FOREX TRADING

Sunrise Market Commentary

• Core bonds profit from surprise drop in US retail sales
  On Friday, markets started the session in a positive mood, but a disappointing US retail sales release spoiled the game. Investors picked up core bonds again going into the weekend. This week, we look out whether the cautious easing of tensions on the intra-EMU government bond market can be maintained.
• Euro enters calmer waters
  On Friday, EUR/USD basically tracked the swings in global investor sentiment. As was the case for the stock markets, the damage from a poor US retail sales release was only temporary in nature. EUR/USD regained even the 1.2150 resistance area. This suggests that the single currency might be entering calmer waters. EUR/GBP tested also the lows, but the test was rejected and a nice rebound occurred.

The Sunrise Headlines

• On Friday, US Equities opened lower after a weak retail sales report, but reversed their losses in the last hour of trading. This morning, Asian shares start the week in a positive mood.
• Herman Van Rompuy, president of the European Union, has blamed the strength of the euro in recent years for blinding the eurozone to its underlying fiscal problems.
• New Zealand’s central bank chief warned this morning that the country needed to cut its high debt or face punishment by markets with higher lending rates and the risk that its debt servicing costs may become intolerable.
• The ECB will maintain its bond-buying program, which is aimed at correcting distortions in specific markets, until financial markets stabilize, Austrian Central Bank Governor Nowotny said on Sunday.
• Big Japanese manufacturers grew more optimistic about the business environment in the second quarter and also sharply raised their capital expenditure plans a government survey showed.
• Fitch Ratings said it is not concerned over Hungary’s immediate financing capacity after a Treasury Bill Auction fell short of expectations, as the country is backed by substantial funds at home and from abroad.
• Today, the eco calendar is thin as it only contains the euro zone industrial production data.

Currencies: Euro Enters Calmer Waters

EUR/USD

On Friday, positive sentiment on risk survived. European stocks extended the gains in the US and Asia. There was some market chatter on a press article that the EU was preparing to activate a rescue package in case Spain asked for it. However, even this ‘news’ didn’t unsettle markets. Spreads of Spanish bonds over Germany widened hardly and EUR/USD easily held north of the 1.21 mark. Italy sold the full amount of €7B of bonds. The bid/cover was rather low and this caused an underperformance of some sectors of the Italian bond curve but with no impact on global markets/ Investor sentiment or on the euro. A week earlier, the market reaction would have been quite different. EUR/USD even tested the key 1.2150 area going into the publication of the US retail sales data. This time it wasn’t the European data which spoiled the game. The retail sales release came out at a very disappointing -1.2% M/M. This was a setback for risk-taking and EUR/USD returned beyond the 1.21 mark after the publication of the release. However, even as the figure was a disappointment, the damage for equities and also for EUR/USD was limited. A better than expected Michigan consumer confidence release eased the potential negative impact of the retail sales. Even more, late in US trading stocks recouped to post-retail sales losses and EUR/USD turned again north. The pair closed the session at 1.2112, little changed from the 1.2124. However, both stocks and EUR/USD more or less ignoring negative news is also a factor worth taking into account

Today, the calendar of eco data is almost empty with only the EMU industrial production data on the agenda. However, as the production figures from most important member states are already available, investors might consider this data series as a bit outdated. So, the impact on EUR/USD trading should be limited. In a day-to-day perspective, global sentiment on risk will again be the most important factor for EUR/USD trading. In this respect, the price action on the equity markets in the US on Friday and in Asia this morning doesn’t look that bad. So, if this ‘positive’ momentum would continue in European trading this morning, the downside in EUR/USD will might be rather well protected. However, for a more pronounced rebound in the single currency to develop, a further, sustained easing in tensions on the intra-EMU government bond market is needed. On this issue, the jury is still out. Nevertheless, we start the day with a cautiously positive bias for EUR/USD.

MT picture and technicals. Early May, the ‘big shot’ of the EU policy makers brought hardly any relief for the euro. Very soon it became obvious that the plan was not the ‘final’ solution to stop the bleeding. So, EUR/USD resumed its downtrend and the pair finally dropped below the key 1.2331 level (2008 low), painting a massive double top formation on the charts. The long-term fundamentals are not in favour of the euro. Several ‘South’ European countries desperately need a weaker currency to restore competitiveness. There are a lot of the credibility issues on European fiscal and monetary policy that are not yet solved. Last but not least, European policy makers several times indicated that they were happy with the current level of the euro as it will help to support growth. So, there is no reason for the euro to be overvalued, which is still the case. We hold on to our long-term EUR/USD negative bias. The 1.1640 (2005 low) is the next high profile target on the EUR/USD charts.

Two weeks ago, we turned temporary a bit softer on the pace of the euro decline as we felt that there was room for some consolidation after the steep losses since mid- April. The pace of decline slowed a bit, but the single currency again didn’t give the impression being able to perform a powerful rebound and the Hungarian crisis even caused EUR/USD to set a new corrective low. However, this apparently was some kind of short-term exhaustion move as EUR/USD was heavily oversold. Euro sentiment is still very fragile, so we don’t row against the tide yet. Nevertheless, for four days in a row, EUR/USD set a higher intraday low and a higher intraday high. This suggests that some consolidation might be in store. The pair is still struggling to regain the 1.2150 area. Sustained trading above this area would be an indication that the pressure is easing short-term and that the correction has some further to go.

EUR/USD: tries to regain 1.2150 resistance, despite poor US retail sales.

Support comes in at 1.2142 (MTMA), at 1.2075 (STMA), at 1.2045 (Reaction low), at 1.1985 (Break-up), at 1.1924/01 (Reaction lows hourly), at 1.1876 (Reaction low) and at 1.1826 (March 2006 low).

Resistance stands at 1.2208/21 (Reaction high/Boll midline), at 1.2243 (Breakdown hourly) and at 1.2331 (Neckline).

The pair is unwinding oversold readings.

USD/JPY

On Friday, there was again no big story to tell on USD/JPY trading. The pair gained a few ticks in Asia and during the morning session in Europe. However as was the case for all markets on Friday, the US retail sales caused a temporary knockdown in sentiment. USD/JPY dropped temporary to the 91.25 area, but the move was soon reversed as US equities were still able to end the day in positive territory. USD/JPY closed the session with a moderate gain at 91.65, compared to a 91.34 close on Thursday. So, the changes were limited. Nevertheless, the performance of USD/JPY was still a bit better compared to the previous sessions when the pair failed to profit from any easing of tensions on global markets.

This morning, Asian stock markets extend the rebound of the end of last week. We still consider this move in the first place as a short-covering on the recent steep losses. Whatever, the reason, this easing in tensions might also support a similar technical rebound in most major yen cross rates, including USD/JPY. So, USD/JPY is moving toward to 92.00 area at the moment of writing.

We have a LT positive bias for this cross rate as we still assume that the cyclical economic rebound in the US will support the dollar over time. The ongoing need to fight deflation is a LT negative for the yen. However, during the euro crisis, we didn’t feel the need to hold yen short exposure as the overall sentiment on risk remained negative.

Two weeks ago, we indicated that we had the impression that some bottoming out could be in store. So, we reinstalled a cautious buy-on-dips approach, mostly on technical considerations (the pair regained the 90.74 previous high and the 200 MA 90.92). The flaring up of global risk aversion two weeks ago (Hungary) caused USD/JPY to reverse part of its previous gains. The 200 MA was tested but USD/JPY managed to hold above that level. We saw this as cautiously USD/JPY supportive. At first, USD/JPY failed to profit from last week’s easing of global tensions, but finally the pair is again moving cautiously higher. So, there might be room for some further gains short-term. 93.65 is still the first high profile target on the upside. Sustained trading south of 90.92/74 (200 ma/previous high) would be a sign of weakness. 88.95 remains our line in the sand for USD/JPY longs (Stop-loss).

USD/JPY: moving cautiously higher

Support is seen at 91.54 (STMA+ MTMA), 91.24 (Reaction low + Boll Midline), at 90.92/84 (200 d MA/Reaction low, at 9054 (Reaction low) and at 90.26/20 (Reaction lows).

Resistance comes in at 92.03/10 (Reaction high), at 92.82/89 (Boll top/Reaction high) and at 93.65 (reaction high).

The pair is in neutral territory

EUR/GBP

On Friday, the price action in the EUR/GBP cross rate was very interesting. Sterling was well bid early in the session and EUR/GBP touched the 0.8211 year low. However, no break occurred. On the contrary, UK production data for May came out far below the market consensus. The release pulled the trigger for a reversal in the fortunes of sterling. EUR/GBP recouped Friday’s and Thursday’s losses. On the other hand, a quarterly survey from the BoE showed that Briton’s expectations for inflation over the next 12 months jumped to 3.3% in May. This might cause some nervousness with the BoE as the Bank assumes that current high inflation will return toward target within its policy horizon. As such, this higher measure of inflation expectations could have been sterling supportive, but the negative impact from the poor production data apparently prevailed. The euro was well bid, too, but we consider this in the first place as a sterling move rather than a euro move. The US retail sales incited a flaring up of risk aversion. Despite a strong performance of sterling of late, the UK currency this time was more sensitive to this reversal in risk sentiment. EUR/GBP jumped above the 0.8300 mark even as the euro ceded (temporary) ground. EUR/GBP closed the session at 0.8325 compared to 0.8241 on Thursday.

Today, the UK calendar is empty. Over the weekend, BoE’s Sentence in an interview raised the question of how long a highly expansionary monetary policy will remain appropriate given the Britain’s economic recovery and resilient inflation. These quotes had no big impact on sterling trading this morning.

Since mid March, sterling succeeded a reasonably good performance against the euro. Global euro weakness was the name of the game. At the same time, sterling digested the uncertainty on the outcome of the UK elections rather well. Early May, the EUR/GBP cross rate came already close to the key 0.8400 support level (2009 low) and two weeks ago the global decline of the euro and a repositioning in the market linked to the Prudential/AIA deal finally hammered EUR/GBP through this high profile support level. In a longer-term perspective we are not convinced that sterling should strengthen further against the euro from current levels. The euro is under pressure as investors fear that the austerity measures to reduce the government deficits/debt will dampen growth. However, is the situation in the UK that much different? In addition, we assume that monetary policy in the UK will stay very accommodative (as will be the case in Europe) as the BoE will counterbalance a tighter fiscal policy with a loose monetary policy. One can also doubt whether UK policy makers will be happy with the current sterling strength.

However, from a market point of view, we couldn’t ignore last week’s high profile signal on the technical charts. The break below the key 0.8400 area is an indication that global negative sentiment toward the euro outweighs the potential doubts on sterling. So, we amended our short-term bias for EUR/GBP trading from neutral (range trading between 0.8400 and 0.8800) to negative. Even in such a scenario, we still expect any further losses in EUR/GBP to occur at a much slower pace compared to the potential losses in EUR/USD. In a short-term perspective, at the end of last week, we suggested that there might be room at least for a slow-down of the decline of EUR/GBP, after the recent sell-off. EUR/GBP touched the year lows on Friday, but a rebound kicked in later in the session. This is a nice ST technical signal. So, the jury is still out, but we have the impression that the downside in EUR/GBP is becoming better protected short-term. Sustained trading north of the 0.8428/43 breakdown area is needed to call of the downward alert.

EUR/GBP: test of the year low rejected

Support comes in at 0.8310 (Reaction low hourly), at 0.8282 (Break-up/STMA), at 0.8211 (Reaction low), at, at 0.8170(50% retracement), at 0.8135 (Boll bottom) and at 0.8156 (1st target of 0.8653).

Resistance is seen at 0.8338/42 (MTMA/Boll midline) 0.8360 (Reaction high hourly), at 0.8380/95 (Reaction highs), at 0.8428/43 (Breakdown hourly/daily).

The pair is in oversold territory

News

US: retail sales disappiont on building materials

In May, US retail sales dropped for the first time in eight months, while a slight increase was expected. Retail sales fell by 1.2% M/M in May, while the April reading was upwardly revised from 0.4% M/M to 0.6% M/M. Excluding autos and gas, retail sales dropped by a slower 0.8% M/M. The details show that the decline was led by building materials (-9.3% M/M), but also gasoline stations (-3.3% M/M), motor vehicles and parts (-1.7% M/M) and clothing (-1.3% M/M) fell significantly. Sales of furniture (1.0% M/M) and electronics (0.6% M/M) rose in May. The decline in building materials might be due to end of the government’s tax credit on the 30th of April, which boosted sales in the previous months. Excluding gas, building materials & autos and other motor vehicle dealers, retail sales rose by 0.1% M/M, which indicates that figure is not as bad as it looks at first sight.

In June, University of Michigan consumer confidence rose to the highest level since January 2008. The headline index rose from 73.6 to 75.5, exceeding the consensus estimate of 74.5. The breakdown shows that the improvement was due to an improvement in both the economic conditions (82.9 from 81.0) and economic outlook (70.7 from 68.8) sub-indices. The outcome indicates that the weaker payrolls hadn’t too much effect on consumer sentiment and also the stock market decline due to the European debt crisis didn’t have a big impact on consumer confidence.

Other: UK industrial production unexpectedly fell in April

UK industrial production disappointed in April as the month-on-month reading showed an unexpected decline. On a monthly basis, UK industrial production fell by 0.4% M/M, while an increase by 0.4% M/M was expected. Also the details were meagre, with a decline in manufacturing (-0.4% M/M) and elec, gas & water supply (- 0.5% M/M), while mining & quarrying stayed unchanged. Part of the decline was due to a fall back in car production. The decline in production means a slow start to the second quarter, but might only be correction after the strong figures in the previous two months.

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