Sunrise Market Commentary

Bonds rebound after FOMC reconfirms rates may stay low
Yesterday evening, bonds reacted positively to the Fed statement, which reconfirmed that rates may stay at the excep-tionally low levels for an extended period and didn't say a word about the exit strategy. As such, the test of the downside has failed for now, but only a sustained (unlikely) break above the highs would really improve the technical outlook.
FX: dollar rebounds despite soft Fed statement
US equities faced some profit taking after the announcement of the Fed policy decision and this triggered a USD re-bound, too. However, as the Fed reaffirms its commitment to keep interest rates low for an extended period, the global picture remains USD-negative. Sterling showed a brief rebound after the publication of the BOE minutes, but the mone-tary context remains sterling unfriendly, too.

The Sunrise Headlines

FOMC keeps rates unchanged and still expects them to remain 'at exceptionally low levels for an extended period', despite the more optimistic view on the economic outlook. The purchases of agency MBS and agency debt will slow and will now be executed by the end of the first quarter of 2010 instead of the end of this year.
US equities first rose to new highs on the FOMC decision, but were hit by profit-taking later on to close 1% lower in the S&P. Asian equities are down too this morn-ing, except for Japan, which resumed trading today. Financials and cyclicals lead the way down.
Commodities were also hit by profit-taking. Oil drops around 3 USD, but gold is still above 1000 USD/ounce.
Aiful, Japan's second largest consumer lender, warned of a Y311B net loss for the year to March 2010 and said it would aim to cut 2000 jobs.
Three US paper companies and the United Steelworkers filed an antidumping case against China and Indonesia raising protectionist fears ahead of the G20 Summit.
Today, the calendar is again well packed with the German IFO, US claims and ex-isting home sales, a 7-year Note auction and the G20 summit in Pittsburgh.

Currencies: Dollar Rebounds Despite Soft Fed Statement

EUR/USD

On Wednesday, global markets were in a wait-and-see mode ahead of the an-nouncement of the Fed policy decision. Stocks were well bid early in European trad-ing, but gave up most of the early gains later in the session. EUR/USD more or less tracked this move and the pair drifted from the 1.4800 area to the mid 1.47 area at close of the European markets. The Fed in its statement acknowledged some im-provement in the economy, but the recovery remains fragile. This continues to war-rant exceptionally low levels of the Fed Funds rate for an extended period. So, the global framework hadn't changed. The Fed gave no clear signal that it was preparing an exit of accommodative policy anytime soon. In theory this should be good news for the liquidity driven rally on the stock markets and bad news for the dollar. Indeed, stocks jumped higher immediately after the decision, but finally this uptick was seen a good reason to lock in some profits on the recent rally. So, some kind of buy-the-rumour-sell-the-fact reaction kicked in. A similar move occurred in EUR/USD. The pair revisited the (intraday) highs in the 1.4840 area. At that stage profit taking kicked in. The pair closed the session at 1.4735, compared to 1.4790 on Tuesday evening

EUR/USD: correction despite Fed-commitment

Support comes in at 1.4683 (Daily envelope), at 1.4669/53 (Reaction lows hourly/MTMA), at 1.4611 (reac-tion low/23% retracement), at 1.4561 (reaction low) and 1.4525 (Boll mid-line).

Resistance stands at 1.4770/94 (Breakdown hourly/ daily envelope daily), at 1.4845 (Reaction high/Equality C-wave), at 1.4867 (2008 Sept high), at 1.4909 (Boll Top) and at 1.5021 (2nd double bottom).

The pair is in overbought territory.

USD/JPY

Today, the German IFO indicator will be published. The market expects a further im-provement, but yesterday the German PMI's disappointed. The figure remains an in-teresting piece of information, but we don't have the impression that it will have a lasting impact on global (equity and currency) markets. In the US, the initial claims and the existing home sales (via the stock markets) might leave some traces on the intraday charts. Global investor sentiment as mirrored in the stock markets' perform-ance will remain the main driver for the price action on the currency market. How-ever, over the next two day's currency traders will also keep a close eye on the flood of comments and news headlines coming for the G20. One shouldn't expect any offi-cial coordinated plan/action for the currency markets. Nevertheless, in discussing the US proposals to build a more balanced global economy, the currencies will come in the picture. An 'agreement' on this issue will be very balanced, but at the margin we can't see this discussion yielding any support for the dollar. French officials showed their concern on the strength of the euro, but this probably won't be a big item in the overall debate.

Global context. Recently, the swings in risk appetite/risk aversion were the most obvious drivers on the currency markets. In this context, the decline of the dollar is considered as a signal of improving global investor sentiment. On top of that, in this low yield environment, the dollar has become the preferred currency to fund carry-trade deals. Lingering uncertainty on the huge US financing needs together with the Fed's intention to run an expansionary monetary policy for a prolonged period of time offer additional ammunition for carry traders to use the dollar rather than other cur-rencies. This has put the dollar in a vulnerable position. We don't see many reasons to turn dollar positive before it becomes clear that the Fed will start tightening monetary policy. Yesterday's Fed decision indicated that this point hasn't been reached yet. Any correction on the stock markets might also leave its traces on the currency market and on EUR/USD in particular. Nevertheless, as we expect any corrections on the liquidity driven rally on the stock markets to be limited, we also see the down-side in EUR/USD well protected.

Looking at the (technical) charts, EUR/USD cleared the range top at 1.4448, im-proving the picture for EUR/USD. Over the previous sessions, the pair extensively tested the key1.4719 December. However, until now there was still no sharp follow-through action on this 'break'. We maintain a buy-on-dips approach. The 1.4611 re-action low is the first important ST support. The 1.4450 area is the key area to watch. A correction towards this area would offer a good opportunity to step in again. However, we doubt whether the dollar will have enough rebound potential to return to this level. As soon as stocks resume their uptrend, the 1.5021 target (2nd target double bottom of 1.3739) will come in the picture again.

On Wednesday, the price action USD/JPY again mostly tracked the price action in other USD cross rates. The dollar received a better bid in the run-up to the Fed meeting. There was a brief dollar drop immediately after the Fed decision, but as stock markets corrected lower later in the session the dollar moved again higher on the unwinding of carry trades. USD/JPY was again no exception to this rule. USD/JPY closed the session at 91.29, compared to 91.10 on Tuesday.

Today, Japanese markets have resumed trading after a 3-day holiday period. So, yen trading will still develop in thin market conditions. Japanese stock markets still had some catching up to do. Other Asian markets join the profit taking move in the US yesterday evening. USD/JPY already faces some downward pressure this morn-ing even as global stock markets show a more cautious investor attitude this morn-ing. Japanese foreign trade data were rather close to expectations and had hardly any impact on currency trading.

Global context. USD/JPY reached a reaction high in the 97.80 area early August. Despite a positive global investor sentiment, the dollar could not hold on to its gains against the yen. This suggested underlying dollar weakness. The link between USD/JPY and global investor risk aversion/risk appetite became less tight and has now even completely reversed. The dollar (and not the yen) gradually has become the preferred funding currency for carry trades. So, the price action in USD/JPY more or less joined the global dollar trend (decline). Last week, we turned more cautious on USD/JPY shorts on technical considerations (the 91.73/90.00 area was a high profile support level). Nevertheless, the odds for a sustained USD/JPY rebound are far from bright. So, this remains a sell-on-upticks environment. The 93.30 is a first high profile resistance short-term. The 87.10 (year low) area remains the next high profile target on the downside for this pair. We wouldn't be surprised for this level to be reached in the near future

USD/JPY: dollar rebound short-lived

Support is seen at 90.84/47 (Reaction low/daily envelope), 0.9047 (ST low), at 90.19/12 (Boll Bottom/16 Sept), at 89.99 (Weekly envelope), at 88.94 (Broken daily channel top) and at 87.10 (Year low).

Resistance comes in at 91.76 (Reac-tion high), at 91.86/92 (Daily enve-lope/Boll midline), at 92.56/68 (Week high /breakdown hourly), at 93.05 (38% retracement) and at 93.31 (re-action high).

The pair is in neutral territory.

EUR/GBP

On Tuesday, there were already tentative signs that the steep decline of sterling against the dollar and euro had slowed. Yesterday, the UK currency even regained some ground. This move was in the first place a technical reaction on the violent sell-off of last week. The key level on the charts of EUR/GBP 0.9082 played perfectly its role as technical resistance. Sterling traders yesterday watched out for the Minutes of the September BOE meeting. The bank as expected left rates unchanged and the Bank also maintained the amount of asset purchases at £ 175 bln. However, the supporters of a bigger amount of asset Purchases at the August meeting (King and Miles), this time joined the consensus even as they indicated that a higher amount may still be warranted. Nevertheless, the unanimous decision and the Bank not dis-cussing a cut of the remuneration rate of deposits of commercial banks with the BOE were enough a reason to trigger additional profit taking on GBP shorts. EUR/GBP drop from the mid 0.9050 area reached intraday lows just below the 0.90 mark. The pair closed the session at 0.9015, compared to 0.9042 on Tuesday.

Today, the there are no key eco data on the calendar in the UK.

Global context. Since mid June, the EUR/GBP cross rate entered a consolidation pattern. Sterling had come off from distressed levels at the end of last year. This move was supported by growing evidence that the decline in economic activity in the UK had moderated. However, lingering uncertainty on the BoE's quantitative mone-tary policy capped the rebound of sterling. The early August BoE decision to raise the asset purchase program to £175B and Governor King's call for an even greater effort indicated that the Bank intended to maintain a loose policy for a prolonged pe-riod of time. This triggered a new sterling selling wave. The break above the 0.8700 range top confirmed the deterioration in market sentiment towards the UK currency. At the September meeting, the BoE took no additional policy steps. Nevertheless, the (monetary) picture stays sterling negative, as evidenced by BoE King's remarks in his testimony before Parliament last week (discussion on interest rates for excess bank reserves). Recently, we had a buy-on-dips approach for EUR/GBP. After the recent rebound, the pair was now heavily overbought and a test of the high profile 0.9082 level was rejected. There is still no good reason to row against this sterling negative tide. We stay sterling negative longer term. Yesterday's correction should be considered as a logical unwinding of overbought market conditions. This correc-tion/consolidation might still go a bit further, but we wouldn't wait to long to hedge sterling long exposure

EUR/GBP: first test of the key 0.9082 resistance rejected

Support comes in 0.8988/84 (Daily envelope reaction low), at 89.69 (Break-up hourly), and at 0.8911 (MTMA) and at 0.8829 (Break-up daily) .

Resistance is seen at 0.9034/56 (Breakdown daily/daily envelope), at 0.9082/90 (Reaction high + 24 April high/Boll Top), 0.9002 (50% retracem) and at 0.9164 (Weekly envelope) and at 0.9268 (62% retracement).

The pair is in overbought terri-tory.

News

EMU: Business confidence improves moderately

The EMU PMI business sentiment surveys showed some further, albeit modest, improvement in September, according the flash estimate. The composite index rose 0.4 points to 50.8, the highest level since May 2008 and points to a return of positive GDP growth in Q3. The manufacturing sub-index increased to 49 from 48.2 while the services sub-index crossed the 50 boom/bust level arriving at 50.6 from 49.9 previ-ously. Despite the modest improvement, the advance fell short compared to expecta-tions. Looking at the results of Germany and France, the two countries for which there are results available, the German indices disappointed. The services index dropped to 52.2 from 53.8 while the manufacturing index rose to 49 from 48.2, still indicating a contraction in activity. Contrary to the German indices, the French ones were strong and stronger than expected with the services PMI at 52.2 from 49.9 and the manufacturing one at 52.5 from 50.8.

EMU industrial orders showed a strong 2.6% M/M increase, while on a yearly ba-sis, orders still declined 24.3% Y/Y. There were also revisions to the previous months, leading to the conclusion that Q3 orders are well above Q2 levels.

French consumer spending disappointed in August falling 1% M/M and 1.3% Y/Y, following a 1.2% M/M and 0.5% Y/Y decline in July. The market was looking for small positive increases. The outcome is of course a disappointment and while the figures are volatile and thus September may show a decent growth figure, it puts downward risks for French Q3 GDP

Belgian and French business confidence indices (national data) showed a further advance, the French one to 85 from 79, while the Belgian showed a more modest in-creased, notably to -17.8 from -18.2. While the report shows the recovery continues, details point to a moderate pace of improvement.

Other: BoE downplays recent better eco data

In the Minutes of the September meeting, the MPC downplayed the importance of recent better eco data for the medium-term inflation outlook. 'Although the data on output growth were more encouraging, the level of output had fallen significantly and there was likely still a large measure of spare capacity in the economy'. There were also a lot of doubts on the sustainability of the recovery. The MPC noted that previ-ous financial crises had shown that the drag on aggregate demand was likely to be long-lasting and sounded concerned about the downward risks posed by the high levels of public debt and the persistence of global imbalances. As such, the MPC de-cided unanimously to maintain the Bank rate at 0.5% and to continue its £175B asset purchase programme, although King and Miles indicated that a further extension of the programme may still be needed later on.

At their September meeting, the Norges Bank as expected kept the key policy rate unchanged at 1.25%. The accompanying statement however unveiled that the Board has also considered the alternative of increasing rates, as the unemployment may remain considerably lower than previously expected

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