KBC Sunrise Market Commentary: Dollar stays on the defensive, but losses remained limted after the payrolls

On Friday, all eyes were on the US payrolls report and the currency market was noexception to this rule. EUR/USD hovered sideway in the 1.25 area going into thestart of the US trading session. The dollar came already under pressure in the run-upto the release. The payrolls report came out on the weaker side of expectations (cf..News). In line with the price action of late, this disappointing news from US causedadditional dollar selling. EUR/USD jumped north of the 1.26 mark. However, themove stalled there. The details of the report were disappointing, but not really dramatic.So, the report was not enough a reason for investors to push EUR/USD for atest of the key 1.2673 resistance area. Even more, after the strong gains of the previoussessions and going into a long weekend in the US, some investors apparentlydecided to cash some profits on the recent EUR/USD rebound. So, the pair gaveback most of the post-payrolls gains and closed the session at 1.2566 compared to1.2527 on Thursday evening. So, after all, the payrolls were not able to give tocurrency market a clear signal.

Today, the calendar is thin. In the US traders enjoy a day off for the 4th of July holidayand no eco data are released. In Europe, the final release of the services PMI’sand the May EMU retail sales will be published, but most likely won’t bring marketmovinginfo. So, (currency) investors will continue to chew on the US payrolls andthere meaning for currencies. Is it a sign that the US recovery is losing momentum ina worrisome way? Or will investor finally come to the conclusion that things couldhave been worse? The answer to this question will not only be important for currencies,but also for equity markets. In this respect, the question arises whether a furtherslide on the equity markets will continue to hurt the dollar was the case last week orwhether the yen and, to a lesser extent also the dollar, will continue to fulfill their roleas safe haven in case of rising stress on global markets. The jury is still out on thisissue and we wouldn’t be surprised that markets will need time to sort this out (e.g. atleast until the real start of the earnings season, mid July). In the meantime, we keepa close eye on the technical charts when looking for guidance.

MT picture and technicals. Early May, EU policy makers came out with a big planto restore stability in the EMU government bond markets. However, in a first reactionthis decision didn’t help the euro. EUR/USD continued its downtrend and the pair finallydropped below the key 1.2331 level (2008 low), painting a massive double topformation on the charts. This was an outright negative signal from a technical point of view. The long-term fundamentals were also seen not in favour of the euro. Several‘South’ European countries need a weaker currency to restore competitiveness.There were also a lot of the credibility issues on European fiscal and monetary policythat were/are not yet solved. Last but not least, European policy makers severaltimes indicated that they were happy with the current level of the euro as it will helpsupporting growth. So, there is no reason for the euro to be overvalued, which is stillthe case. On the other side of the EUR/USD equation, the US recovery looked likebeing rather well on track. However, recent US data disappointed and the Fedstatement of the June meeting turned also more cautious on the pace of the US recovery.So, the cyclical/interest rate balance turned less supportive to the US currency.This was also visible in the trade-weighted dollar. The index declined sinceearly June and lost an important support level last week. The relative developmentsbetween the euro-zone and the US obviously are now less in favour of the dollarthan a few months ago. Nevertheless, for now we don’t change our long-standingEUR/USD negative bias yet, even as we are well aware that a quick return to theyear lows or to the 1.1640 support are far from evident in the near future.

End May, we turned a bit softer on the pace of the euro decline as we felt that therewas room for some consolidation after the steep losses since mid-April. TheHungarian crisis caused EUR/USD to set a new corrective low, but this was apparentlysome kind of short-term exhaustion move. Recently, we kept a wait-and-seeapproach and hoped that the correction would go to the 1.2455/1.2673 area (previoushighs), where we would reconsider to reinstall shorts. At first, the euro rebounddeveloped only in a very gradual way, but last week’s move of course changed theshort-term picture as EUR/USD regained the 1.2455/90 resistance area. Nevertheless,the jury is still out whether the euro should become a big beneficiary of a loss ofmomentum in the US economy. The payrolls were not able to give the currency marketa clear answer on this issue. On the other hand, in Europe, there are also stillseveral big issues to be solved. For example, will the stress tests be able to removeto uncertainty on the strength of the European financial sector? For now, the downsidein EUR/USD looks well protected. So, a test of the range top over the next daysis very well possible, but at this stage we do not front-run on a break higher beyondthis level. For that to happen markets probably need some kind of high profile eventand it is far from sure that this will occur in the days to come. Short-term players whoplayed the card of the euro correction/rebound might consider partial profit taking incaseof return action to the 1.2673 range top.

On Friday, there was no big story to tell about USD/JPY. Investor uncertainty goinginto the US payrolls report kept the pair under pressure. There was some nervousnessat the time of the release, but the report had no lasting impact on USD/JPYtrading. The pair settled in the 87.50 area. Apparently, the losses on the equity marketsafter the payrolls were not big enough to spark another safe haven run to theyen. Investors were apparently also reluctant to push the pair again for a test of theyear lows. USD/JPY closed the session at 87.75, even marginally higher comparedto the 87.60 close on Thursday evening.

This morning, Asia stocks markets are mostly higher, Chinese markets underperforming.The Nikkei succeeds a cautious technical rebound after recent steep lossesand is helping USD/JPY to move a few ticks higher. There were no important ecodata in Japan this morning.

We had a LT positive bias for this cross rate as we still assumed that the cyclicaleconomic rebound in the US will support the dollar over time. Recent USeco data and the June Fed statement didn’t support our case and obviously had anegative impact on the USD/JPY cross rate short-term. Until now, we didn’t changeour long-term assessment on the US economic recovery yet. Last week’s US payrollsreport was not able to give a clear signal to assess the pace of the US economicrecovery.

Looking at the technical picture, USD/JPY reached a reaction high in the 92.89 areaearly last month. Since then the pair drifted again lower. The break below the 88.95support deteriorated the short-term picture and caused us to step aside on or tacticalUSD/JPY long bias. The ST picture had become USD/JPY negative and last week’sbreak below 87.95 (previous year low) reinforced the dollar negative picture. On Friday, the dollar managed to avoid further losses against the yen. However, for now,we don’t see any compelling reason to row against this USD/JPY downtrend. For thepicture in this cross rate to become more positive again, we first need a clear signalthat equities will be able to avoid a next down-leg. Looking at the fragile picture of theS&P, it is much too early to play already this card. In this context, we expectUSD/JPY to hold close to the recent lows even as markets turn a bit more cautiouson pushing the pair sharply lower due to the threat of (verbal) interventions fromJapanese policy makers.

On Friday, EUR/GBP was locked in a very tight trading range roughly between0.8250 and 0.8220 ahead of the US payrolls figure. The US payrolls came out(slightly) weaker than expected. EUR/USD extended its gains after the publication,but cable lagged this move. So, the EUR/GBP short-squeeze continued , too. Froman economic point of view, there is no obvious reason why the dollar should declinemore against the euro than against sterling due to a poor payrolls release. So, themove suggests that there were still stale GBP longs in the market that had to bescaled down after the recent rally of sterling. EUR/GBP reached intraday highs in the0.8295 area. Later in the session, the global rebound of the euro slowed andEUR/GBP closed the session at 0.8269, compared to 0.8254 on Thursday evening.

Today, the UK calendar contains the services PMI. A small decline from 55.4 to 55.0is expected. We assume that quite a sharp deviation from consensus is needed tohave a lasting impact on EUR/GBP trading. Later this week sterling traders willwatch out for the production data (Wednesday) and the trade balance figure on Friday.On Thursday, the BOE will hold its monthly meeting. However, any change inBank’s policy is highly unlikely. The details on the debate within the MPC will only beavailable with the publication of the Minutes of the meeting later this month.

Since mid March, sterling performed well against the euro. Global euro weaknesswas the name of the game. Finally, EUR/GBP dropped below the key 0.8400 supportarea (2009 low). We were not convinced that sterling should strengthen much furtheragainst the euro from that level. The euro was/is under pressure as investors fearthat the austerity measures to reduce the EU government deficits/debt will dampengrowth, but we assumed that the situation in the UK was a bit similar. In addition, wethought that monetary policy in the UK would stay very accommodative (as will bethe case in Europe) as the BoE would counter balance a tighter fiscal policy with aloose monetary policy. After the June BoE minutes, this assessment of a tight fiscalpolicy combined with an ongoing extremely loose monetary policy is not that sureanymore. One should no longer exclude that inflation at some point will force theBoE to tightening monetary policy ahead of the ECB. This change in the BoE rhetoricgave sterling a boost. However, this factor looks like being priced in now.

Early June, we couldn’t ignore the high profile signal on the technical charts. Thebreak below the key 0.8400 area was an indication that global negative sentimenttoward the euro outweighed the potential doubts on sterling. So, we amended ourshort-term bias for EUR/GBP trading from neutral (range trading between 0.8400and 0.8800) to negative. Two weeks ago, EUR/GBP started another down-leg andthe pair finally dropped below the 0.8200 mark, further deteriorating to ST picture inthis pair. The pair came already close to the 0.8056 level (1st target double top of0.8603). Early last week, we indicated that there might have become room for someprofit taking on EUR/GBP shorts. The pair regaining the 0.8200 breakdown area wasa first indication that the pressure is easing short-term. EUR/GBP is now again in theprevious consolidation pattern between 0.8200 and 0.8400/25. For now, we assumethat the correction might still go a bit further. However, a break of the topside of thisrange looks still difficult. Short-term we look to take profit an tactical longs and evenreconsider shorts in case of return action to the 0.8400/25 area.