Daily Market Analysis - Forex Forum

There is a plethora of data coming up today including US Durable Goods Orders and New Home Sales, plus rate decisions from Norway and New Zealand. The Norges Bank rate announcement will likely see Norway follow Australia as the second G10 economy (and first in Europe) to begin tightening monetary policy since the onset of the financial crisis, with markets expecting a move of 25bps to 1.50%. The RNBZ should also prove to be a hawkish affair, as data in the past month has provided compelling arguments for policymakers to drop their dovish bias; latest Retail Sales figures for Aug were 1.1% MoM (vs. 0.5% expected), Q3 Consumer Prices rose 1.3% QoQ (0.8% expected), and September Business PMI figures revealed the first expansion in 18 months (51.7 vs. 48.8 in Aug). Yet despite these positive developments for both NOK and NZD, there is a sense that a USD resurgence could well overshadow gains in individual currencies. The recent wobble in equity markets and weak Consumer Confidence figures from the US yesterday (47.7 vs. 53.5 expected) have allowed the USD to recover a footing against its major counterparts and I believe there may well be further rebound to come.

This morning’s Australian Q3 CPI beat estimates with a 1.0% increase QoQ (vs. 0.9% expected), however despite the initial spike higher to 0.9207, the rally has since been sold down to 0.9056; price-action that seems indicative of a loss of risk appetite in the FX markets. This has been echoed in the lower closes across most Asian equity indices, and indeed European stock markets have started the day in the red, with US futures portending a lower open to come. With the first measure of US Q3 GDP due tomorrow it seems investors have become nervous about the prospects of a correction after enjoying a stream of good news out of corporate earnings season. Risk appetite correlated trades are looking fragile at this point, with gold shying below $1040 and testing downside support at $1032.80 yesterday, and EURUSD looking vulnerable to a further correction to 1.4500.

So far this morning Scandinavian data has dominated price action; despite slightly better than expected Swedish Consumer Confidence, Retail Sales for Sep missed estimates (0.2% MoM vs. 0.5% expected), and there were downward revisions to the month prior (-2.3% from -2.1%), which caused a sharp sell-off in SEK. USDSEK rallied off the lows at 6.9470 to touch a high of 7.0025, and EURSEK revisited resistance around 10.3600. This was soon followed by Norwegian AKU Unemployment Rate that unexpectedly grew to 3.2% (3.1% forecast, 3.0% last month), causing a rapid spike higher for both USDNOK and EURNOK. USDNOK is now hovering just below 5.7000 but resistance should come in around 6.7200, and currency direction from here will be largely guided by the tone of the statement that accompanies today’s rate announcement.
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Dark clouds (in the figurative sense, not Japanese candlestick) are clearly forming over risk appetite. Wall Street's severely underperformed yesterday and Asian equity markets are broadly lower, with our favorite risk barometer, the Shanghai composite, down -2.33%. The Baltic Dry index has closed lower in the last two days. Both the Norges Bank and RBNZ were significantly less hawkish than the markets had anticipated, prompting an unwinding of rate expectations. Economic data from the US, UK, Eurozone and Japan has failed to impress and actually points to a decline in the moment of recovery. But today, with the anniversary of the October 1929 share market crash in the back of trader’s minds, the day brings a critical US GDP figure. After the disappointing UK GDP figure last week (q/q -0.4% vs. 0.2% exp), a limp US growth figure will have the risk correlated trades feeling very vulnerable (however, a better figure will have participants pushing the entrenched recovery story). While Gold was the first to top out at $1070, it seems that traders are following crude prices direction. We believe this short term correction is the paired down of G4 growth expectations and should not turn into a complete risk appetite overthrow. However, in the near term the rapid climb in VIX to 27 and oil's 3% decline doesn’t bode well for the very crowded risk trade. In Japan, Industrial production for September printed ahead of expectations at +1.4% m/m (cons. 1.0%, prev. 1.6%) and -18.9% y/y (cons. -19.3%, prev. -19.0%) a 7th consecutive monthly increase. This should be enough to prompt the inflation indicators and jobless rate to bottom out. Earlier, the RBNZ left the Official Cash Rate unchanged at 2.50% as the market had universally expected. The accompanying statement was dovish relative to the market's expectations, as the text failed to remove the threat of further rate cuts or move forward their forecast for rate hikes (continuing a trend of less hawkish central bank statements). The initial reaction was selling of NZDUSD down to 0.7165 but has recovered since. It seems self evident that the Central Bank is very concerned with the NZD strength and rightly believe they must anchor expectations. The statement said that "The high level of the New Zealand dollar has limited the scope for exports to contribute to the recovery, and reinforces a bias towards domestic expenditure". Looking ahead to today’s session, there are a number of further key releases. First up will be Norwegian Retail Sales (Sep), where the market is looking for a 0.4% increase m/m after the 0.3% gain last month. The spate of impressive figures from Norway in the last few months has pushed ambitions high and this number is likely follow suit. However, if there is a downside miss in the numbers, NOK could suffer acutely, as positioning and market sentiment is primed for an unwind in commodity currencies today. The other major release of the European session will be Eurozone Consumer Confidence (-18 expected, -19 prior); Given sentiment we believe the bias strongly favors EURUSD weakness as a better-than-expected figure will be unlikely to present a compelling case for buying EUR, but a weak number will almost certainly add fuel to the risk aversion fire. Looking ahead to today’s session there are a number of further key releases. First up will be Norwegian Retail Sales (Sep), where the market is looking for a 0.4% increase m/m after the 0.3% gain last month. The spate of impressive figures from Norway in the last few months has pushed ambitions high, and this number is likely follow suit. However, if there is a downside miss in the numbers, NOK could suffer acutely as positioning and market sentiment is primed for an unwind in commodity currencies today. The other major release of the European session will be Eurozone Consumer Confidence (-18 expected, -19 prior); given sentiment we believe the bias strongly favors EURUSD weakness as better-than-expected figure will be unlikely to present a compelling case for buying EUR, but a weak number will almost certainly add fuel to the risk aversion fire. For today, sentiment clearly remains critical with US Q3 GDP with market consensus looking for 3.2 % q/q growth. However, with some analyst already reducing their forecast, expectations may be somewhat less optimistic.
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Traders this is an exceptionally important week for economic releases this week, with four major central bank rate meetings; RBA (Tue), Fed (Wed), BoE and ECB (Thu), in addition to the minutes of the recent Riksbank and BoJ meetings on Wednesday. So you know what these mean, get your platform ready for some scalping pips
The RBA is likely to be the only one to alter monetary policy, as the market is anticipating another 25bps of tightening to 3.5%. There is an outside chance of 50bps as latest data this month has shown a reduction in unemployment and an uptick in CPI in Q3, but considering the continued fragility of market sentiment, I think it is far more likely they will opt for 25bps and signal their intentions in more detail in the accompanying statement.
The Fed meeting the following evening will be a crucial event for FX markets as we will get the first official appraisal of last week’s US GDP figures. Thus far the market has been deliberating between whether the better-than-expected 3.5% annualized rate of growth merely presents a rosier global backdrop for further risk-asset rallies, or whether it implies the Fed may shift their stance on the low interest rate environment – a move that would potentially threaten USD-funded carry trades, so be aware forumers.
I feel it is a step too far to draw the latter conclusion just yet; in the face of continuing deterioration in the labor market and many questions about the sustainability of growth without stimulus yet to be answered, it seems more likely that policy-makers will be cautious not to appear hawkish prematurely. The retracement in EURUSD and equity markets in the past few days is, in my personal view, a temporary correction; and I expect a rebound in these assets after Wednesday. The notable exception to the weak USD-fuelled rally continues to be GBP; after the dismal Q3 GDP figures not only have markets gradually come around to our view that further quantitative easing is virtually ensured on Thursday, but consensus has gone from an expansion of £25bn to expecting £50bn. This is sure to be distinctly GBP negative and I look for further weakness in GBPUSD in spite of any resurgence of risk appetite, I think is a fair trade at least for now…
Good trading!!!
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The news of India’s massive purchase of gold in the past 2 weeks has helped propel the precious metal to new all-time highs ($1093 at the time of writing) as speculation mounts that central banks are keen to increase holdings of gold to diversify their reserves. The enormous 200 metric ton acquisition from the IMF is the largest single purchase in at least 30 years, and comes after China revealed in April that they too had increased their total holdings to 1,054 tons (from 454 tons in 2003). Speculators are now querying whether such purchases signify a change in attitudes about gold as a reserve holding, and as the USD continues to weaken, whether more central bank interest is likely to follow. Although a pure fundamental move – and hence the less pronounced moves in correlated EURUSD and equity markets – gold markets will be just as focused on tonight’s critical FOMC meeting as other risk-asset classes. Commentary is divided on whether the recent improvements in US data may prompt a shift in the tone of the expected statement, or whether the doves remain in power and will reaffirm the low-for-long interest rate policy that has underpinned the USD-funded carry trade in the past 9 months. There are good arguments for both scenarios, but our core view is that the Fed is unlikely to burst the bubble just yet as the sickly state of the labor market and fragile nature of market sentiment mean the recuperation of consumer confidence is for now, reliant on the continued recovery of asset prices. Any deviation from a verbatim reiteration of last month’s low for long commitment could trigger a nasty unwind in USD-funded assets and long-term damage to consumer confidence which we feel is too big a risk for policy-makers to take right now. Whether EURUSD will shoot to 1.4900 by this evening or plummet to1.4500, what is certain is that the outcome of tonight’s meeting will be pivotal for the drivers of both FX and equity markets from here, and we expect an aggressive move whichever way the cards fall. The rest of today’s events are likely to be mere side attractions to the main FOMC focus, but we will also look forward to ADP Employment figures and ISM Non-Manufacturing Composite. We still see better-than-expected data fuelling EURUSD and risk-assets higher, but the prospect of the game-changing Fed statement later is sure to constrain any over exuberant rallies.
Good trading!!!!!!
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As I expected yesterday, the Fed was unwilling to end the liquidity-fueled party just yet and that’s just what happened. The FOMC members voted unanimously at the meeting to hold rates steady and indicated its ultra loose monetary policy would remain "excessively low" for “an extended period.” The recent sell-off in risk correlated trades has been driven primarily by the worries that the Fed would subtly signal a timetable for its exit strategy.
Forumers, I doubt that with the recovery still fragile and extended weakness in the US labor markets that the Fed would risk prematurely popping any asset bubble, don’t you agree? The initial price reaction was one of uncertainty as the central bank also reduced the target agency debt purchases from $200bn to $175bn. Participants seemed to be confused whether this was the exit signal they were searching for. However within the accompanying statement was a clear & rational explanation that a lack of demand was simply the culprit.
To talk about currency pairs (what I’m actually interested) EURUSD initially chopped between 1.4830 – 1.4860 before climbing to 1.4900 as traders came to the realization that liquidity would stay plentiful and risk correlated assets were back in play. In the Asian session we have seen a slight reversal of risk taking as the USD clawed back gains and equity markets were broadly lower. Now the markets’ attention turns to the BoE and ECB. I expect the central bank will hold rates and at the often hyped ECB press conference, Trichet will stick to the company line. Overall I believe the ECB meeting will be a non-event and energy would be better spent monitoring the BoE rate decision.
Good trading!!!!!!
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Welcome back from the weekend traders.
As another weekend G20 meeting has passed without comment on FX and with continued commitment to maintaining stimulus, the USD has slid appreciably against the majors and gold. The shock headline on Friday that US unemployment hit 10.2% initially sent investors scrambling for the exit of risk-correlated trades, with gold plunging and EURUSD skidding precariously towards downside support. I couldn’t believe the gold going so high.. it was obvious the bad data from the US Payrolls was going to have a great impact, but I didn’t expect it being the gold, I thought the refuge in safe heavens going
Good trading to all!!!
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