Euro Hammered By Negative Credit Headlines

Daily Forex Fundamentals | Written by KBC Bank | Oct 06 08 08:10 GMT |

Sunrise Market Commentary US Treasuries rise on approval TARP, as it doesn't convince equity investors Treasuries had some modest gains on the gain, but staged a spectacular reversal when equities hit again the skids on the second the TARP bill got a majority in the House. Does this lead to more pain in risky markets today? Bund breaks higher The Bund on Friday tried to break higher (116.13 was key resistance), but didn't really succeed. More troubles in financial sector in the week-end push the contract again higher. Decisively this time? The short end of the curve still outperforms Euro hammered by negative credit headlines The credit-tsunami causes material damage in Europe and the euro pays the price. The euro continues to lose ground against the dollar (despite very poor payrolls) and even EUR/GBP currently tests a key support area The Sunrise Headlines US Equities started the day hopeful on Friday, but declined sharply once the $700 billion bailout plan was accepted by the House of Representatives; Dow/S&P ended 1.50%/1.35% lower. Asian stocks plunge on renewed tensions in financial markets in Europe. European leaders announced that they will not create a pan-European fund for banks; but each government will act according to its own methods and its own means, but in a coordinated manner with the other European states. After the Dutch government agreed on Friday to buy most of Fortis's operations in the Netherlands for 16.8 billion euros, BNP Paribas takes control of the remaining assets via a share swap. Fortis shares are suspended from trading on Euronext Monday. The German government and the country's banks and insurers agreed on a 50 billion euro rescue package for Hypo Real Estate. In a reaction, chancellor Angela Merkel said the German government will guarantee all private German bank accounts. UniCredit announced a plan to raise 6.6 billion euro in new capital after investor confidence fell and the share price came under pressure. The US Securities and Exchange commission declared the ban on short selling will expire October 8. Crude oil ($91.70) drops on fears the turmoil in financial markets and the economic slowdown in the US will hurt demand. Currencies: Euro Hammered By Negative Credit Headlines On Friday, EUR/USD showed some wide intraday swings, but at the end of the day the pair was only little changed. The EUR/USD cross rate started trading in Europe in the 1.3850/1.3900 area and continued to trade in the 1.3800/1.3900 range throughout the morning session. As was already often the case recently, the US traders joining the market action triggered again a steep decline in EUR/USD. The US payrolls came out (much) weaker than expected but even this was not able to stop the ascent of the dollar against the euro at that time. EUR/USD set intraday lows just above 1.3700 in the wake of the US payrolls release. The pressure eased later in the session as markets looked forward to the outcome of the vote on the US bailout plan. In nervous trading the pair even temporary returned to the 1.39 area after the voting of the plan but the dollar finally kept its composure and closed the session at 1.3772 compared to 1.3819 on Tuesday. The least one can say is that this is again a decent performance from the US currency considering the very weak payrolls report and the lackluster stock market reaction to the approval of the US bailout plan. Over the weekend, the focus in the markets obviously turned to the European banking sector with a series for European governments stepping in and taking measures to support their local bank sector. This clearly weighs on the single currency this morning with the pair trading in the 1.3620 area at the moment of writing. Today, the calendar in the US only contains the pending home sales. In Europe the eco calendar is even almost empty. However, the flaring up of the credit crisis, especially in Europe, most probably will continue to set the tone for trading on all markets. EUR/USD is already under heavy pressure for quite some time and the new episode in the (European) credit crisis doesn't make things easier for the single currency. At the current juncture, it is almost impossible to make an assessment on who (Europe or the US) will be hurt the most by the recent developments. Will the US bailout plan be enough to bring back some stability to the US financial system? What will the plan ultimately mean for the US budgetary and global financial position? How long will it take for the credit-addictive US economy to overcome the current crisis? Al these considerations might look justified, but this obviously is not what determines sentiment on the currency markets right now. Markets currently are focused on the lack of coordinated action in Europe and the quick deterioration in European eco data. Together with a still dollar positive market flow, this keeps the dollar in the driver's seat for now. As indicated above, we're not impressed by the fundamental talk that is supposed to drive the current decline in EUR/USD, but for now EUR/USD is a falling knife and there no reason at all to try to catch it. EUR/USD: sell-off accelerates USD/JPY From a technical point of view, EUR/USD rebounded from the 1.3885-area and set a new reaction high in the 1.4865 area. This was a significant correction, but the key 1.4900/10-area (reaction highs) was not challenged and last week EUR/USD turned again south. The pair lost a series of key support levels. The previous low (1.3882) and the longstanding daily uptrend line since 2002 (today in the 1.3980 area) are now broken and this worsens the picture for the pair further. Sustained return action above the previous low (1.3882) would be a fist indication of an easing in the euro sell-off. The pair regaining the 1.43 break down area is needed to really call of the alert. Obviously, we are not at that point yet. So, this remains EUR/USD sell-on upticks environment. On Friday, USD/JPY was an era of relative calm with some high profile events like the payrolls and the approval of the US bail-out plan on the agenda. The pair hovered in the 105 area during the morning session in Europe, almost ignored the US payrolls report and even tested the 106 area as US stocks opened in a positive mode. The disappointing stock market reaction to the US bailout plan caused USD/JPY to give back the earlier gains. The pair closed the session at 105.32, unchanged from the close the previous day. However, the new episode in the (European) credit crisis and the sell-off on the Asian stock markets this morning finally helped the yen to fully take up its mission as safe haven in the currency markets. EUR/JPY takes the lead in the decline, but also USD/JPY is now feeling the heat and the pair extensively tests the 103.50 support area. On the technical charts, USD/JPY set a reaction low in the 103.55 area after the Lehman crisis. The hope on a US bail-out plan propelled the pair again higher in the 103.55/110.68 trading range, but the gains could not be extended and renewed global market stress caused the pair to retest the range bottom last week, but a real break didn't occur till this morning. Recently, we indicated that we were not impressed by the yen performance. However, the global tensions apparently have now become sever enough for the yen to take advantage of the situation. A sustained break below the 103.50 range bottom is a clear warning signal and suggests that there is room for more downside in this pair. The hypothesis of range trading in the 103.50/108 range is under sever strain. At least partial stop loss protection on USD/JPY longs is warranted. The latter of is of course even more appropriate for EUR/JPY longs USD/JPY: tests key support area. EUR/GBP The euro sell-off that hammered the single currency against almost all major currencies is now also visible in EUR/GBP. The sharp decline in EUR/USD early in US trading also spilled over to EUR/GBP and the pair dropped to the 0.7755 area; testing the key longstanding bottom of the sideways range. There was a small rebound later in the session and the pair closed the day at 0.7777, still a decent gain for sterling compared to the 0.7834 close on Thursday. The very poor UK ISM from the services sector (dropping to 46.00) hardly had any impact on trading. The overall euro weakness was the name of the game, also for EUR/GBP trading. Today, the UK calendar is empty. Recently, the sterling showed remarkable resilience vis-à-vis the euro (despite global market stress and ongoing poor UK eco data) and dropped below a series of intermediate support levels and. Late on Friday and this morning the pair attacked the key 0.7760 area, the bottom of the longstanding sideways trading range. Recently, we advocated that we didn't see the need for a major/sustained comeback of the sterling against the euro based on the eco (and financial) picture in both areas. However, the global sell-off in the euro obviously is the dominant market theme and the break below the 0.7766 range low is a high profile technical alert that shouldn't be ignored. So, we have to leave our long-standing sideways trading approach in this pair. Stop loss protection on EUR/GBP longs is highly warranted. Longer term, we are not convinced that the UK eco and financial fundamentals call for a strong sterling rebound against the euro, but as long as the hyper euronegative sentiment on markets persists, this is not a good argument to fight the current EUR/GBP sell-off. EUR/GBP: key support under heavy pressure News US: Payrolls confirm recession fears The payrolls report showed a drop of 159 000 in employment in September, while the consensus was seeking for a more modest decline of 105 000. The August figure was slightly upwardly revised from -84 000 to -73 000 and the July outcome was downwardly revised from -60 000 to -67 000. Overall, employment was 52 000 below expectations. The unemployment rate stayed unchanged at 6.1%. Looking at the details, private payrolls plunged 168 000, while government payrolls added 9 000. The service providing sector deteriorated sharply (-82 000 from -16 000), but also goodsproducing (-77 000 from -57 000) sector worsened. Healthcare and mining were the only sectors continuing to add workers, but growth in healthcare and education declined from 59 000 in August to 25 000 in September. Temporary help agency payrolls improved from -35 000 to -24 000, but remain very weak. Average weekly hours worked, which is traditionally falling in recessions, reached its lowest level since series began in 1964, while average hourly earnings were 0.2% M/M up. The Labour Department commented that it was unlikely that hurricane Ike had substantial effects on the payrolls. This is the ninth consecutive month of job losses and together with the manufacturing ISM it raises fears that the US economy is in recession. September non-manufacturing ISM came out in line with the expectations at 50.2, after 50.6 in August. Business activity (52.1 from 51.6), new orders (50.8 from 49.7) and new export orders (50.5 from 44.5), which are important sub-indices, showed an improvement, while employment (44.2 from 45.4), backlog of orders (46.5 from 49.0) and inventories deteriorated. Prices paid slowed from 72.9 to 70.0. This outcome is sharply in contrast with the plunge in manufacturing ISM seen earlier this week and might be an outlier. EMU: Retail sales surprise on the upside In August, euro zone retail sales surprised on the upside rising 0.3% M/M, while the July figure was upwardly revised from -0.4% M/M to 0.1% M/M. On a yearly basis, sales were falling 1.8% Y/Y. Retail sales are a pointer of household consumption and with both July and August sales showing an increase, this raises hopes that household consumption might show a rise in the third quarter of 2008. Other: Also services PMI plunged to record low In the UK, September services PMI disappointed coming out at 46.0, while the consensus expected a figure of 48.0. Looking at the details, all sub-indices showed deterioration. New business (45.2 from 47.1), outstanding business (42.1 from 44.1) and business expectations (58.2 from 61.0) worsened significantly, while employment declined slightly. Prices charged and input prices came out lower. With both manufacturing and services PMI dropping in September to its lowest level since series began, an early rate cut in the UK is very likely Download entire Sunrise Market Commentary