Trichet Shows Unease With Euro Strength But Gets No Official G10 Support

Sunrise Market Commentary

- US Treasuries surge higher on rumour mill
Treasuries got a further boost on rumours about liquidity problems at Bear Stearn that was denied later on and lower equities. However, overnight large chunk of the gains were erased, as Asian equities moved higher. Equities and credit market events key factor for trading today. New high on June Note future needs confirmation.
- Rising tensions on the European money markets
Yesterday, the Schatz, Bobl and Bund futures all set new contract highs. For now, we remain bullish on the outlook for European bonds and would use dips towards the 117.24 level to add to long positions, as the reluctance of the ECB to cut rates will fuel the idea the ECB is falling behind the curve and will have to do more afterwards.
- Trichet shows unease with euro strength but gets no official G10 support
Yesterday, Mr. Trichet said to be concerned about excessive exchange rate moves. However, the G10 apparently didn't join his concerns and the markets weren't impressed either. The US data and events probably will continue to set the tone for USD trading and for now the US news flow remains dollar negative

The Sunrise Headlines

- US equities continue their slide after rumours on problems at Bear Stearn drag the financials to new cycle lows. S&P now at the cycle lows, NASDAQ dropping further below lows confirming break.
- Asian equities higher despite Wall Street's decline and soaring Chinese inflation
- Bear Stearn denies rumours that it has liquidity problems but stock tumbles 11%.
- Lehman is laying off 5% of its workforce according to sources, while Blackstone reported very weak quarterly results, but stock ends up.
- Chinese inflation surges higher to 11-year high (8.7% Y/Y), stoking fears of a tighter monetary policy
- ECB Trichet sounds alarm on euro's rise, FT reports
- Crude seems unstoppable as it sets new high above 108 $/barrel, before easing marginally. There is no fresh news behind the move. Dollar weakness and hedge fund buying continue to be the talk in the market. Other commodities traded calmer.
- Very weak UK housing prices (RICS) and retail sales (BRC) might affect UK markets at opening
- German ZEW index and IEA oil report highlights for trading today

Currencies: Trichet Shows Unease With Euro Strength But Gets No Official G10 Support

On Monday, the eco calendar was thin, but global investor sentiment was still haunted by a new wave of negative credit headlines and rumours. However, the impact of these credit-related stories on EUR/USD was rather limited. EUR/USD traded in the 1.5360/80 area waiting for the declarations from Mr. Trichet after the G10 central bankers meeting. The G10 sees downside risks to the global economy, but also continues to warn about inflation risks. On currencies, the G10 apparently didn't feel the need (or didn't reach a consensus) to make any comments on the decline of the dollar or the strength of the euro. So, on this Trichet could only make some comments in its function of ECB president, and not as chairman of the G10. As ECB president, Mr. Trichet said to be concerned about excessive exchange rate moves and repeated that he noted with extreme attention that the US supports a strong dollar. Of course, the fact that he could only make these remarks as ECB president and not as G10 chairman suggests that there is no big support for the European point of view. On top of that, it remains difficult for the ECB to advocate a strong anti-inflation policy while at the same time trying to cap the strength of the euro which is perfectly in line with its anti-inflation policy. So, the EUR/USD reaction on Trichet's remarkets was rather limited. EUR/USD briefly dropped to the 1.5320 area upon the Trichet headlines but returned to the 1.5350 area soon and closed the day at 1.5340, marginally lower from Friday's closed at 1.5356.

Today, the eco calendar contains the US trade balance and the ZEW economic sentiment in Europe/Germany. Both series recently only had a rather limited impact on trading.

Regarding trading, we have a dollar negative bias and recent developments support that view. At least for now, we are not really impressed by Mr. Trichet's attempts to slow the ascent of the euro. In case of more bad news from the US, the ECB warnings will be forgotten soon. Last Friday's post-payrolls correction suggests the market needs some consolidation after the recent steep dollar losses. This may continue today and tomorrow as the US calendar is back-loaded this week with the US retail sales scheduled for Thursday and the CPI on Friday. However, room for any sustained dollar rebound remains limited.

Looking at the graphs, the EUR/USD picture was already euro constructive and the break above the 1.4968/1.50 only opened the way for further euro gains. We continue to feel confirmed in our long-standing buy-on-dips approach. The short-term picture remains positive as long as the pair holds above the MTMA (1.5174). A correction below could signal that the euro rally shifts into a lower gear.

Short-term the pair remains in overbought territory.

Support is seen at 1.531202 (Reaction low/Break-up hourly + daily envelop), at 1.5289/85 (Reactrion low hourly/Broken weekly Boll Top), at 1.5266 (Weekly envelope) and at 1.5174 (MTMA).

Resistance is seen at 1.5404 (ST high), at 1.5427 (daily envelope), at 1.5465 (reaction high), at 1.5482 (2nd target triple bottom) and at 1.5536 (Last target triple bottom).

USD/JPY

Yesterday, USD/JPY resumed its gradual downtrend and drifted lower throughout the session. A series of negative credit headlines during the US trading hours only reinforced the gains of the Japanese currency. USD/JPY dropped to the101.60 area yesterday and USD/JPY even came close to the 101.4 area (post-payrolls low) this morning. However, the test was rejected and USD/JPY currently trades again in the 102 area. The G10 meeting hardly left any traces on
USD/JPY trading.

This morning, Japanese Finance Minister Nukaga said he will keep carefully watching the FX markets. However, the rebound in USD/JPY this morning in Asia probably has more to do with the (slight) improvement in stock market sentiment in Asia rather than with the Fin Min comments.

Over the previous two weeks, USD/JPY fully joined the global dollar decline. Overall dollar weakness and a flaring up of global risk aversion hammered the pair to new cycle lows. Key technical levels are coming with striking distance (101.22 is 1999 low). Japanese officials will probably try to prevent an uncontrolled USD/JPY sell-off. However, we don't have the feeling that they are already at the point to take decisive action yet. This remains a sell USD/JPY into up-ticks market and if global market/credit uncertainty persists, a test of the 100 level is on the cards.

EUR/GBP

On Monday, EUR/GBP started the week on a weak footing, extending last week's correction. The pair event tested the0.7600 area around noon. The PPI and production data painted a mixed picture and only had a limited impact on trading. However, later in the session, the negative headlines from the financial sector and the credit markets again weighed on sterling sentiment and EUR/GBP started a gradual rebound bringing the pair to the 0.7637 at the close, even slightly higher compared to Friday's close.

This morning, the BRC retails sales and even more the RICS house price balance again painted a break picture on the health of the UK economy and sterling is again feeling some headwinds this morning, with EUR/GBP trading above the 0.7650 area at the moment of writing.

Except for the correction on Friday, EUR/GBP recently held close to the recent highs suggesting ongoing upward pressures in this pair. After the recent steep gains in EUR/GBP, some temporary consolidation shouldn't come as a big surprise. However, we hold on to our view that any sterling up-ticks should be considered a temporary in nature.

On the graphs, EUR/GBP set a corrective bottom at the end of January which was confirmed mid February. The break above the sideways trading range late February was an additional sign that sterling remains very vulnerable both to negative financial sector headlines and to fears of a pronounced slowing in UK growth. Short-term corrections on overbought conditions are always possible, but the trend is obvious and there is no reason at all to row against sterling negative tide. Any downward corrections in EUR/GBP, if they were to, occur, are seen opportunities to sell the sterling. The previous highs in the 0.7550/80 area should already give decent support in this pair.

The pair is in neutral territory

Support is seen at 0.7632 (reaction low), at 0.7620 (MTMA), at 0.7605/96 (ST low/Daily envelop), at 0.7580/77 (MT break-up + Weekly envelop/38 % retracement) and at 0.7553 (Break-up daily).

Resistance comes in at 0.7679 (Break-down), at 0.7693/97/99 (Reaction high/Second target double bottom/ irr B) and at 0.7706(Target triangle break).

News

Other: Input PPI rise to record high, while industrial production stalls

In the UK, the PPI showed little sign of abating price pressures, as the input PPI reached a fresh record high at 19.4% Y/Y and the output PPI stabilized at a 17-year high of 5.7% Y/Y in February. Core output PPI eased slightly from 3.2% Y/Y in January to 3.0% Y/Y in February. The persistence of strong increases in PPI is expected to keep an upward pressure on consumer price inflation in the coming months, which was already expected to rise towards the 3% level by mid-year.

At the same time, industrial and manufacturing production growth stagnated in January. In the three months to January, output remained unchanged compared to the three months to October, while the increase in energy supply was offset by the decrease in mining and quarrying.

The combination of upside inflationary pressures and slowing economic growth still puts the MPC between a rock and a hard place.

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