Forex News and Events
The FOMC will release minutes from its September 16-17th meeting, USD is broadly in demand. Despite stronger USD, the gold recovers losses after testing the critical $1180 support on Oct 6th. The low gold prices are clearly attractive for physical demand as the festivities in China, India approach. However, the buying interest will perhaps be insufficient to counter the selling pressures by investors across the board. In Russia, the central bank sold 420mn Ruble for October 7th settlement to cool down the sell-off in Ruble as USD/RUB tests fresh historical highs.
XAU recovers despite stronger USD
As the Gold rebounds from the critical $1,180-support on Oct 6th (for the third time since June 2013), the jitters on gold markets revive. The 1-month implied volatilities spike to year highs and are perhaps not ready to cool down yet. Walking into 2015 - presumed Fed normalization period, the selling pressures on gold intensify despite anticipations for increase in physical demand due to the upcoming Chinese/Indian festive period. Some believe it good time to buy gold as we are now at the critical support levels, others argue that the physical demand will not be sufficient to reverse the bearish momentum and predict the continuation of weakness towards $1,000 before potential recovery. The SPDR Gold holdings (ARCA:GLD) remain below 800 metric tons, representing lowest levels since 2008. The gold futures curve shifts lower, suggesting lower interest for gold contracts for all maturities. The sentiment remains on the downside.
Russian Central Bank intervenes
The Russian Central Bank sold USD 420mn for October 7th settlement as Ruble weakened to historical low levels vs. USD. USD/RUB hit 40.0801 on Monday and insistently tests 40.00+ levels over the past three days of trading. The lower energy prices, geopolitical risks, EU and US sanction combined to broadly higher USD, keep the bias in favor of higher USD/RUB.
At this point, the CBR refrains from further hiking its benchmark 1-week repo rate (already lifted from 5.50% to 8.00% since February 2014) and will decidedly concentrate on 7- and 28-day FX repos to stem fast depreciation in RUB. The FX repo intervention is an efficient solution in the short-run, providing USD financing to Russian banks, with USD-denominated Russian bonds accepted as collateral. The Russian banks hold approximately 40 billion dollar worth of Eurobonds from Russian issuers.
The FX repo facility should cool off tensions on USD-denominated debt repayments from the Russian companies, estimated at about 50 billion dollars, due before the year-end. We believe at least 60-70% of this amount should be covered by the FX repo facility to temper undesired squeeze in RUB in the short-run and estimate the size of FX repo intervention to 30-35 billion dollars by the year-end. The idea is to avoid a massive sell-off in RUB especially now that the CBR is looking to move toward a free-floated RUB by 2015. If the CBR sticks to its free-float RUB plan, the interest rates will inevitably become the key policy tool, rather than direct FX interventions. If the Western sanctions rise, the FX repos will fall short of need, therefore further rate tightening will become necessary. This is clearly negative news for Russian companies, increasingly reliant on Russian rates given that the foreign financing is already very difficult to obtain. We keep our cautious stand regarding RUB and RUB-denominated holdings.
Today's Key Issues (time in GMT)
- 2014-10-08T09:00:00 USD Oct 3rd MBA Mortgage Applications, last -0.20%
- 2014-10-08T10:15:00 CAD Sep Housing Starts, exp 198.0K, last 192.4K
- 2014-10-08T16:00:00 USD Fed Releases Minutes from Sept. 16-17 FOMC Meeting
The Risk Today
EUR/USD remains sought after having reached the 1.2500 psychological threshold, as can be seen by yesterday's significant daily lower shadow. Monitor the hourly resistance area between 1.2699 (02/10/2014 high) and 1.2715 (see also the declining channel). Another resistance lies at 1.2816. An initial support now lies at 1.2584 (07/10/2014 low). In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. The break of the strong support area between 1.2755 (09/07/2013 low) and 1.2662 (13/11/2012 low) opens the way for a decline towards the strong support at 1.2043 (24/07/2012 low). Intermediate supports are given by 1.2500 (psychological support) and 1.2466 (28/08/2012 low).
GBP/USD is bouncing. However, a break of the resistance at 1.6176 (intraday high) is needed to improve the short-term technical structure. Another resistance stands at 1.6287. Hourly supports can be found at 1.6027 (07/10/2014 low) and 1.5944. In the longer term, the collapse in prices after having reached 4-year highs has created a strong resistance at 1.7192, which is unlikely to be broken in the coming months. Despite the current short-term bearish momentum, we favour a temporary rebound near the support at 1.5855 (12/11/2013 low). A resistance lies at 1.6525.
USD/JPY has weakened near the major resistance at 110.66 (15/08/2008 high). The key support at 108.01 (see also the low of the declining channel) is challenged. Another key support stands at 106.81. An hourly resistance lies at 109.23 (07/10/2014 high). A long-term bullish bias is favoured as long as the key support 100.76 (04/02/2014 low) holds. The recent new highs confirm a strong underlying bullish trend. Despite the recent pause near the major resistance at 110.66 (15/08/2008 high, see also the 50% retracement from the 1998's top), a move higher is eventually favoured. Another resistance can be found at 114.66 (27/12/2007 high).
USD/CHF declined sharply on Monday and displayed a significant daily upper shadow yesterday. These price developments suggest a weakening short-term bullish momentum. Hourly supports can be found at 0.9518 (02/10/2014 low) and 0.9489. Hourly resistances stand at 0.9625 and 0.9691. From a longer term perspective, the technical structure favours a full retracement of the large corrective phase that started in July 2012. The break of the strong resistance at 0.9456 (06/09/2013 high) confirms this scenario. A key resistance now lies at 0.9751 (09/07/2013 high). A support can be found at 0.9301 (16/09/2014 low).
