The recovery in the currency markets over the past few sessions is certainly not to be unexpected following a bout of significant USD buying in the previous week.
We had warned of the strong possibility for some form of initial USD selling, with the markets needing to consolidate the latest moves before considering the next up-leg in favor of the greenback. Whether or not this USD selling persists through Tuesday trade is still very much in question, however, we would not expect the USD selling to last much longer, with weekly technical signals warning of a major USD bottom and fundamentals also aligning on the back of an escalation in risk aversion and uncertainty over the outlook for the global economy. Markets have once again been reacting less to any specific data and more to the pressing concerns over sound economic recovery and stability within the major global economies. The resurfacing of sovereign risk concerns in Ireland have not helped matters and could place additional pressure on currencies in general should a full on Irish restructuring occur.
Relative Performance Versus USD on Tuesday (As of 10:00GMT)
- EURO+0.46%
- AUSSIE+0.46%
- KIWI +0.37%
- CAD+0.27%
- YEN+0.02%
- STERLING-0.01%
- SWISSIE-0.22%
For the time being, currencies are better bid, led by gains in the euro, which has managed to rally back above 1.2900 on Tuesday following a round of data that was on the whole quite mixed and divergent. German ZEW economic sentiment was the key release for the Eurozone, and the indicator came in much softer than expected. This was however somewhat offset by a much stronger current situation reading. Nevertheless, there are some strong offers in the 1,2900’s, and ultimately, we think that the much weaker ZEW economic sentiment indicator will weigh more heavily on investor minds going forward, with the euro most probably in search of a fresh lower top ahead of the next major drop.
Other data released overnight included some broadly in line UK inflation and retail price index indicators, while in Australia, the RBA was out with the minutes from its most recent rate decision. While the central bank did remain relatively upbeat on its outlook, the acknowledgment of the threat of broader global economic pressures, and appropriate rates at current levels, could prove to weigh on the higher yielding antipodean going forward, with the prospects for additional rate hikes over the near term now all but gone. Although the RBA cites strength from the Chinese economy as a source of encouragement, more recent data out of China may cast a shadow on this optimism and increase downside pressure on the Australian Dollar. This in conjunction with a pullback in global risk sentiment does not bode well for the Aussie.
Elsewhere, there has been a lot of talk of the shared safe haven status between the USD, yen and Swissie throughout this latest wave of risk selling. Traditionally, the USD has been a prime beneficiary of safe haven flows, and while the Yen is also a major benefactor, to see the Swissie equally benefitting does reflect a potential shift in the way the global economy views the U.S. dollar. When the USD was selling off sharply in recent years, many cited a major diversification away from the buck and into other currencies in an effort to not be so heavily dependent on USD fluctuations. However, what is even more compelling and fascinating has been the same diversification away from the USD in times of elevated uncertainty and risk aversion. Presumably, not only is there a push to invest in higher yielding alternatives to the USD, but also a push to have attractive alternative safe haven investments outside of the buck. This is a scary development for the U.S. dollar and one that ultimately could eventually knock the greenback off of its longtime pedestal over the coming years.
Looking ahead, U.S. building permits (-0.5% expected), housing starts (2.0% expected), and producer prices (0.2% expected) are all due at 12:30GMT, along with Canada international securities transaction (10.00B expected) and manufacturing shipments (-0.5% expected). Attention the shifts to some more important data in the form of U.S. industrial production (0.5% expected) and capacity utilization (74.6% expected) at 13:15GMT. On the official circuit, Treasury Secretary Geithner hosts a housing finance conference at the Treasury at 13:00GMT. U.S. equity futures point to a higher open, while oil has also been rallying and gold trades flat.
EUR/USD: In the process of consolidating the latest sharp setbacks out from 1.3330, with the market stalling out ahead of 1.2700 for now. The overall structure remains quite bearish however following a bearish weekly reversal formation and any rallies should be well capped ahead of 1.3000 in favor of the next major downside extension below 1.2700 and towards 1.2500 over the coming days.USD/JPY: Critical support by 84.80 has finally been broken to open some fresh multi-year lows by 84.70 thus far. Next key support comes in by 84.45, with a break below this level exposing the monthly lows from June 1995 further down at 83.50. However, as we have already warned, daily studies are starting to look stretched, and with 84.80 finally broken, any additional declines should be very well supported ahead of 83.50 in favor of a much needed upside reversal. A break and close back above 86.40 will be required at a minimum to relieve downside pressures.
GBP/USD: Setbacks have stalled out ahead of some formidable support by 1.5500 with the 200-Day SMA and rising trend-line support propping declines for the time being while the market considers its next move. A bearish weekly reversal signal however certainly warns of deeper setbacks ahead, and we look for any inter-day rallies to be well capped ahead of 1.5850 in favor of the next major downside extension below 1.5500 and towards 1.5000 over the coming days.
USD/CHF: Continues to chop around after being very well supported on dips in the 1.0300’s. However, the latest recovery is still only classed as corrective within a multi-day range, and a clear break back above 1.0680 will now be required to accelerate gains and mark a shift in the structure. Broader market price action has been net USD supportive of late, so we would not be surprised to see a close above 1.0680 over the coming sessions. Back under 1.0330 negates and exposes a drop towards parity.
David Song is a currency analyst at FXCM.
