With one trading session down and four to go this week, already the mighty U.S dollar has managed to take a healthy breather on Monday. There were several notable market moves that managed to end up handcuffing the dollar. Precious metals bounced ahead of multi-month lows to record their best day in two-months, while the dips in US yields across the curve succeeded in giving the dollar’s its offered look. The 18-member single unit (€1.2626) had its best day in nearly a year, with momentum divergence seen both outright and in AUD/USD ($0.8800) – investors should work with these heavy breathers within the context of a much bigger trend. Day’s like yesterday allows investors better levels to once again own the mighty USD.
RBA and BoJ upping currency rhetoric
During the Australasian session, central banks once again were able to run the tables. The RBA remained on hold at +2.5% for the 13-consecutive meeting as had widely been expected. Governor Stevens reiterated that “monetary policy is appropriately configured” and “inflation is consistent with the 2-3% target.” For many, the accompanying statement was nearly a carbon copy with a marginal update on exchange rate, noting that the AUD ($0.8800) remains high by historical standards – Stevens has been mostly relying on the “above most estimates of fundamental value” copy. The AUD has dropped +7% since the central bank last met. Nevertheless, the RBA acknowledged a “volatile” labor data after the august employment change put in a 36-year high. The Aussie briefly fell about -20pips, just above of $0.8730, but has managed to rally since the post-RBA announcements. The commodity and interest sensitive currency has erased all of its early losses and has set sights on the psychological $0.8820 for a short-term objective. The AUD trend lower seems to be losing some momentum according to the daily averages. Market resistance at last week’s high ($0.8827) and any potential break of this should open the 20-day MA at $0.8883.
Yen on firmer footing
The JPY has also strengthened (108.59) after the BoJ made no changes to its monetary policy, but PM Abe mentioned the damaging effects of a weaker yen on smaller companies and households. The only concern that Japanese officials have with a weaker currency has more to do with “speed” rather than breadth. The risks looks to be for more ease with even Governor Kuroda noting earlier in Diet testimony that action “will be taken if economic and price outlooks veer from price outlooks.” Both EUR and AUD/JPY have since traded sideways, while GBP and USD/JPY are underperforming.
Germany delivers another body blow
Lackluster German industrial production is dealing a body blow to Euro equities already this morning. Euro bourses have been burdened by German lackluster data, which again is dealing another body blow to the region’s largest economy and raises market concerns surrounding the growth outlook for the whole region.
Factory output slumped -4% in August – well below a decline of -1.5%. Making matters worse was July’s numbers being downwardly revised to growth of +1.6% from +1.9%. Numbers like this will only solidify weak expectations for IP numbers in Q3 and Q4 and lead to downside risks to Germany’s Q3 GDP growth forecast. Yield spreads have so far failed to widen in favor of a stronger USD since mid-last month. This may suggest that the aggressive dollar move that has been clearly telegraphed since early July may have overshoot its medium term objectives. The weaker dollar longs could be the most obviously exposed.
On the other hand, the USD continues to outperform within the G10 group as we enter Q4 and this despite the pace having slowed near multi-year record dollar highs. Policy differentials will also consolidate in the U.S. dollars favor, and the latest round of data could suggest that it’s the Fed that could end up be the most assertive of central banks, maybe even dislodging Governor Carney at the BoE to be the first developed banker to tighten monetary policy.
The 10-DMA continues to cap the market and protect the short EUR trade. Two failed attempts by that average, last at €1.2662 have been seen today. The “short” EUR positions continue to target €1.2465, with their stop-losses parked north of the psychological €1.2700 handle. The intraday indicators continue to work on the market’s “oversold bias,” while the underlying trend remains firmly with the EUR ‘bear’ ever since the ECB has failed to convince the market that the eurozone inflation expectations have not fallen again. Draghi has failed to convince markets that the ECB’s balance sheets can be expanded to 2012 levels (+EUR3b) sufficiently quickly to avert deflation – for the EUR ‘bear’; the trend remains your friend unlike disproven. The market should not be surprised that a plethora of EUR option strikes could help to contain the near term range of the EUR – today €1.4b (€1.26), €500m (€1.2635). Wednesday – €1.65 (€1.26) roll off before FOMC meet.
Vicious circle: U.K. Factory output slides
U.K factory output disappointed in August (+0.1% vs. +0.3% m/m), driven by automakers summer shutdown while exports kept slowing. In annual terms, August fared better than 2013 with a +3.9% rise compared to +3.5% previously.
Economic weakness in the eurozone, Britain’s largest trading partner and geopolitical pressures with Russia means the UK, like Europe, has to become more dependent on domestic demand to fuel the current rate of economic growth. More than 50% of British manufacturing companies sell abroad, accounting for more than +40% of total exports. Not to be too discouraged, other data from last week shows that U.K business investment went up by +11% in Q2 (largest yearly increase in seven-years). This should have a positive effect on demand for capital goods and benefit manufactures.
Nevertheless, the market seems more comfortable to sell GBP on rallies. Already this morning, there have been some pounds to go ahead of 1.6100. The techies the hourlies are about to topple from overbought levels and that the market risk is for easing action. Through 1.6050 opens up the door for speculators to once again focus on 1.6009 in the short term.
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