Market Brief
The US dollar weakened against most G10 currencies despite the fact that the FOMC upgraded the wording of its statement. The Fed wrote that the “Near-term risks to the economic outlook have diminished”.
It also improved its assessment of the labour market after the strong June’s payroll. However, overall, if we put aside the improvement in “near-term risks”, which is in our opinion exclusively linked to the Brexit story, there were only fairly minor changes and the market interpreted this as a negative signal, triggering the dollar sell-off.
The greenback fell 1.20% against the Japanese yen, down to 104.50 despite the Japanese government’s plan for $265 billion fiscal stimulus. Expectations for substantial monetary stimulus from the BoJ are very high. Accordingly, the risks that the BoJ disappoints by under delivering are also very high. In fact, it seems that whatever the BoJ does won’t be enough and the JPY will resume its rally.
However, in the short-term, traders are rather buying upside protection in USD/JPY as 25 delta weekly risk reversal moved to positive territory - for the first time since April this year - suggesting that market participants do expect the BoJ to act. In the longer term, downside risk remains the biggest fear as 1-month, 3-month and 6-month risk reversal measures are still below the neutral threshold.
Commodity currencies bounced back on Thursday as investors started seeking higher yielding currencies in the wake of the disappointing FOMC statement. The Australian dollar took advantage of the greenback’s weakness and surged 0.48% to 0.7525.
The New Zealand dollar was also better bid as NZD/USD jumped 0.36% to 0.71 but still trying to break the 0.7095 resistance to the upside (Fibonacci 38.2% on July’s debasement).
In the equity market, most Asian regional market were trading in negative territory with the Japanese Nikkei down 1.13%.
In mainland China, equity returns were rather mixed with the Shanghai Composite edging higher while its Shenzhen counterpart traded lower.
Offshore, Hong Kong’s Hang Seng was down 0.31%. In Europe, futures are blinking red across the screen as investors bought precious metals.
Today traders will be watching unemployment rate from Spain, Sweden, Germany and South Africa; consumer confidence from the euro zone; inflation reports from Germany and Brazil.
Currency Tech
EUR/USD
R 2: 1.1428
R 1: 1.1186
CURRENT: 1.1095
S 1: 1.0913
S 2: 1.0822
GBP/USD
R 2: 1.3981
R 1: 1.3534
CURRENT: 1.3199
S 1: 1.2851
S 2: 1.2798
USD/JPY
R 2: 109.14
R 1: 107.90
CURRENT: 104.63
S 1: 103.99
S 2: 99.02
USD/CHF
R 2: 1.0328
R 1: 0.9956
CURRENT: 0.9843
S 1: 0.9764
S 2: 0.9685