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Wednesday’s FX: Volatility And Uncertainty

Talking Points:

– Day sixteen of the US government shutdown: the debt deal that would cover costs into the 1Q’14 in question.

– US debt limit hit on October 17 (tomorrow).

House Republicans reject bipartisan Senate bill that would have ended stalemate.

INTRADAY PERFORMANCE UPDATE: 09:40 GMT

MAJORS

AUD

CAD

CHF

EUR

GBP

JPY

NZD

(vs USD)

+0.12%

+0.12%

0.00%

+0.04%

+0.16%

-0.23%

+0.45%

Dow Jones FXCM Dollar Index: -0.09% (-0.13% prior 5-days)

ASIA/EUROPE FOREX NEWS WRAP

A breakdown in talks between Democrats and Republicans late on Tuesday jolted market participants and put an immediate halt to the bubbling optimism that began at the end of last week. The US Dollar, which had shown signs of basing amid a resolution of the fiscal deadlock, has taken a modest step lower again as uncertainty reigns just one day before the debt limit is hit.

Headlines after the US cash equity session have proved to be the major determinant of price action in both the Asian and European sessions. The safe haven currencies swung violently against the commodity currencies in particular, with the many of the major’s daily ranges having been set during the illiquid 16:00 EDT/20:00 GMT to 20:00 EDT/00:00 GMT interssion break.

The shift in the expected outcome of the US fiscal negotiations yesterday – a medium-term resolution to nothing at all – has only had a modest impact on risk appetite. One needs to look no further than the AUDJPY, which is up by +0.35% on the day. Uncertainty, with respect to the US Dollar however, is rising. Take note of the overnight change in implied volatiltiy over the next week:

Percent Change 1-week Implied Volatility: October 15 to October 16, 2013

MAJORS

AUD

CAD

CHF

EUR

GBP

JPY

NZD

(vs USD)

+3.99%

+5.31%

+6.07%

+5.62%

+2.56%

+8.06%

+1.56%

Of note, expectations for US Dollar volatility jumped by +6.07% and +8.06% against the Swiss Franc and the Japanese Yen, respectively, a sign that the US Dollar may continue to suffer against its safe haven counterparts over the coming days – perhaps on the heels of a less-than-optimal (with the standard being yesterday’s purported three-month continuing resolution to reopen the government and four-month debt limit extension).

USD/JPY 5-minute Chart: October 16, 2013 Intraday

USD/JPY: 5 Minute” title=”USD/JPY: 5 Minute” src=”https://d1-invdn-com.akamaized.net/content/picbcd27859736ff9516701fd0f529d935e.png” height=”undefined” width=”undefined”>

Thus far today, traders have been fading the uptick in the USDJPY from the start of the Asian session, and today’s daily Inverted Hammer, Inside Bar highlights the hesitation among traders as the debt deadline approaches at the end of today.

AU CPI And The AUD

The AU CPI report today could solidify the current trend of the AUD. If we get a significantly better release, it could mean that RBA not only won’t cut rates in the future, but because of the rising inflation, rate hike could take place before the end of 2014. Of course, if the opposite is true, a weaker than expected release, market could initially sell off the AUD, but with RBA unlikely to cut rates further, AUD will probably recover shortly after.

Here is the current forecast:

9:30pm AU CPI q/q Forecast 0.8% Previous 0.8% DEVIATION: 0.3% (BUY AUD 1.1% / SELL AUD 0.5%)

The Trade Plan Here is the plan, if we get a better than expected CPI data, we should see an instant appreciation of AUD by at least of 40 pips within the hour, but if we get a worse than expected number, AUD should drop and we should expect the market to consolidate. Of course, the deviation that I am looking for must be at least 0.3%, or I will skip the after news trade… On a minimum release of 1.1%, I would buy AUD/USD after a decent retracement. If we get a 0.5% or worse release, I’d SELL AUD/USD immediately.

I’d recommend to use the Recommended Pairs from above as they are based on my CSM, which should provide the best combination of currency pairs to trade based on better/worse news… of course, you can also trade the default pair: AUD/USD.

Outlook Score Outlook score is derived from market sentiment, focus, and economic indicators for the currency. It represents the long-term trend of the currency and its market perception. In short, a strong Outlook Score means more long-term demand for the currency, and a weak Outlook Score is the opposite.

Definition “The Consumer Price Index (CPI) measures the rate of inflation (i.e., the rate of price changes) experienced by consumers when purchasing goods and services. A rising trend has a positive effect on the nation’s currency. The primary objective of the central bank is to achieve price stability; when inflation rises above an annualized rate of approximately 2%, they will respond by raising interest rates to bring prices down. Higher interest rates attract foreign investment, thus increasing demand for the nation’s currency. CPI is one of the most closely watched indicators and will usually have a high impact upon release.”

Eurozone HICP To Hit Fresh Cyclical Low, Increase Pressure On ECB

Traders seem very happy to watch and wait for Thursday’s fireworks it seems with price action particularly quiet yesterday. Eurozone manufacturing PMIs further increased the belief that something needs to be done by the European Central Bank; of course, nobody can quite agree on what needs to be done. Germany’s PMI fell to a 7 month low in May, with weakness seen as a result of a strong euro hurting exporters alongside Ukrainian fears and the late Easter. France’s manufacturing sector contracted once again and fell to a 4 month low while Italy fell to a 2 month low.Price pressures within the indices were not particularly extreme with most countries’ manufacturing sectors reporting ‘marginal’ softening in inflation. At the current levels however, marginal is all the averages need to be pushed into freshly poor territory.Germany’s preliminary HICP reading for May disappointed, falling to a 4 year low of 0.6% compared to 1.1% in April, with deflation of 0.3% on the month alone. If this isn’t a flag for the throwing of a kitchen sink at the European economy then I don’t know what is. The Eurozone-wide HICP measure is due at 10am and we would think that this German slip must push expectations below the 0.6% consensus. Of course, we must take into account core CPI as the ECB has been persistent in its attempts to validate its current policy outlook by emphasising the negative effects of food and energy inflation on the overall price basket.Yesterday’s UK PMI showed continued growth with a reading of 57.0, right on expectations. There is a danger that the continual good news from the UK economy becomes mundane but we are always happy to celebrate growth; the UK manufacturing sector has now expanded every month since March of last year. Once again the story remains the same as stronger hopes and expectations around the recovery engendered strong growth in output and new orders. For the 13th month in a row we have seen employment increase as well allowing backlogs to be reduced across the sector, and export orders were strong globally, including areas – such as Europe – where aggregate demand has become an issue.This number continues our assessment that the 1.3% growth in manufacturing and industrial production in Q1 was ably looked after heading into Q2, and increases the chances of a figure north of 1% for Q2 GDP.There is not enough time to fully explain the awesome strangeness of what happened with the US’s ISM number in the afternoon. Originally the Institute for Supply Management reported that it’s PMI for the US manufacturing sector came in at 53.2 in May, down from 54.9 in April; a miss against expectations. This was definitely an unwelcome surprise as it showed jobs growth slowing and the inventories – a facet of the US economy that is expected to have a strong Q2 – remaining very poor.The fears were that the weather-related bounce had taken place in April and was now over. This figure was then revised twice by the ISM as it became clear that a computer error had entered incorrect seasonal data. The true number hit expectations of 55.4 and increases belief that the US economy should accelerate from here. The non-manufacturing number is due tomorrow.Overnight, the Reserve Bank of Australia has completed its latest monetary policy meeting and kept rates on hold at 3.25%. The rhetoric against the strong AUD increased within the accompanying statement with the RBA stating that “the earlier decline in the exchange rate is assisting in achieving balanced growth in the economy, but less so than previously as a result of the higher levels over the past few months. The exchange rate remains high by historical standards, particularly given the further decline in commodity prices”. The AUD has ignored this however, possibly expecting stronger language, and is slightly higher on the session.Away from those Eurozone HICP and unemployment readings at 10.00 BST, we have the UK’s construction PMI release which is expected to stay at exceptional levels. We have seen this morning that, according to the Nationwide Building Society, house prices rose 11.1% nationally in the year to May. The figure is due at 09.30.

Indicative Rates

AUD Throws Away Recent Gains; US Data Now Dictates

Since AUD reached the 0.950 target it didn’t hang around long before bearing its heaviest sell-off in 8-weeks.

Below you may find the video

Trend Line Analysis: August 4th, 2015

We have focus on few majors crosses for the day, with AUD and GBP likely to make noise for heavy sets of data in store for the AUD in Asia and later GBP will react to it’s Construction PMI.

We have two setups on GBP crosses and one on the AUD, so while we come close their news events caution is required.

GBP/JPY

No change from yesterday’s layout, only the support has dropped in a tart lower. 192.7X is support we like to see a test and a hold to go long.

GBPJPY 2-Hour Chart

Looking to buy a T1 test and a hold for a push higher to newer highs.

EUR/AUD

No change from yesterday’s layout. Only the support has dropped in a tart lower. 491X support we like to see a test and a hold to go long.

Caution is required for today we have some big news event for Australian Dollar with Retail Sales and Trade Balance to be followed by Cash Rate and RBA statement. AUD is likely to stay heavy with while mostly it is expected RBA won’ t be cutting rates at present, but the RBA statement will be more important to see if the statement is dovish and whether further rate cuts to seen.

EUR/AUD 4-Hour Chart

T1 looks decent supp to try longs for 5050 zone.

GBP/NZD

There is a particular swing setup in place where both buys and shorts can be initiated.

There are various ways to play this setup. Going with the view that the pair can test T3 or 2.395X which comes in as a decent looking spot to try shorts for an initial move back to 2.385X with potential run lower to 2.35XX. This for now is the preferred scenario.

Alternatively, we can use a move lower to 2.3515-20 to enter longs for the desire target to test the black trend line to the top. If aggressive, we can even look to play the break of T4 or 2.384X for a possible 100 pips move to the 2.395X target and reversing the course from there.

GBP will see Construction PMI data and a better than expected numbers can push the pair higher and vice versa.

GBP/NZD 4-Hour Chart

T3 test can get a test and if holds to it shorts preferred.

Risk Averse Sentiment Dominates Amid Concerns About China

Risk averse sentiment dominated throughout the trading session, with the ongoing concerns over the future growth prospects in China, together with less than impressive macroeconomic data from the US, dampening investor appetite for risk.

AUD was particularly sensitive, with sentiment for antipodean dampened by bearish comments by Goldman Sachs (NYSE:GS) on the iron sector and IMF on Chinese growth prospects. On that note, the IMF cut their growth forecast for China and now sees 2015 6.8% and 2016 6.3%. At the same time, copper prices fell amid subdued sentiment towards growth prospects in China, while Japan also posted weak data. Meanwhile, Dalian iron ore prices fell nearly 1% as demand from Chinese steel mills are said to weaken.

Elsewhere, EUR/GBP held onto the 50% retracement level of Aug 5th low to Aug 12th high in early European trade, before the upside traction by EUR/USD towards the sizeable 1.1100 option strike saw the cross stage a recovery back into minor positive territory. At the same time, GBP failed to benefit from somewhat hawkish comments by BoE’s Forbes, who said that a rate hike is needed ‘well before’ inflation reaches 2%, while departing BoE member Miles said that the case was building for a rise in Bank rate despite current low inflation.

Market participants also digested the release of the latest US Empire Manufacturing report, which came in at its lowest level since April 2009. A large part of the fall in the headline number for the month of August was driven by a fall in new orders, which fell to the lowest since November 2010, with some attributing part of this fall to recent strength in the USD. The latest release will likely put even more emphasis on any communiqué from Fed members, as market participants look for any clues as to whether the Fed will consider raising rates in September or holding off to later in the year.

Aussie Dollar Facing A Volatile Week

The Australian dollar has experienced some sharp volatility early, ahead of the vaunted RBA interest rate decision, but the risk of a slowing China looms large.

The AUD saw some sharp volatility early in the week as the turmoil in China impacted the economic outlook for the country. Subsequently, the pair fell sharply to form a low at 0.7030, before clawing its way back to trade around the 0.7140 level. The changing economic view of China caused the market to reconsider the AUD’s valuation and, subsequently, sellers were in force with the pair falling strongly to 0.7030 before closing around the 0.7140 level.

AUD/USD Daily Chart

The market has been relatively quiet ahead of the Reserve Bank’s decision on interest rates. As expected, the central bank opted to keep rates steady at 2.00%; subsequently there was little volatility with the pair closing up around 20 pips. It would appear that the central bank is relying upon the U.S. Federal Reserve to hike rates and thereby depreciate the AUD.

However, there is a growing sentiment that the U.S. Fed may not raise rates and may indeed delay any monetary policy action until 2016, especially given the ongoing Chinese slow down. If this suspicion becomes reality the RBA may very well be forced to act decisively to support the ailing Australian economy.

Regardless of the RBA’s decision to hold rates steady, the AUD is facing a week of strong volatility as the market looks for hints of the Fed’s intentions. Considering the relative importance that is placed upon the Non-Farm Payroll figures, you can expect the Aussie Dollar to move strongly. The NFP’s are forecast at 219k but the chance for a surprise is real given the economic flow on effects from China.

From a technical perspective, the pair’s price action has remained relatively flat since the volatility early in the week. RSI has also remained steady within neutral territory, albeit close to over-sold levels, whilst the 12 and 30 EMA’s are still hinting at further bearishness. The pair faces plenty of economic news this week that could prove to be negative for the Aussie. Support is found at 0.7029, 0.6974, and 0.6865. Resistance is found at 0.7393, 0.7468, and 0.7541.

Ultimately, the take away for the week is, expect the unexpected as the economic data could swing either way.

EUR/USD To Proceed Long Above 1.12105 And 1.11810

Good morning. Hope all is well! We seem to have had an above average forecast for yesterday with a 71% accuracy. In some instances markets behaved as we had predicted during the day and just before the close of market changed direction suddenly. As predicted we had seen some strong movements on the Oceanic pairs (AUD, NZD) yesterday due to fundamentals.

Today British pound and US dollar pairs are on our radar. Both US and the yen could be on the bullish side today. Adding two hedged pairs to offset the risk. Happy trading!

Forecasts Outlook

  • US Dollar: Mixed Sentiments
  • Today we’re expecting the EUR/USD to proceed long above the barrier levels of 1.12105 and 1.11810.

Fundamental Watch

  • MPC Official Bank Rate Votes
  • Official Bank Rate
  • MPC Rate Statement
  • Monetary Policy Summary
  • Unemployment Claims

EUR/USD Chart

Depressed Energy And Metals Markets Weigh On Commodity Currencies

Price action continued to be dominated by risk averse flows, as the uncertainty over the economic outlook for China and the potential implications for monetary policies of the Fed and other central banks remained at the forefront of investors’ minds. As a result, the in vogue energy and base metals markets remained depressed, in turn weighing on commodity sensitive currencies such as AUD, CAD and RUB.

Elsewhere, various central bankers did their best to keep the negative sentiment stemming out of China from spilling over and impacting on the outlook for respective economies. Specifically, Fed’s Fischer said that the first rate-hike would come when there is “some further improvement in the labour market” while ‘there is good reason to believe inflation will move higher and forces holding down inflation will dissipate further’. While, BoE Governor Carney pointed out what while a slowdown in China’s economy could suppress inflation, at this moment in time does not alter the central bank’s position on when it will hike rates.

Despite the volatility in early European trade, EUR/USD headed for a positive close, supported by slightly firmer than expected EU CPI data, as well as better bid USTs on the safe-haven related flows, which in turn weighed on the USD index.

Looking elsewhere, despite the risk averse sentiment, EUR/CHF traded higher, in part driven by comments by SNB’s Jordan who stated that the CHF is highly overvalued at present levels and interest rates will remain negative for a while.

AUD/NZD May Trade Towards 1.1000

AUD is one of the strongest today after good Employment data (58.6K vs. 14.8K). We see very strong upward move from yesterday, so we believe it’s an impulse that will continue towards 1.1000. That said, current minor reversal is likely a corrective move that may find a support around 1.0850-1.0880.

AUD/NZD, 30 min

AUD/NZD 30 Min Chart