On Tuesday, there was only one factor to guide trading on all markets: the announcement of Greek PM Papandreou to hold a referendum. It is not yet clear what the exact subject of the referendum will be. However, on thing is very clear: Papandreou is making a very risky bet that might have extremely far-reaching consequences for Greece and for the European union/EMU.

EUR/USD was already under pressure on Monday, as the dollar gained across the board in the wake of the interventions of the BOJ. Late on Monday, Greek PM Papandreou then threw its bomb into financial world as he announced to hold a referendum on the EU rescue package for his country. It was impossible to oversee all the consequences of this step. Nevertheless, it was obvious that this would be the start of period of extreme uncertainty in Europe. So, the positive market reaction after last week’s EU summit was already more or less worked out and this announcement provided the perfect excuse for major comeback of the risk-off trade. EUR/USD was hammered on Monday evening and this move only continued on Tuesday. The analyses and comments were plentiful. However, the repositioning out of the euro simply continued. The widening of the intra-EMU credit spreads was another symptom of the rising intra-EMU tensions. The pair reached an intraday low in the 1.3610 area at the start of trading in the US. On Monday morning in Asia, the pair still changed hands in the 1.4150 area. Later in the US, some kind of technical consolidation kicked in. US equities hovered sideways after the steep opening losses and EUR/USD entered calmer waters, too. The US ISM of the manufacturing sector was weaker than expected (the details weren’t that bad) and had no big impact on currency trading. EUR/USD closed the session at 1.3703, compared to 1.3858.

Today, there are quite some interesting eco data and events on the calendar, especially in the US. In Europe the final PMI’s of the manufacturing sector will be published. We don’t expect these data to have a big impact on EUR/USD trading. The focus will be elsewhere. In the US the ADP labour market report is interesting. However, of late, the ADP report often failed to have a lasting impact on currency trading. A slightly better than expected figure is possible (consensus 101K), but it is doubtful that this will be able to change market sentiment in a profound way. At best, positive figures (from the US) might help to slow the sell-off of riskier assets, including of EUR/USD. Later today, the FOMC will announce its policy decision and Fed’s Bernanke will give a press conference at 19.15 CET. Especially the later will be interesting. We don’t expect the Fed to take additional measures of quantitative easing yet. In the press conference, the Fed President might address some questions on communication and we also look out whether he will give some hints that the Fed could take additional steps to support the US housing/mortgage market. The latter might be slightly USD-negative. However, even a move in that direction probably won’t be able to change the course of events on global markets. Of course, as was the case since Monday evening, the focus of EUR/USD trading will be on the EMU/Greek debt crisis. In this respect, one might expect all kinds of initiatives to try to contain the damage. Markets will keep a close eye on a meeting between German Chancellor market, French president Sarkozy, several EU leaders and Greek PM Papandreou. However, it is doubtful to this meeting will be able to remove the uncertainty. To conclude, the first stage of the sell-off might be behind us but there are still that many issues to be solved to bring the EMU rescue package back on track. In this context, we don’t see any compelling reason for the a sustained recovery of the single currency. For now, the issue of underlying USD weakness, which was still visible at the end of last week, will probably be of secondary importance. We assume that EUR/USD is again captured in a sell-on-upticks pattern.

Looking at the technical picture, at the end of last week and early this week, the pair had regained the ‘old’ sideways trading pattern roughly between 1.40 and 1.4550. This improved temporary the technical picture in this cross rate. However, the Japanese interventions and the announcement of the Greek PM again overthrew this improvement. The 1.3655 area was the first important support on the technical charts. This area was extensively tested yesterday, but no sustained break occurred yet. Nevertheless, we can’t assume any sustained rebound of the single currency as long as uncertainty remains as high as it remains for now. So, we change our short-term bias for EUR/USD from neutral(range trading in the old range) again to negative and we look to sell into strength. A break below the 1.3655/08 area might reaccelerate the sell-off.

On Tuesday, it looked as if USD/JPY had resumed the sideways trading, that has been developed of late. The only difference was that it occurred at a different level. The pair settled in a very tight sideways trading range in the lower half of the 78.00 big figure. The least one can say is that the pair has found a new equilibrium level very soon after Monday’s BoJ intervention. The pair moved cautiously higher during the US trading session as the sell-off on the US equity markets slowed. However, it is clear that the BOJ is the key factor for trading in this cross rate. USD/JPY closed the session at 78.37, compared to 78.17 on Monday evening.

This morning, sentiment on the Asian equity markets is mixed. Japanese equity markets are the underperformer (so the Nikkei doesn’t really profit from the interventions for now). Chinese indices outperform. USD/JPY remains under pressure and is returning toward the low 78.00 area. The fear for more BOJ action is probably the only factor to prevent further USD/JPY losses.

During most of the summer, USD/JPY was under pressure mirroring global dollar weakness while the yen continued to ‘enjoy’ an ongoing safe haven bid. The BOJ made clear that it stands ready to step in the market in case of further yen gains, which effectively occurred on Monday. Will it really be able to change the course of events in a fundamental way? We don’t see a trigger to change the current framework for USD/JPY trading. In September/early October, the dollar was in better shape even as US monetary policy suggests ongoing global dollar weakness. However, this broader dollar rebound was hardly visible in the USD/JPY cross rate. Any upticks soon met selling interest. We don’t see much room for a sustained rebound of USD/JPY, except when it might get additional support from the BOJ.

On Tuesday, EUR/GBP remained under pressure in the wake of the announcement of Greek PM Papandreou to hold a referendum on the new EU rescue package. However, the decline was less pronounced than was the case in EUR/USD. The UK eco data were mixed with the Q3 GDP growth slightly better than expected at 0.5% Q/Q. However, the PMI of the manufacturing sector was much weaker than expected as it dropped deep into contraction territory at 47.4. This slowed the decline of EUR/GBP. The pair set a correction low in the 0.8550 area. However, a test of the key 0.8531/31 area didn’t occur. EUR/GBP closed the session at 0.8592, compared to 0.8615 on Monday evening.

Today, the PMI of the construction sector will be published. We expect the indicator to be only of intraday importance for trading. EUR/GBP will again be affected by the overall story on the euro. In a day-to-day perspective, we have to impression that the post-Papandreou sell-off is slowing. A break below the 0.8531 area still won’t be that easy.

Global picture. In August/September the EMU debt crisis came again to the forefront. In addition, at the September meeting, the ECB put the normalization process of its policy rate on hold and even a rate cut is again possible. This changed, at least temporary, the balance between the euro and sterling. EUR/GBP dropped (temporary) below the key 0.8611 range bottom. Euro skepticism, at least temporary, outweighed uncertainty on more UK QE. Still, the downside pressure in EUR/GBP remained much more contained compared to the potential losses in EUR/USD in case the EMU debt crisis would worsen. In this context, we favoured a scenario of EUR/GBP holding the sideways trading pattern between 0.8531 and 0.8800. The bottom was under heavy pressure early October but the test was rejected. The October BoE decision to raise the amount of asset purchases pushed EUR/GBP again higher in the established trading range. A broader rebound of the euro in the run-up to the EU summit triggered further gains in EUR/GBP too. The pair tested the key 0.8795 neckline early last week, but the test was rejected. The announcement of a Greek referendum also triggered a major setback in this cross rate. However, the 0.8531 range bottom was not challenged yet. Uncertainty remains extremely high, but for now we assume that the range bottom will hold.

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