FOREX TRADING

Sunrise Market Commentary

• Global bonds rally, as equities crumble
  Friday, bonds digested very well a series of stronger eco data and rallied when equities crumbled later in the US session. An important week ahead for bonds as they are at crucial levels. Key US eco data, the ECB meeting, the Greek saga and vulnerable equities will spice trading.
• Good news is good for the dollar; bad news is still negative for the euro
  EUR/USD continued its slide on Friday. A strong Q4 US GDP figure (and subsequent stock market gains) supported the dollar positive sentiment. Later in the session, the correction on the equity markets showed that bad news was still negative for the euro as well. While the EUR/USD downtrend remains firmly in place, the decline in EUR/GBP is slowing

The Sunrise Headlines

• On Friday, US Equities ignored the better than expected US fourth quarter GDP figures and ended the session 1% lower led by technology shares and materials. This morning, Asian shares start the new month in negative territory.
• China sustained its manufacturing expansion in January as export orders jumped and inflation pressures grew, but the pace of expansion slowed according to the official PMI survey.
• US President Barack Obama will propose today a $3.8 trillion budget for fiscal 2011 that projects the deficit will shoot up to a record $1.6 trillion this year, but would push the red ink down about $700 billion, or 4% of GDP by 2013.
• The Bank of Japan may need to do more on the monetary policy front to stop deflation, Japan’s Finance Minister Naoto Kan said this morning in the Nikkei daily.
• Australian house prices rose at their fastest pace in six years last quarter as historically low mortgage rates and tax breaks stoked demand in a tight market. This week, the Australian central bank is forecasted hike rates from 3.75% to 4.00%.
• Crude oil prices ($72.76) dropped for a fourth consecutive session on Friday, threatening to break down trough key support levels. Commodities in general are under pressure with the CRB dropping through major support.
• Today, the eco calendar contains euro zone and UK manufacturing PMI, the US manufacturing ISM and personal income and spending data

Currencies: Good News Is Good For The Dollar, Bad News Is Still Negative For The Euro

EUR/USD

On Friday, EUR/USD trading developed more or less in a similar way as it did earlier last week. The pair was under pressure in Asia. Early in Europe, the decline slowed and one even got the impression that some consolidation might be in store. However, this hope was again in vain. Euro sentiment came again under pressure as soon as US traders joined the action. The Greek tragedy continued to haunt the single currency. However, this time it was not only euro weakness that drove EUR/USD trading. The US Q4 GDP growth came out at a stronger than expected 5.7 % annualized reading. A few months ago, this kind of good news, would have been considered euro supportive and dollar negative, especially when it supported equity markets. The initial stock market reaction indeed was up, but it was no help for the single currency. On the contrary, positive news is now seen as raising the case for a tightening in the Fed policy over time. Wednesday’s Fed statement only reinforced this way of thinking. So, after a few minutes of hesitation, EUR/USD took the way south again. The Chicago PMI and the Michigan confidence also coming out better than expected only added to the dollar positive sentiment. Later in the session, US stock market indices had to return the early gains. However, this was no help for the euro either. Positive (US) news is good for the dollar and bad for the euro; risk aversion is also bad for the single currency. So, in the current market sentiment, it has become difficult to see some kind of euro supportive scenario. Of course, this one-way thinking can not last forever. Nevertheless, at least for now that’s how it works. The pair reached an intraday low in the 1.3860/65 area after the close of the European markets and ended the week at 1.3863, compared to 1.3971 on Thursday.

This morning, Asian stocks are in the red, too, but given the poor performance in the US on Friday evening, the losses are not excessive. No high profile new headlines on Greece or other EMU budget stories. EUR/USD is holding close to Friday’s lows, but at least for now no new follow-through losses are to be registered. Of course, it is still early days……

Today, we’re at the start of the first calendar week of the month. As usual, a lot of key eco data are on the calendar this week. Today, the US ISM for the manufacturing sector will be published. The consensus expects the figure to improve slightly from last month’s 54.9 reading, confirming that the sector is moving further into expansionary territory. In theory, such an outcome should be USD supportive. Question is whether the market will still react to such a signal after last Friday’s GDP release. A wide deviation from consensus is probably needed to trigger a lasting reaction, both for the dollar and/or the stock markets. Markets will also keep an eye on Treasury Secretary Geithner’s testimony to the Senate Budget committee. We expect the US government to maintain a rather stimulating budgetary policy. In theory, this should be USD supportive.

However, at this stage we don’t have the impression that it will be much of an issue for markets. Greece and the budgetary problems of other member states remain a wildcard for EUR/USD trading.

Wednesday might be the next milestone in this story as the EC is scheduled to approve the Greek budget trajectory.

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. 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 last month pulled some cold water on the hopes for the Fed to raise rates anytime soon. We kept a cyclically inspired sell-on-upticks approach in EUR/USD, but we advocated not to front-turn on forceful break lower in EUR/USD. However, 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. Nevertheless, we couldn’t ignore the strong technical signal of the break below the 1.4220 level, even as it was due to outright euro weakness. Wednesday’s Fed decision, very cautiously goes in our way of a cyclically inspired USD rebound. So, we see this as confirming or even reinforcing a EUR/USD sell-on-upticks approach. So, both the euro story and recent evidence from the US all support the case for the EUR/USD decline. There is no reason at all to row against the tide. Nevertheless, a correction on the recent forceful move is always possible, especially as we come close to the 1.3748 area, the next key support on the charts. In MT perspective, we still see these kinds of corrections, if they where to occur, as an opportunity to sell EUR/USD.

Technical picture. Last month, EUR/USD faced quite a forceful correction on the longstanding rally from March. The pair lost several important support levels, including the longstanding uptrend line, indicating 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. We continue to apply a sell-on-upticks approach for return action to this 1.3748 target. Partial profit taking on EUR/USD might be considered in case of returning action to this high profile level

EUR/USD: good news good for the dollar, bad news bad for the euro

Support comes in at 1.3952 (ST low), at 1.3819 (Boll bottom), at 1.3781 (Daily envelope/Daily downtrend line) and at 1.3748/30 (June low/ 50% retracement 2008).

Resistance stands at 1.3893 (Daily envelope/Broken daily channel bottom), at 1.3958/61 (STMA/Weekly envelope), at 1.3988 (Reaction high), at 1.4028/53 (Reaction highs) and at 1.4141 (MTMA).

The pair is in oversold territory.

USD/JPY

On Friday, markets initially saw the glass half full rather than half empty as they did until Thursday evening. The Greek problems moved somewhat to the backstage, European stock markets took a surprisingly strong start and last but not least, the US eco data reinforced the market feeling that the US recovery is gathering momentum. USD/JPY tested Thursday’s lows early in Asia, but the test was rejected. The pair settled above the 90 mark in Europe. Later in the session, USD/JPY got a shot in the arm after the better than expected US Q4 GDP figure. This release (together with the Chicago PMI and the final Michigan consumer confidence) supported the case for the cyclically inspired USD-rebound. So, USD/JPY reached intraday highs in the 90.90 area early in US dealings. However, later in the session, equities failed to hold on to their early gains. Sentiment took quite a big U-turn going into the close of the European markets and this dragged USD/JPY lower, too. So, USD/JPY closed the session at 90.27, only slightly higher compared to 89.92 on Thursday evening.

This morning, the Chinese PMI’s confirm a strong growth momentum in the country’s manufacturing sector. However, as was the case recently, good news from China left investors with mixed feelings. Asian stocks are moderately lower, with China underperforming. USD/JPY is hovering just above the 90.00 mark. Japanese Fin Min Kato is quoted in an interview as he said the BOJ should do more to fight deflation.

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 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. Medium term, we hold on to our global positive eco view and we think a global cyclical recovery story might still turn out be USD/JPY supportive. At the end of last week, we indicated that we were looking for confirmation to see whether Wednesday’s lows would be a good base to (re)install/add to USD/JPY long positions. The reaction to the Q4 GDP figure was hopeful, but in the end not that much had happened. We keep a cautious buy-ondips approach. However, tight stop-loss protection is warranted. A sustained drop below the 89.14 short-term low would suggest that the correction has some further to go

USD/JPY: holding close to the 90.00 mark.

Support is seen at 89.80/72 (Reaction low hourly/daily envelope), at 89.57/47 (Reaction low/Break-up hourly), at 89.14/06 (Reaction low/Boll Bottom), at 88.83 (18 Dec low) and at 88.24 (62% retracement) and at 0.8736 (Dec 04 low).

Resistance comes in at 90.44/58 (Weekly envelope/MTMA), at 90.81/93 (Reaction high/Daily envelope), at 91.01 (Boll Midline), at 91.28/39 (Weekly channel top/Breakdown hourly) and at 91.88 (MT reaction high).

The pair is in oversold territory.

EURGBP

On Friday, sentiment with EUR/GBP traders had changed a bit. The pair disconnected, at least partly, from the ongoing decline in EUR/USD. A better than expected GFK consumer confidence and Nationwide house prices were not longer able to support the UK currency. Thursday’s negative comments from S&P on the UK financial sector apparently had pulled the trigger for some profit taking on the recent rally of sterling against the euro. This move continued on Friday. The move was mostly technically in nature. EUR/GBP closed the session at 0.8671, compared to 0.8658 on Thursday.

Today, the UK lending/money supply data and the PMI for the manufacturing sector are on the agenda. It will be interesting to see whether the UK currency will be able to resume its uptrend against the euro on one of those data series. We don’t have a strong view on the outcome of these data series. However if sterling fails to take advantage from it, it might be an indication that markets might turn a bit more GBP cautious going into Thursday’s key BoE meeting.

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. The picture in EUR/GBP remains negative and the break below the 0.8650 support brought the 0.8400 August reaction low again in the picture. Looking at the eco fundamentals, we have the impression that the correction has gone far enough. However, this is obviously not a good enough reason to row against the EUR/GBP negative tide. Nevertheless, we stay alert. The consolidation at the end of last week might be first indication that the rebound of sterling against the euro is loosing momentum.

EUR/GBP: sell-off is slowing

Support comes in 0.8684 (STMA), at 0.8662/61 (Reaction low/weekly boll bottom), at 0.8630/21 (Reaction low/daily envelope), at 0.8605/03 (Daily channel bottom/reaction low) and at 0.8557/54 (Boll Bottom/weekly envelope).

Resistance is at 0.8698/04 (Daily envelope), at 0.8733 (Reaction high + MTMA), 0.89753/55 (Reaction high + weekly envelope/ 38% retracement), at 0.8796 (Reaction high) and at 0.8830 (23% retracement).

The pair is in oversold territory

News

US: Q4 GDP grew at fastest pace in six years

According to the advance estimate, US growth accelerated from 2.2% Q/Q in Q3 to an astonishing 5.7% Q/Q (annualized) in Q4, while the consensus was looking for a GDP figure of 4.7% Q/Q. The details show that the biggest positive contribution (3.39% Q/Q) came from a slower pace of inventory liquidation and also personal consumption shows a significant positive contribution (1.44% Q/Q). Also residential (0.14% Q/Q) and non-residential (0.29% Q/Q) investment added to GDP, together with net-exports (0.50% Q/Q). The surplus was offset by a small negative contribution of government consumption (-0.02% Q/Q). US GDP grew at its fastest pace in more than six years primarily based on a slower pace of inventory liquidation and strong personal consumption, still the composition is encouraging as also business investment reared its head

In January, the Chicago PMI survey surprised on the upside of expectations, as its headline index rose from a downwardly revised 58.7 to 61.5, while the consensus was looking for an outcome of 57.2. The details show that the recovery is broadlybased with increases in production (66.6 from 64.2), new orders (66.4 from 64.4), employment (59.8 from 47.6), inventories (48.7 from 38.6) and order backlog (54.3 from 52.0), while supplier deliveries fell slightly (55.3 from 57.0). Manufacturing in the Chicago region expanded in January at its fastest pace in more than four years spurred by improvements in new orders, production and employment. It put the risk on the upside for today’s ISM release.

The final figure of Michigan consumer confidence showed a significant upward revision compared to the first estimate. The headline figure was adjusted from 72.8 to 74.4 due to a considerable improvement in the economic outlook (70.1 from 67.5), while the economic conditions stayed broadly unchanged (81.1 from 81.0). The Conference Board survey earlier reported suggested that the revision might have pushed the Michigan index higher. It is also the highest reading since the trough was reached.

EMU: M3 money supply surprises on the upside

In December, the decline in M3 money supply slowed from 0.3% Y/Y to 0.2% Y/Y, while an outcome of -0.5% Y/Y was expected. On a monthly basis, M3 increased strongly, reversing November’s sharp decline and marking the first monthly expansion in four months. The lending data showed that loans to households grew further in December (1.3% Y/Y from 0.5% Y/Y), while loans to non-financials declined further (-2.3% Y/Y from -1.9% Y/Y). Lending to businesses might show a further contraction in the coming months as it usually lags the business cycle by three quarters, while lending to households bottoms at the same time as the economy. So, overall the report eases fears of a credit crunch, which was confirmed by the ECB bank lending survey also released on Friday.

In January, the first estimate of euro zone CPI surprised on the downside of expectations. On a yearly basis, CPI inflation rose from 0.9% Y/Y to 1.0% Y/Y, while the consensus was looking for an outcome of 1.2% Y/Y. Euro zone inflation is now at the highest level in almost one year, but inflationary pressures are expected to remain subdued, at least during 2010

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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.