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A Stressful Weekend For Euro Traders

Published 10/24/2014, 05:52 AM
Updated 03/19/2019, 04:00 AM

New Zealand's trade balance data showed the worst deficit in the country’s history, another argument (on top of overvaluation, a hostile central bank and a steep drop in the price of the country’s most important export, milk) in favour of kiwi downside. AUDNZD bounced hard off the recent lows and may be coiling for an attack on new highs above the recent 1.1310 area that has served as the peak for the cycle.

Yesterday, Norges Bank proved far more complacent in its outlook on policy than recent developments would suggest is prudent, as the bank forecasted that the 1.50% rate would remain unchanged through the end of next year. Still, the fact that governor Øystein Olsen and company did not cave into the pressure from the data and oil price developments saw NOK rallying yesterday toward the 8.30 area in EURNOK.
From here down to the 8.2750 area (close to the 200-day moving average) is an important support zone that I suspect may launch a fresh attack on 8.50, barring a large rally in energy prices.
Technical comments
EURUSD found support ahead of 1.2600 and may be at risk of a bounce on a quiet day with the unknown of this weekend’s stress tests on the menu. First resistance zone looks like 1.2700/50.
USDJPY found resistance in the ideal 61.8% retracement zone around 108.20, and bulls and bears will battle it out between there and the key 107.50 level discussed yesterday.
EURJPY snapped sharply higher yesterday from low levels on stronger than expected preliminary Eurozone Purchasing Managers Index survey results. That rally has shored up the downside risk for the moment, as bears will need to see 135.50 falling again to believe that we are in a down-trend. The action may simply be due to bad nerves in euro pairs ahead of the stress tests.
EURJPY EURJPY Source: Saxo Bank GBPUSD will be reactive to the data with 1.6000 as important support and room to rally back toward 1.6200 on strong data. Weak data could mean EURGBP launches a fresh rally after finding support in the important 0.7875 area. AUDUSD is a lost cause, stuck in an endless limbo. USDCAD has been trying the bulls' patience as well, with risk of a trend line failure if we work much lower below 1.1200 here in the near term.
EURSEK is looking for support ahead of 9.150/9.130 and could be gearing up for a try at the high end of the range.
ECB stress tests
This Sunday (October 26), the European Central Bank will release the results of its comprehensive “stress tests“ of the European financial institutions as it has become the supervisory authority over all European banks. This is the third major series of stress tests administered by the ECB and by far the most thorough.
At issue is how many banks will be found to have insufficient capital for their operations. If a significant number of banks are deemed in need of raising capital, this is a negative for credit and for the euro as they will have to scrape around after capital and sell assets. Any larger institutions on the “fail” list would be an additional possible negative for the euro from this exercise.
It's grading season in Europe as the ECB prepares to rate the union's banks. Photo: Hannelore Foerster Getty
Given that the ECB is doing everything it can to get credit flowing in Europe, I have a hard time seeing an excessively harsh assessment this weekend. Likely, the very worst positioned banks will be made examples of and declared to have failed the test. But as explained in a recent Bloomberg article, this is a two-part test in which banks were reviewed as of the end of last year and have been given time to address their capital shortfalls.
Still, it is difficult to assess where the market stands on this issue and there is some gap risk for euro pairs at the open of next week. This is more likely to take the form of asymmetric downside risk if an especially large name or two makes the list.

FOMC critical for USD outlook
In my view, the USD is looking vulnerable at current levels in the near term if next week’s Federal Open Market Committee meeting confirms the shift in the market’s assessment of the Federal Reserve’s policy trajectory.
Taking the December 2015 Fed Funds future as a barometer, in the wake of the FOMC minutes it rapidly priced out more than a full rate hike from the Fed by that timeframe before stabilizing. So at present, the market is pricing in a Fed Funds rate about 40 basis points higher than current levels by the end of next year.
It will be very interesting to see how the Fed deals with this shift in market expectations; it may think the market has swung too far in pricing out Fed removal of accommodation and may choose to "double underline" that it will in fact hike rates if the incoming data supports such a move.
Today’s calendar
Watch out for the preliminary third-quarter gross domestic product figures out of the UK today, as EURGBP has recently been toying with the key 0.7875 support and GBPUSD has so far found support at the 1.6000 level. The pound will be vulnerable on any negative surprises.
Economic Data Highlights

  • New Zealand Sep. Trade Balance out at -1350M vs. -625M expected and -489M in Aug.
  • Germany Nov. GfK Consumer Confidence out at 8.5 vs. 8.0 expected an 8.4 in Oct.


Upcoming Economic Calendar Highlights (all times GMT)

  • UK Q3 GDP estimate (0830)
  • US Sep. New Home Sales (1400)

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