, the euro ceded some ground as Trichet didn't step up his inflation rhetoric at the February meeting. Looking at the BoE inflation report, the BoE sees rising upside inflation risks compared to the November report. However, BoE governor King was less committed to a rate hike than a lot of investors had anticipated. So, there was a window of opportunity to take profit on sterling long positions. From here, we expect some consolidation in EUR/GBP. The downside in this pair might become better protected. Hawkish ECB talk might support this process. A first important support is coming at around 0.83555/60, while 0.8285 is the key point of reference. We expect this level to be tough to break without high profile news.
EUR/GBP: dragged lower in step with EUR/USD
Support comes in at 0.8393 (Reaction low hourly/daily envelope), at 0.8357/54 (15 Febr. low/Daily uptrend line since 2010) and at 0.8335/30 (Weekly envelope +Daily Boll bottom/18 Jan low) and at 0.8285/73 (Year low/76% retracement 2010)
Resistance is seen at 0.8436 (MTMA) at 0.8445/50/54 (Reaction high/Last Week high/LTMA), at 0.8478 (Daily Boll Midline) and at 0.8497 (Weekly envelope).
The pair is in neutral territory.
News
EMU: PMI's hit multi-year highs, but so do prices
Activity in the euro zone continued to grow strongly and even accelerated unexpectedly in February. According to the first estimate, euro zone manufacturing PMI rose from 57.3 to 59.0, the highest level in 11 years, while the consensus was looking for a slight decline. Together with activity, also prices are picking up further. Factory input prices rose from 79.2 to 85.7 in February, a record high level in the 14-year survey history. National data show that the improvement in the manufacturing sector was again led by Germany, where the manufacturing PMI hit a record high level (62.6 from 60.5). In France, manufacturing PMI rose slightly (from 54.9 to 55.3), which was exactly in line with expectations. In the services sector, sentiment improved to. The advance estimate of euro zone services PMI rose from 55.9 to 57.2, the highest level since August 2007. Markit added however that, while growth continued to be led by Germany, the February survey brought welcome news of real signs of life in the periphery. Growth differences are therefore starting to narrow. The bulk of news coming from the PMI's is very encouraging and indicates that growth is picking up in the first quarter of 2011 after a disappointing fourth quarter of 2010, but the sharp increase in price pressures is a bit worrying and won't go unnoticed by the ECB.
Besides the German manufacturing PMI, also the Ifo business climate indicator in Germany reached a new record high in February. While the consensus was looking for a stabilization, the Ifo extended its remarkable recovery to set a new record high. The improvement was led by a rise in the current assessment sub-index (114.7 from 112.8), but also expectations index rose marginally (from 107.8 to 107.9) in February. The Ifo added that companies expect to pass higher energy and raw materials prices to customers and inflation is still not a problem in Germany.
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