15th Dec. Weekly outlook on the currency market
Currency markets – Fundamentals starts to work……
EUR/USD (1,3650): Most attention this week will be on Fed Tuesday but not in focus as the last couple of times. A rate cut of 50 basis points is priced in already with a possibility of 75 basis points, but regardless of the cut it of course doesn’t draw the same attention as this will be the last or the second last rate cut. So it might be fair that fundamentals gain in importance as the markets are always searching for new clues.
EUR/USD broke 1,3000 three trading days later than expected in the Weekly from 1st December. The move was partly linked to developments in the stock markets but fundamentals all of a sudden did send the greenback lower.
What is the most important factor then, the smart person naturally asks? Good question, as interest rates are also back in the game. As mentioned in the last Weekly is EUR the only remaining high yielder among the major currencies. It has become even more clear after the latest comments from ECB members where they indicate a slow pace in rate cuts now.
That the stock markets are less important for the Dollar is due to less investor outflow from hedge funds. It means less need to sell equities and generate USD cash, so other forces like fundamentals and short term interest differentials have some importance again. If I should try to put a number on the importance of the 3 factors, then I would say stock markets explains 50% of the Dollar moves (down from 85%+), fundamentals are around 35% and short term interest rates 15%.
Public debt and similar obligations (like bank guarantees) I regard as a fundamental risk. This is growing and so is the concern about the rising debt – in the nearest future the exploding US Government obligation will be the biggest concern regarding public debt globally.
Two other US numbers are actually interesting during this week. Housing starts on Tuesday (expected 730k) and Philly Fed on Thursday (expected -40,0). The EUR/USD reaction will follow the numbers i.e. good numbers send EUR/USD lower and vice versa.
Some will of course watch the German IFO on Thursday (expected 84,0) but it should not move the market.
The target at 1,3000 and the next at 1,3250 was reached. Sentiment is Dollar bearish right now, so 1,3800 is the next step followed by a 1,3300 – 1,3800 range.
Target: 1,3800 followed by range 1,3300 – 1,3800.
EUR/GBP (0,8935) – GBP/USD (1,5300): The EUR/GBP range 0,8100 – 0,8600 surely didn’t hold as EUR is fairly bid and fundamentals plus short term interest rates dominates Sterling these days.
As usual one can’t find anything positive to say about the British economy, where the housing market still is the biggest concern. It looks like the private household debt (particularly related to real estate) will weight seriously for a long time to come.
Like mentioned above are short term rates starting to play a role again where the surprisingly large cuts from Bank of England simply sends Sterling lower. It wouldn’t be a surprise if the base rate is lowered almost to zero. GBP will very suddenly get a new life as funding currency…….
On Wednesday Bank of England releases minutes from the MPC meeting, that will be interesting reading. The fast and large rate cuts give reason to believe that the people at Bank of England are very worried about the outlook.
Sterling might be oversold short term but the reality will send GBP lower.
Targets: EUR/GBP 0,9500 GBP/USD 1,4650.
EUR/JPY (124,00) – USD/JPY (90,75): The trading pattern in Yen confirms that not only equities decides the currency market these days. The targets at 118,50 in EUR/JPY was reached for the 3rd time and for the first time at 90,00 in USD/JPY.
118,50 will only be reached again if USD/JPY drops well below 90,00 or if equities turns towards the lows.
Equities will be sold off again but depending on where JPY is trading when it happens, levels below 118,50 could trade again, though I am not so convinced.
So far Bank of Japan stayed away from intervening in the currency market, but it will come. They of course used verbal intervention already but that was to expect. Bank of Japan will be intervening alone, which is a reason why they try to wait as long as possible.
I still think that 90,00 is the pain level.
Macro economic the picture is like usual extremely bleak. The Tankan report from Monday morning just once more confirmed it with a reading of -24 against -3 last. A number of -23 were expected, so one could argue that it was priced in the market. Maybe, but it’s very difficult to price the full effect in as the economy is dropping to a new absolute level with a new demand situation at a much lower level.
The target was reached but USD/JPY will continue to test the downside followed by intervention giving some wild swings. EUR/JPY will be wild as well due to intervention, but I argue for an underlying 119,00 – 126,00 range.
Targets: EUR/JPY range 119,00 – 126,00 USD/JPY swings around 90,00. Expect intervention.
Loading ...