Yesterday saw a rather strong comeback in the US dollar late in the day after several of the USD pairs pushed at key support levels for the USD trend. This move sets the stage for new highs in the greenback across the board, with some fundamental tailwinds yesterday from the market erasing most of the reaction in Fed Funds futures (and the front of the yield curve) to Friday’s US employment report.
USDJPY is already pushing toward the highs of the cycle, and most other JPY pairs were well bid overnight as well, as rising yields are particularly challenging for the Japanese yen fundamentals, though some observers might take limited heart that Japan’s current account posted a larger-than-expected surplus in September. Meanwhile, Japan’s latest consumer confidence reading doesn’t give much room for cheer.
Note that EM and risk currencies seem especially sensitive to US rates – if we are seeing a bigger sell-off unfolding in US treasuries, expect these currencies to underperform.
One of the contributors to the late EUR selling yesterday was the European Central Bank executive board member Yves Mersch out indicating that the ECB will begin to purchase ABS next week. On government bond buying, Mersch said: “There hasn’t been a decision to buy government bonds….It is a theoretical option of the situation deteriorates.”
Despite the crowds on the bustling Takeshita Street in Tokyo, Japan’s latest consumer confidence reading doesn't give much room for cheer. Photo: Siraanam Wong Thinkstock.com
Looking ahead
EURSEK will react to the Swedish consumer price index data up this morning as it trades in a nervous pivot zone around 9.20. That pair needs to pick a direction soon.
So the greenback avoided a scary test of support levels to start the week and now we need to see it follow through to the strong side to reinvigorate the trend, as quality trends don’t pause for long if there has been a recent fresh break to new highs in the trend.
In other words, we saw a brutal USD strengthening from late July to early October followed by a very organized “flag formation” style consolidation period. Then, last week, the USD broke stronger and once a break out of a significant formation is achieved, the price needs to continue to underline the quality of the trend.
Chart: AUDUSD
AUD is under pressure from suffering commodity prices (multi-year lows in iron ore prices, one of its key exports, especially to China) a static rate view, a Reserve Bank of Australia that is hostile to any currency strength, and risks from excess private leverage, particularly in housing, that could turn into a credit bust and an economic bust on all fronts as key commodity prices continue lower.
The AUDUSD chart is emblematic of the USD pairs, as we saw a brutal move lower, followed by a tight and organized consolidation, and then last week’s breakout. We saw a scary backfill to start this week and now it is time for the downtrend to continue apace, or else… Looking lower, the 0.8100 and even 0.8000 areas could be the next objectives. 
Economic Data Highlights
- Japan Sep. Adjusted Current Account out at ¥414.4B vs. ¥36.9B expected and vs. ¥130.8B in Aug.
- UK Oct. BRC Sales Like-for-Like out at 0.0% YoY vs. -0.5% expected and vs. -2.1% in Sep.
- Australia Oct. NAB Business Confidence out at 4 vs. 5 in Sep.
- Australia Oct. NAB Business Conditions out at 13 vs. 1 in Sep.
- Australia Q3 House Price Index rose +1.5% QoQ and +9.1% YoY vs. +1.5%/+8.8% expected, respectively and vs. +10.1% YoY in Q2
- Japan Oct. Consumer Confidence Index out at 38.9 vs. 40.5 expected and 39.9 in Sep.
Upcoming Economic Calendar Highlights (all times GMT)
- Sweden Oct. CPI (0830)
- Sweden Oct. Riksbank Meeting (0830)
- US Oct. NFIB Small Business Optimism (1230)
- New Zealand RBNZ Financial Stability Report (2000)
- New Zealand RBNZ Governor Wheeler News Conference (2005)
- Australia Nov. Westpac Consumer Confidence (2330)
- Australia Sep. Credit Card Purchases (0030)
- Australia Q3 Wage Price Index (0030)
- Japan BoJ’s Miyao to Speak (0100)
- Japan BoJ’s Sato to Speak (0430)
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