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IG Markets Forex thoughts

IG Markets Forex thoughts


Overnight, the eyes of the capital markets fell on the meeting between German Chancellor Merkel and French President Sarkozy, which was given more significance after the poor German GDP print was released in early European trade. All the talk had been on whether we would see complete fiscal union with a eurobond being announced, or at the very least an increase to the European Financial stability fund (EFSF), however anyone hoping for this was sadly disappointed. Eurobonds were mentioned, but it seems the barriers to entry are high, although Mr Sarkozy said it could ‘be imagined’ one day, but only after each country’s fiscal functions are coordinated by a central authority. One would think the creation of a eurobond would spark huge protests in core Europe, as the German’s and French would have to pay for years of fiscal indiscipline in periphery Europe by guarantying the debt. The creation of a new 'economic government' gave the euro a mild boost, with current EU Council President Mr von Rompuy to fill top spot. The controversial aspect was undoubtedly the proposal of a financial transaction tax, which should struggle to get the green light and highly unlikely to be endorsed outside of the EU. It is clear that the Franco-German alliance is trying to establish leadership and show the markets they mean business with their deficit cutting proposals. However, what the market wants is an increase to the EFSF, and if the ECB is to continue buying Italian and Spanish debt as aggressively as it is, the current size of the fund is clearly not big enough. In the mean time though, it is impressive to see EUR/USD hold up as well as it is, given we feel the European issues, longer term, are more significant than that of the US. A close above 1.4431 (May downtrend resistance) would be very positive for the single currency, and could indicate the start of an uptrend. Traders keeping an eye on 1.4358 (the 100 day moving average), which may act as support intra-day.

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Overnight, USD/JPY traded to a low of 76.66, as US economic painted a mixed picture. Industrial production grew at the fastest pace in seven months (0.9%) and beat the street’s forecast, whilst housing starts and building permits both slowed from the previous month, with the end result being a drop in US treasury yields across the curve. It has to be said though, there are more exciting places to be trading at the moment and those seeking a bit more volatility should look at AUD/JPY, which seems to have re-established it’s mantra as ‘global risk proxy’ of the forex world. JP Morgan wrote overnight ‘the dollar's inability to capitalise on the most intense market stress since Lehman is another reminder of the regime change afoot in currencies due to US fiscal policy’, with the bottom line being: if the dollar cannot rally in a crisis, its collapse will be very swift and broad if stability returns to core markets. They are of course talking about USD on a trade weighted basis, but against the JPY it is clear that corporate Japan are fed up with the strength in the JPY, with industrial leaders being very outspoken about their displeasure here. The CFO of Hondo was recently reported as saying that their breakeven rate is even higher than 90 JPY, whilst investment bank Nomura, for every 1% move in the JPY’s value it cuts Japan’s manufacturers earnings by 1.8%. We will simply have to sit and watch what the BOJ/MOF plan to do, but it is clear they have a massive uphill battle with traders looking to sell any rallies.


Overnight, the AUD’s trading patterns were relatively subdued compared to what we have seen for the currency over the last fortnight. Disappointment that talks between Mr Sarkozy and Mr Merkel failed to lead to any meaningful solutions to the debt crisis engulfing Europe saw equities on the retreat, with risk currencies being sold down. However, as equities recovered off their lows, so too did the AUD. Having ended yesterday’s Australian session around the 1.0470 level, the AUD drifted to an overnight low of 1.0406 before recovering along with equity markets to close at 1.0486. Upon reopening for Asian trade, the AUD slid back into the 1.0430 range, but climbed back into the 1.0460’s as equity markets surged on rumours that President Obama will unveil a very a specific plan to boost the economy, create jobs and control the deficit by mid September.


Sterling moved higher for the fourth straight session overnight as stronger-than-expected CPI data pushed the currency pair north. GBP/USD finished.6452, after earlier hitting a high of 1.6474; it had traded as low as 1.6321 earlier in the day. UK CPI climbed to an annual rate of 4.4% in July from 4.2% the previous month, as the market had been expected a figure of 4.3%. Cable pushed higher on the back of the news, as traders started winding back expectations that they could see the size of the quantitative easing package increased. However, Bank of England Governor King stuck to his long held view that inflation would slow to below target levels, as the recent dislocations in financial markets hindered prospects for sustainable growth of developed markets. From a technical perspective, the last three months have seen the formation of an inverted head and shoulders reversal pattern, with a neckline around the 1.6460 level. Last night’s trade briefly touched this level before retreating; nonetheless, a decisive break out to the upside would see the pattern completed and a target towards the figure of 1.72. Tonight, the all important monetary policy meeting minutes will be released at 6.30pm, with all eyes watching to see if any board members have changed their views.


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