Market Drivers - Currencies

Market Drivers - Currencies

Review: Last week the euro zone also delivered 'soft' economic indicators. Once again unemployment in Spain and debts in Greece attracted attention, which was one of the reasons why EURUSD was traded below 129. Over the weekend, the German finance minister emphasised that Germany does not intend to release Greece from more debts and that Greece must demonstrate that the country can follow the austerity plan/rescue plan it has been given. Moreover, Berlusconi added to the precarious political scene in the euro zone.

The above indicates that the political agenda is indeed the big challenge in the euro zone. We expect that the negative pressure on EUR seen over the past week will gradually diminish as has been the case many times before.

Over the weekend the Bank of England warned twice against over-interpretation of recent good economic indicators in the UK. Both statements anticipate economic weakness in the fourth quarter. These statements are very much in line with our expectations that, on this basis, GBP will not strengthen further from the current level. In order for EURGBP to weaken further, EURUSD must first breach down below 128 and hence contribute to a further decline of EURGBP.

Important events of the week: This week will see several most interesting macro-economic events. Early in the week, particularly Bank of Japan's interest-rate meeting will attract attention. We expect that BoJ will give in to the enormous pressure that the new finance minister in Japan put on the BoJ in order to stimulate the economy further though the programme of asset purchases. Such an expansion has been discounted in the price of JPY, and therefore only if it does not materialise will EURJPY and USDJPY show strong fluctuations. If the BoJ expands the programme, EURJPY may trade up to 105-107 (see chart) and USDJPY will have scope up to the range of 82-84. Read more on the next page.

Tomorrow house prices and consumer confidence from the US will be announced. On Wednesday we will see retail sales and the interest-rate meeting in Norway as well as the ECB's loan survey. On Thursday, PMI (China), ISM (the US) as well as PMI (UK, NOK & SEK) will be announced. Finally, the very important Non-Farm payroll will be announced in the US on Friday.

Market sentiment: The financial markets are still characterised by an underlying negative sentiment. Particularly equities and several commodity indices show strong signs of a gradual close of the 'long-only position trend' that we saw in connection with the expectations that the Fed would announce QE III.

EURUSD (NEUTRAL): We recommend a BUY ORDER at 131.85. S/L at 130.45. Also, we recommend a SELL ORDER at 127.85. S/L at 129.58. We choose to place BUY and SELL ORDERS as we assess that generally there is an equal likelihood of a breach on the up or downside for EURUSD. What we know is that when EURUSD sees a – significant – breach of 132 or 128, there is a strong likelihood that EURUSD will show strong fluctuations in the direction of the breach with a subsequent trend that may last for quite some time. A breach above the top at 131.72 would be the final confirmation that EURUSD continues up towards our 3-month target at 138. If that happens, there will be resistance in the range of 134-136. If we see the breach this week, we assess that it will most likely take place at the end of the week. Maybe in connection with the announcement of Non-farm pay roll in the US. EURUSD has formed a GOLDEN CROSS, which is a significant buy signal, characterised by the fact that the 50MA (green line) has breached up through 200MA (red line) and both averages have a positive slope. Investors 'using technical tools' as well as several FX models trade on this signal. (For further details see Friday's issue of Market Drivers).

EURSEK (SELL): We recommend SELL; T/P at 845 and S/L at 879. There is strong resistance at 871.31 (200MA) and the upper trend line at 872. Also, there is an express divergence which adds to the probability that EURSEK is about to peak this time around.