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Major currencies continue to mirror global market sentiment

Thursday, January 24, 2008

On Wednesday, the single currency again traded as a kind of carry trade currency, at least in relation to the dollar and the yen. The poor performance of stock markets during the morning session in Europe and the losses at the open in the US made EUR/USD to give back half of Tuesday gains and pair reached an intraday low in the 1.4510-area. The gradual improvement of US stocks later in the session helped the pair to return above the 1.46 mark and the pair still trades in that area this morning. The European eco data (PMI, slightly better than expected) and the speech of Mr. Trichet had no lasting impact on trading.

Today, the IFO business confidence will be on to the agenda. In the recent past, the IFO had no material impact on the currency market, but in the current juncture it deserves some more attention as it could impact the market expectations on the ECB interest rate path going forward. In the US, the claims and the existing home sales are on the agenda, but those series are of second tier importance for the currency market.

The plans on how to support (bail out?) the monoline insurers and the way it will (or won’t) be able to calm the storm on the stock market will be the most important driver for global markets and also for the currency market. Looking at the developments in the US yesterday evening and in Asia this morning, investors apparently are cautiously positive and this should give the single currency support at the start of the session.

The key question for global market remains whether the Fed action on Tuesday and the plans to support the monoliners will be enough to calm the markets in a sustainable way. Short-term spots of market nervousness will continue to trim the rebound of the single currency. However, longer term, the rising interest rate support should continue to give the euro decent downside protection.

Recently, we turned more cautious on EUR/USD. However, Tuesday’s rebound after the Fed rate cut and yesterday’s intraday rebound show that the 1.43 range bottom is not really in danger. So, we are more confident on our long standing buy EUR/USD on dips strategy in case of corrections lower in the 1.43/1.4968 trading range. Renewed stock market uncertainty in this respect might provide short term buying opportunities in EUR/USD to play the trading range from the downside. We maintain stop-loss protection in case of a drop below the 1.43 range bottom.

Lingering doubts mostly on the European stock markets (despite the Fed action on Tuesday) yesterday morning helped the yen to set a minor reaction high against the dollar (USD/JPY tested the 105-area). Against the euro, the yen was not able to do so. However improved stock market sentiment helped both USD/JPY and EUR/JPY to stage a good rebound later in the session. However, no important technical levels are regained yet. This morning, the Japanese trade balance came in weaker than expected, as did the all industry activity index. A group of LDP lawmakers made pro- posals to support the Japanese stock markets, but markets are far from convinced that any of these proposals will materialize anytime soon.

We have a standing negative bias for USD/JPY, but turned more cautious ahead of the key levels in USD/JPY and EUR/JPY last week. For EUR/JPY, the break below the sideway range (158.70-area) is confirmed and also USD/JPY holds below the 107.22 previous low, even after Fed action and the current stock market rebound. A cooling of the stock market tensions could take some of the shine of the yen short-term. However, recently the yen negative corrections remained rather limited. The standing yen uptrend is not questioned at all. The technical picture of the stock markets remains the key driver for the yen. Major stock markets (including the S&P), even after yesterday’s rebound, remain below key support levels. So, the theme of risk avers investor behaviour is not out of the way at all. In a day-to-day perspective, the yen momentum may turn softer, but we still see more pronounced up-ticks in USD/JPY as a selling opportunity. A sustained re-break above 107.92 would indicate that the short-term yen momentum is waning and that the correction might have some further to go.

Yesterday, EUR/GBP extended its rebound, after setting a new low on Tuesday morning on global euro weakness in the heat of the stock market sell-off. The UK advanced GDP for the first quarter was slightly better than expected but failed to give the sterling support.

Today, there are no important eco data on the UK calendar. So, global market themes will set the tone for trading.

Looking at the graphs, last week’s downward correction in EUR/GBP halted after the poor UK retail sales report on Friday. The pair over the previous sessions held above the first important support level in the 0.7397/89 area, which is a euro positive from a short-term perspective and suggests that the downside in EUR/GBP is better protected. We hold on to our buy-on dips approach. Medium term, a drop below the 0.7240 previous high would question our longer-term sterling negative view.

Posted by MOHAMED SAID at 10:46 PM  

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