IG Markets Forex thoughts
IG Markets Forex thoughts
Overnight, the euro succumbed to further risk aversion as traders questioned global growth. EUR/USD traded to a low of 1.4158, although again the focus was on EUR/CHF, which descended to a new record low of 1.0822 in the US session, only to trade just below the figure in early Asian trade. Not only has the CHF benefitted from risk aversion flows, but when you see retail sales up 7.4% and PMI figures beating expectations, it deserves to be rated as a growth currency in its own right. If this trend continues, parity could be just around the corner! It was interesting to see commentary from the Italian authorities who met overnight to discuss the recent turmoil that has seen ten-year bond yields spiking up to 6.28%, which is also pushing yields against German bunds to record levels. The conclusion was that the issues lie externally and are not due to domestic factors. There are press reports that the Eurogroup Chairman Mr Juncker will meet with Italian finance minister Mr Tremonti today, given the blow out in spreads and the issue that bank stocks have been smashed recently. During Asian trade, EUR/USD moved between 1.4168 and 1.4217, and having broken the recent uptrend the directional bias is for a move lower. However, it is certainly worth noting that there is strong support between 1.4139-15, representing several pivot lows in July. We have seen a number of sovereigns buyers stepping in, so we expect 1.41 to be reasonably well defended. European retail sales and services PMI could set the direction tonight, and a weaker-than-expected print could see the 1.41 come into play.
USD/JPY again struggled to find any traction, despite the debt deal being passed through the Senate and Moody’s re-affirming the US’s AAA rating. For the second day in a row, the pair pushed lower than 77.00, with traders seemingly happy to buy below here. However, the fact that two-year treasuries fell five basis points to thirty one basis points is a major headwind for the USD, and certainly makes it very unattractive compared to the JPY. All the talk yesterday was whether the BoJ would intervene and sell JPY, and perhaps we could hear more in the short term as Japanese newspapers are reporting that Prime minister Mr Kan and BoJ governor Mr Shirakawa are holding a special meeting today to discuss USD/JPY weakness. There are no major Japanese data points to discuss, so invariably the focus of the market will be on the USD side of the equation, as US services ISM and ADP private sector job numbers are released tonight. Services ISM (the employment component) is considered by many to be the most accurate predictor to the non-farms release, so it will be watched very closely. As it stands, the market is expecting 85,000 jobs created on Friday. However, given the price action on the USD and equities, a number far south of this is being priced in so it will not take much to see a relief- or short-covering rally.
Overnight, the AUD was smashed as investors continued to bail out of risk assets, fretting over the woeful state of the US economy and the seeming lack of a coordinated plan to rectify its many structural problems. It has been a terrible 24 hours for the AUD, with the currency falling from 1.0980 into the 1.0920 range after the RBA kept interest rates on hold for at least another month. Having ended yesterday’s session around this level, the AUD continued a steady drift all the way back into the 1.0780 zone, a fall of more than two cents, or 1.8% by the close of the US session. Unfortunately for the Aussie, things didn’t get much better when currency markets re-opened for Asian trade. With equity markets taking another hammering and risk sentiment completely shot, the AUD continued to plunge, falling below the 1.07 level to a low of 1.0677. This occurred before it stabilised somewhat to be currently trading in the 1.0730’s.
Sterling faired pretty well on a relative basis overnight, managing to close a volatile session largely flat at 1.6294, after hitting a session low of 1.6220. The saving grace overnight for cable was the construction PMI number, which came out at 6.30pm (Melbourne time). Unlike manufacturing PMI on Monday night, the construction read actually showed expansion, coming in stronger-than-expected at 53.5, versus estimates of 53.2. This bought a sigh of relief to the market, as it didn’t follow in the same footsteps as the manufacturing PMI. Nonetheless, the positive price action was muted as the construction sector only accounts for 10% of the domestic economy. Looking ahead, tonight’s trade is going to be dominated by underlying ‘risk off’ sentiment and the reaction to the services PMI data due at 6.30pm (Melbourne time), where the market is expecting growth of 53.3.