USD/JPY rally continues. EUR/USD support holds

Yesterday, the dollar stayed well bid in the wake of Wednesday’s Fed decision. Investors concluded that the Fed rate projections pointed to substantial interest rate support for the dollar in a not-that-distant future. USD/JPY was still taking the lead in the dollar rebound. The pair touched a new top just below 109 after strong (low) US jobless claims. EUR/USD is also on a downward trajectory, but failed to decline below the 1.2860/35 support area.

Overnight, most Asian equity markets are in positive territory, joining the good equity performance of the US yesterday. Japan continues to outperform, powered by an ongoing decline of the yen. The Scottish no vote is a positive for global sentiment on risk too, even as it is less important for Asia. USD/JPY is supported by higher US bond yields and has cleared another big figure, trading in the low 109 area at the moment of wring. The Japanese economy Minister said that rapid FX moves are undesirable. However, this is just political tactics to counter opposition from its trading partners. EUR/USD is back above the 1.29 barrier. We see the move in the first place as technical in nature (impact from the short squeeze in cable?).

Today, markets will we driven by global sentiment on risk, as the eco calendar is unattractive. The Scottish No will support a risk-on sentiment on European markets. In a first reaction, it could be a slightly positive for the EUR/USD, too. Speculation on the potential consequences for other separatist actions within the EMU will cool down and peripheral bonds will outperform. However, the market focus on Scotland will not last long. Even more, a further rise in core bond yields (due to risk-on or for other reasons) is at least as positive for the dollar as it is for the euro. There might be quite some repositioning to do in the major dollar cross rates today, but in the end we think it won’t be easy for EUR/USD to regain 1.30. After the close of the European markets we keep an eye on the rating agencies. There is market talk that Moody’s might downgrade France. Such a move won’t be a surprise for markets, but doesn’t help the euro. To conclude: The global context at the start of the day is euro positive, but we expect a positive reaction (if any) to stay limited. We maintain a sell-on-upticks strategy.

From a technical point of view, USD/JPY extends its rally after the break of the key 105.44 resistance. The Fed statement was balanced, but the rate projections suggest that the dollar might get additional interest rate support in the short-to-medium term. At the same time, the yen remains in the defensive as markets see a decent chance of more BOJ easing down the road. 110.66 is the next important resistance. We have a positive bias on USD/JPY, but after the recent strong gains, the pair is moving into overbought territory. With the 110 barrier coming within reach the upside momentum may slow.

The technical picture of EUR/USD deteriorated further after the break below the key 1.3105 level (Sept 2013 low). This level is now the new resistance that will be difficult to regain. The negative deposit rate is a structural negative for the euro. The Fed communication was mixed hawkish, but the difference in policy bias and projections of higher official interest rates keep the dollar well bid. In a longer term perspective, the EUR/USD downtrend remains in place. 1.2755/1.2662 is the next key support. A more pronounced correction (EUR/USD rebound), is an opportunity to add to EUR/USD short exposure. The recent consolidation helped the mark to digest the post-ECB oversold conditions.

A “No” vote already discounted in sterling?

Yesterday, sterling rallied further against the euro and the dollar. A series of opinion polls pointing to a “No” vote made currency investors closing sterling shorts. The UK retail sales were slightly weaker than expected at 0.4% M/M and 3.9%Y/Y. The CBI industrial trends also missed the consensus estimate.
However, the currency market failed to react. Even more, sterling started another up-leg early in the US trading session. EUR/GBP dropped below the EUR/GBP below the key 0.7875 support. Stop-loss sterling buying filtered also through into cable. The cross rate rebounded to the 1.64 area, despite low US jobless claims and an overall good performance of the dollar. Sterling was clearly positioned for a “No” vote.

It appears that currency markets were right to position for a “No” vote. Sterling jumped temporary above the 1.65 barrier in Asia as the first results confirmed a rejection of independence. EUR/GBP set a new correction low in the 0.7810 area. However, as the “No” vote was already largely incorporated in the currency market, the sterling rally ran into resistance soon. Later today, there are no important eco data on the calendar in the UK. So, sterling trading will still be dominated by repositioning in the wake of the Scottish referendum.

Of late, we had removed our long-standing sterling positive, EUR/GBP negative bias due to the uncertainty on the outcome of the referendum and put stop loss protection on GBP-longs. In retrospect, the damage of the uncertainty on Scotland for sterling has been modest. EUR/GBP is now even well below the lows reached before the uncertainty on the referendum became an issue for the currency market. The uncertainty on Scotland being out of the way is a LT positive for sterling. However, we think that further strong gains are not evident short-term. Even small buy-the-rumour, sell-the-fact reaction of sterling is possible. For EUR/GBP we tend to reinstall a cautious sell-on-upticks bias. The upside of cable will be even more difficult due to overall USD strength.