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Dollar Higher On Banks' End-Quarter Demand

Published 09/21/2015, 06:58 AM
Updated 07/09/2023, 06:31 AM

The dollar has rallied against most G10 currencies despite further declines in Fed fund rate expectations on Friday. It seems that there has been strong demand from banks for dollars heading into the end of the quarter, probably due to constraints on their balance sheets due to stricter regulations. This micro-economic factor could partially outweigh the macro-economic factor, namely the Fed’s dovish stance and the new questions about when they will start tightening rates, and help to support the dollar at least until the end of the quarter, if not longer.

1 Year Basis Swaps

Average G10 1 Year Basis Swap
• Greek election signals fewer problems with European politics The European political calendar, which earlier this year looked like it was going to cause a lot of volatility for the markets, seems to be calming down. Yesterday the Greek voters gave former PM Tsipras another chance to run the government, confounding the polls, which had shown his party running neck-and-neck with the centre-left New Democracy. SYRIZA will rule in coalition with the Independent Greeks party, the same party that it was in coalition with previously. The vote was a resounding endorsement of EMU membership, albeit within the context of record-low voter turnover. SYRIZA’s share of the vote was little changed from the first vote that brought it to power, showing that voters have forgiven it for caving in to the Troika’s demands. On the other hand, the more extreme members of SYRIZA broke off to form a new party that pledged to leave the euro, but it got roundly defeated and will not get any seats in Parliament. Thus the election should bring some stability to the country as it has pretty much settled the question of euro membership and co-operation with lenders’ demands, at least for the time being.

Greek Bank Stocks vs European Bank Stocks

Greek Stocks vs European Stocks
• Next Sunday we have regional elections in Catalonia. The two major nationalist parties have joined forces to turn the vote into an indirect referendum on independence from Spain. However, polls suggest that they will get only 40% of the vote, meaning they would still be a few seats short of a majority in the Catalan regional parliament. There is likely to be increased press coverage and hence more attention paid to the Catalan issue as the voting approaches, but at this point I don’t expect any major change to the outlook for Spain.

• Finally, the new leader of the UK Labour Party has reassured voters that he is in favor of remaining in the Eurozone, thus reducing the threat of a “Brexit” – although the possibility is likely to overhang the pound in the run-up to the referendum on UK membership in the EU, tentatively scheduled for sometime in the autumn of 2016.

• Portugal holds elections on 4 October, while Spain has to hold a general election sometime before the end of the year. It looks like these elections may give fairly conventional results, especially since these two countries’ economies are improving and they are not so much affected by the refugee crisis -- the new threat to the Eurozone. Consumer confidence in the two countries is as high or higher than it was at the peak of the pre-crisis period, which suggests that the voters are not all that dissatisfied with their lives.

Spain, Portugal Consumer Confidence

• Today’s highlights: Today we have a relatively light day. The only important indicator is US existing home sales for August. The housing starts and building permits data released last week were consistent with an improving housing market. Therefore, another strong housing figure could strengthen USD.

• We have several speakers on Monday’s agenda. ECB Executive Board member Benoit Coeure, ECB Governing Council member Ewald Nowotny, ECB Executive Board member Peter Praet and Atlanta Fed President Dennis Lockhart speak,

• This week is “Silver Week” in Japan. Markets are closed Monday, Tuesday and Wednesday. This may mean less liquidity in JPY and therefore more volatility.

• On Tuesday, we have no major releases on the schedule.

• Wednesday is a PMI day! During the Asian session, China’s preliminary Caixin/Markit manufacturing PMI for September is expected to increase a bit but to remain below 50, the threshold dividing expansion from contraction. That may not do too much to reassure the markets about Chinese growth and so is not likely to boost AUD or NZD.

• During the European trading day, we get the preliminary manufacturing and service-sector PMI data for September from several European countries and the Eurozone as a whole. The expectations are for both to decline somewhat. This could weaken EUR a bit. The final GDP figure for Q2 for France is also coming out. The final data is expected to confirm the preliminary figure and show that the French economy fell back to stagnation. Therefore, the market reaction could be limited at this release.

• In the US, the preliminary Markit manufacturing PMI for September is expected to increase slightly from August. The market pays more attention to the ISM figure. As such, the reaction on this release could be limited.

• On Thursday, the main event will be the Norges Bank rate decision. The current market expectations are for the Bank to keep the rates unchanged. Although Norway’s CPI is still close to the Bank’s 2.5% target, negative developments since the last meeting, including lower oil prices, soft industrial production and weak manufacturing PMI, increase the risk of another cut pushing NOK to fresh lows.

• From Germany, we get the Ifo survey for September. The German ZEW survey showed a mixed picture for the bloc’s strongest economy: the expectations index declined once again from the previous month, while the moderate increase in the current situation index was not enough to reverse investors’ concerns about Germany’s weak recovery. We expect the Ifo to nudge down further this month, adding to evidence that the German recovery is petering out.

• From the US, we get the durable goods orders for August. The headline figure is expected to fall, a turnaround from the month before, while durable goods excluding transportation equipment are estimated to decelerate somewhat. The focus is usually on the core figure where a positive surprise could suggest the possible start of a turnaround in business investment and could support dollar. On the other hand, another dissapointment is likely to put USD under selling pressure.

• Finally on Friday, we have the usual end-of-month data dump from Japan. The focus will be on the National CPI rate for August and the Tokyo CPI rate for September. The forecast is for the national CPI excluding fresh food and energy, the Bank’s favorite inflation measure. It’s expected to rise. On the other hand, the national CPI ex-fresh foods is expected to fall into negative territory. The Bank’s favorite inflation measure is likely to support Gov. Kuroda’s view that the underlying trend of inflation is improving. In such case, JPY might strengthen.

• In the US, the 3rd estimate of Q2 GDP is expected to confirm the 2nd estimate and show that the US economy expanded at a 3.7% qoq SAAR. Even though this is the final estimate and not that big a market mover, it could prove USD-positive as it will show a strong growth in Q2. Following the dovish stance by the Fed on Thursday, strong US data are needed for the dollar to regain its glamour.

The Market

EUR/USD tumbles and hits support at 1.1265

EUR/USD Chart

• EUR/USD tumbled on Friday after it hit resistance at 1.1460 (R3). However, the declined was halted at 1.1265 (S1), above the uptrend line taken from the low of the 4th of September. The fact that the rate is still above that trend line keeps the short-term picture somewhat positive. Nevertheless, our momentum studies detect downside momentum and as a result, I prefer to adopt a flat stance for now. The RSI fell below its 50 line, while the MACD, although positive, has topped and fallen below its trigger line. As for the broader trend, given that EUR/USD is still trading below 1.1500, I would hold a neutral stance as far as the overall picture is concerned as well. I would like to see another move above 1.1500 before assuming that the overall outlook is back to positive. On the downside, a break below the 1.0800 hurdle is the move that could shift the picture negative. • Support: 1.1265 (S1), 1.1210 (S2), 1.1130 (S3) • Resistance: 1.1335 (R1), 1.1385 (R2), 1.1460 (R3)

GBP/USD slides after finding resistance at 1.5660

GBP/USD Chart

• GBP/USD slid on Friday after it hit resistance at 1.5660 (R2), and found support at 1.5515 (S1). The price structure on the 4-hour chart still suggests a short-term uptrend, and therefore, I would treat Friday’s decline or any extensions of it as corrective move of that near-term trend. I would expect the bulls to eventually take control and drive the battle above the 1.5560 (R1) hurdle. Something like that could pull the trigger for another test at the 1.5660 (R2) resistance. Nevertheless, our short-term oscillators give evidence that the current retreat may continue for a while. The RSI slid after it exited its overbought territory, while the MACD, although positive, has topped and fallen below its signal line. Switching to the daily chart, I see that Cable has moved back above the 80-day exponential moving average. As a result, I maintain my flat stance as far as the overall outlook is concerned.

Support: 1.5515 (S1), 1.5460 (S2), 1.5400 (S3)

Resistance: 1.5560 (R1), 1.5660 (R2), 1.5720 (R3)

USD/JPY still trades within a triangle

USD/JPY Chart

• USD/JPY seems to have been oscillating within a triangle since the 25th of August. As a result, I would consider the short-term outlook of the pair to be flat. On Friday, the rate hit the lower bound of the formation and rebounded to find resistance at 120.15 (R1). Taking a look at our short-term oscillators I see the likelihood for another negative leg and perhaps the downside exit of the formation. The RSI hit resistance slightly below its 50 line and turned down, while the MACD, although it points sideways, stands below both its zero and signal lines. I would expect the bears to aim for a test at 118.90 (S1), where a dip could bring into the game the 118.40 (S1) line and confirm the downside exit of the triangle. As for the broader trend, the plunge on the 24th of August signaled the completion of a possible double top formation, which turned the medium-term outlook somewhat negative. As a result I would treat the recovery from the 116.00 zone as a corrective phase for now.

Support: 120.00 (S1), 119.50 (S2), 118.90 (S3)

Resistance: 120.85 (R1), 121.30 (R2), 121.75 (R3)

Gold continues north

Gold Chart

• Gold continued trading higher on Friday, breaking above the resistance (now turned into support) barrier of 1132 (S1) and hitting resistance at 1142 (R1). The short-term bias remains positive in my view, but having in mind our momentum signs, I would be careful of a possible downside corrective wave for now. The RSI just exited its overbought territory, while the MACD shows signs of topping and could fall below its trigger line soon. A clear move back below 1132 (S1) is likely to confirm the case of the retreat and perhaps challenge the 1125 (S2) line. As for the bigger picture, with no clear trending structure on the daily chart, I would hold my neutral stance as far as the overall outlook is concerned.

Support: 1132 (S1), 1125 (S2), 1117 (S3)

Resistance: 1142 (R1), 1148 (R2), 1156 (R3)

DAX futures falls below 10000

DAX Futures Chart

• DAX futures slid on Friday, breaking below the short-term uptrend line taken from the low of the 25th of August. However, the decline was stopped fractionally above the 9950 (S1) line, defined by the low of the 4th of September. The fall below the short-term trend line has shifted the near-term bias to the downside and therefore, I would expect a clear dip below 9950 (S1) to set the stage for extensions towards 9780 (S2). Our momentum indicators detect negative momentum and amplify the case for further declines. The RSI edged lower after falling below its 50 line, while the MACD has topped slightly above zero, fell below its trigger line and turned negative. On the daily chart, the break below 10670 on the 20th of August has shifted the medium-term outlook to the downside, in my view. Therefore, I would treat the 24th of August – 9th of September recovery as a corrective phase.

Support: 9950 (S1), 9780 (S2), 9540 (S3)

Resistance: 10070 (R1) 10185 (R2), 10345 (R3)

BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS

BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS

MARKETS SUMMARY

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