Yesterday saw a rather bizarre rush higher in EURUSD in a complete news vacuum amid rumours of stop- and barrier-hunting. Today, we’re getting some consolidation as the market respects the importance of the FOMC minutes up at 18:00 GMT.
Bernanke's legacy
One interesting aspect of the Federal Open Market Committee minutes and the coming handful of FOMC meetings to consider that I hadn’t dwelled on sufficiently is that US Fed chairman Ben Bernanke is likely very carefully considering his legacy and will want to leave the FOMC with a tapering process firmly underway when he leaves office in January. This could make the Fed’s policies less controversial during the nomination hearings for Bernanke’s replacement as at least there is a roadmap for a halt of the Fed’s balance sheet expansion on the table to keep the worst anti-Fed faction at bay. As well, if the coming Fed chairman eventually reaches for the same quantitative easing tools as Bernanke and reverses the tapering process, the blame for any negative outcome could fall on the successor’s shoulders rather than on Bernanke’s.
As far as what to expect from the minutes themselves, a Marketwatch article offers rather good coverage suggesting a range of scenarios and with some analysts questioning whether we get any real answers on the nature/size/mix of the taper at all. I suspect with a mild degree of conviction that we get fewer details from the minutes than we would like, which should lean the scenario toward mean reversion (near-term USD support.)
Be aware that outside of the European currencies and a handful of major Asian currencies, the US dollar is actually quite strong (or at least EM is generally weak) as higher US interest rates are turning the screws on EM liquidity. The question from here is whether its strength could broaden to include strength versus Europe in the wake of the German election if there is a move to expand the ECB’s role and bring more liquidity to European banks (rather than some Cyprus-modeled bail-in). If not and Germany continues to believe it can extract its pound of flesh and the ECB is kept more or less powerless to change its course beyond marginal measures, the euro strength may continue. That is as long as peripheral spreads don’t begin to blow out again on bets that the EU is headed for another round of break-up risks (though a tough stance from Germany/EU core with no peripheral sovereign bond implications is a very hard scenario to believe in…).
Market observations
EURUSD – 1.3400/50 in play after yesterday, with the June high also within this zone. Seeing as this is August, I still prefer the mean reversion scenario, though today’s event risk could trigger another push higher to 1.3500 and then some if the FOMC minutes prove more dovish than the market is expecting.
GBPUSD – I wonder if there is some degree of excess GBP strength from the India crisis as the rupee sets new all-time lows daily versus the dollar and the pound, due to the number of wealthy Indians with a foot in both the UK and on the subcontinent. In any case, I’m operating with the belief that the 1.5700/50 area is very hard resistance save for a brief spike and will have to conjure up a new understanding of the situation if this area fails to hold in the days/weeks ahead. Regardless, we need a big selloff and soon if this thing is going to turn around.
EURGBP – 0.8580/0.8600 are the important resistance levels that need to stay in place for a near term 0.8450 test.
USDJPY – extremely indecisive – looking for 97.00 and 98.75 (Ichimoku cloud) as the near term triggers beyond the tight range.
EURJPY – yesterday saw emphatic support at the Ichimoku cloud around 129.35 and that remains the downside trigger for now (bond consolidation and weak equities likely needed to support this scenario). To the topside, the zone between 131.00 and 132.00 is resistance.
EURCHF – special focus on 200-day moving average as the pair has used that as an important level since the pair started moving again late last year.
USDCHF – 0.9200 has slipped against expectations, but is still looking for a rally somewhere soon, whether after testing the 0.9130 low from June or the final straw area down at 0.9050/0.9025.
USDCAD – rally looking healthier after working through near-term resistance. The 1.0450/1.0500 area is the next hurdle with the important support now 1.0400/1.0375. Upside preferred and there could be an air pocket toward 1.0600 if the FOMC minutes prove USD supportive.
AUDUSD – resistance now 0.9100 with a full blown test of the lows preferred once the 0.9000 nut has been cracked.
Upcoming Economic Calendar Highlights (all times GMT)
- UK Aug. CBI Trends Total Orders and Selling Prices (1000)
- US Jul. Existing Home Sales (1400)
- US Weekly DoE Crude Oil and Product Inventories (1430)
- US Fed releases FOMC Minutes of Jul 30-31 Meeting (1800)
- China Jun. HSBC/Markit Flash Manufacturing PMI (0145)