The greenback was already strong against emerging market and commodity currencies, but has now perked up against the supermajors as well. Will we now see further signs of USD resilience?
The Federal Open Market Committee minutes from its July meeting were a relative non-event compared to expectations which were for an asset purchase taper on track with some on-going uncertainty about the timing. The Ben Bernanke legacy aspect I brought up yesterday suggests to me that the September 18 meeting is a virtual lock for announcing the tapering of Federal Reserve purchases, with the guessing game starting yesterday on whether it will be USD 15 or 20 or 25 billion per month and what the mix of mortgage-backed securities and treasuries will be.
After some fluctuation, the market was bid dollars in the wake of the minutes release, suggesting a hawkish read of the minutes, though we have to remember the greenback buying came from very low levels, so one can also argue that the market had merely taken things too far. In any case, as I discuss below, the technical set-ups are now far more interesting for USD bulls after the pre-minutes weakening has now been fairly strongly rejected.
There was a brief flurry of USD selling in the confusion after the minutes release that may have something to do with the new “facility” discussed in the minutes that Reuters has interpreted as a way to “drain cash” from the system, but that’s not how the discussion reads in the minutes, and I wonder whether it has something to do with addressing the increasingly dire collateral shortage for repo transactions. In any case, the market is choosing to ignore this for now, but we’ll keep this on our radar for possible developments.
Overnight, a stronger than expected Chinese flash manufacturing PMI attracted less attention than it normally does, but this is a fairly important development given that it is the HSBC/Markit survey and should theoretically be covering the smaller private sector enterprises rather than those more directly reliant on state control, which weigh more heavily in the official survey. Still, it’s hard to detect any jubilation in the Aussie or Kiwi on developments as AUDUSD has traded back through 0.9000 overnight. I suspect the risk-off mood post-FOMC minutes is at the bottom of this as is the tapering message.
Looking ahead
From here, the main focus is on whether the market continues to feed on fears of the regime shift of a less accommodative Fed and whether these fears spread from where the pain is worst – in emerging markets. Already, we’re seeing collapsing EM currencies, equities and bond markets and we’ve merely got forward expectations for a mere slowdown of the rate of expansion of the Fed’s balance sheet.
Watch out for the remainder of the preliminary August European PMIs up shortly after a disappointing set of French survey numbers and then the minor US data later. There’s not much else of interest on the calendar for the balance of the week.
Selected Technical/Trading observations
EURUSD – I suggested on Monday that “those looking to short might consider waiting for a test of higher levels and a tactical reversal around the 1.3400 level..” Well – here’s the set-up and let’s see if it pans out. 1.3373 is the daily pivot and it’s important to stay below 1.3400. We could eventually work back toward 1.3200 if 1.3300 falls quickly.
EURUSD
1.3200 is the eventual area of interest if the pair works through the 1.3300/1.3280 zone.
EURGBP – 0.8580/0.8600 remains the key resistance. 0.8500 is proving a tough nut to crack.
USDCHF – It is encouraging to see the pair well back above 0.9200, which is now important support. The next key is to rise to the 0.9350/0.9400 zone.
USDJPY – All eyes are on the 98.75 resistance level. I am not sure if I like a big push higher if risk remains off, but correlations of this kind have been shaky at best lately, so let’s see what happens. A failure to sustain the rally off yesterday’s developments would mean a major local disappointment.
EURJPY – This pair keeps chugging away, but let’s see if the rally is capped in the 131.00/132.00 zone.
GBPUSD – 1.5625 is the first resistance level followed by the daily pivot way up at 1.5671. Support is 1.5575 and then perhaps 1.5500.
USDCAD – 1.0450-1.0500 is now in play with 1.0450 support and looking toward 1.0600 next.
Economic Data Highlights
- China Aug. HSBC/Markit Flash Manufacturing PMI out at 50.1 vs. 48.2 expected and 47.7 in Jul.
- Switzerland Jul. Trade Balance out at 2.38B vs. 2.60B expected and 2.73B in Jun.
- France Aug. Preliminary Manufacturing PMI out at 49.7 vs. 50.2 expected and 49.7 in Jul.
- France Aug. Preliminary Services PMI out at 47.7 vs. 49.2 expected and 48.6 in Jul.
(all times GMT)
- Sweden Jul. Unemployment Rate (0730)
- Germany Aug. Preliminary PMI Manufacturing/Services PMI (0730)
- Euro Zone Aug. Preliminary PMI Manufacturing/Services PMI (0800)
- Sweden Riksbank’s Kerstin af Jochnick to Speak (0800)
- US Weekly Initial Jobless Claims (1230)
- Canada Jun. Retail Sales (1230)
- US Jun. House Price Index (1300)
- US Weekly Bloomberg Consumer Comfort Survey (1345)
- US Jul. Leading Index (1400)
- US Aug. Kansas City Fed Manufacturing Survey (1500)
- US Fed’s Fisher to Speak (1730)