By GCI Forex Research
FUNDAMENTAL OUTLOOK at 0800 GMT (EDT +0400)
USD
Safe-haven currencies benefited from the pull-back in risk-seeking following the Wall Street Journal report on the Eurozone bank stress tests. US equities closed 1% lower and gold jumped to $1255.50 at the time of writing. EURUSD traded 1.2678-1.2878, USDJPY 83.51-84.26. Investors focused on the article amid no data releases in the US as it questioned the methodology of the recent Eurozone bank stress test and included a suggestion that some institutions understated holdings of government debt. The article dampened risk-seeking amid renewed concerns of a sovereign credit crisis, though credit indicators indicate the worries are isolated to the Eurozone as 3m TED and LIBOR-OIS remain below year-to-date averages. While the dollar benefited versus some of the higher beta currencies, concerns on the US outlook kept the safe haven rotation in favor of the Swiss franc and the yen in place. The Fed’s Beige Book is unlikely to provide many surprises and we are likely to see choppy dollar price action unless we get better clarity on the US recovery or should credit indicators signal growing contagion fears.
EUR
Financial sector woes depressed the euro following the Wall Street Journal article that questioned the methodology of the recent Eurozone bank stress tests. Peripheral spreads widened on the back of the news, continuing the widening trend we have seen since early August. Elevated spreads show that structural problems persist in the Eurozone but for now it looks like problems are isolated to the Eurozone rather than spreading globally. Ireland did manage to get EU approval to extend parts of the Irish bank guarantee but these issues will not be fixed overnight.
ECB Executive Board member Stark was on the wires as he discussed the euro and while he did not say anything particularly new, his tone seemed a touch more downbeat than ECB President Trichet’s comments last week. Stark reiterated that Eurozone growth will moderate in 2H 2010 and there are economic growth risks beyond 2010. ECB Governing Council member Nowotny said that the ECB will wait until December before discussing how to implement the next phase of the ECB’s exit strategy. Nowotny was only referring to how ECB liquidity operations could be further normalised, and was not suggesting that policy rate hikes might be on the agenda.
At -2.25 (cons. 0.5%, prev. 3.2%) German industrial orders for July came in well below expectations. In particular falling foreign demand drove industrial activity lower. According to the German Economy Ministry in particular below average volume of big orders dampened the overall result.
JPY
USDJPY dropped to a 15-year low of 83.54 but our team does not think intervention is likely yet. There is still more room before the 79.75 1995 low in USDJPY and until investors either get more clarity on the US outlook and potential Fed actions or Japanese officials ratchet up their rhetoric in concert with approval from other nations, we could see the pair continue to drift lower on global growth uncertainty.
GBP
At 1.0% y/y (prev. 0.5%) BRC retail sales rose in august, but retail sales growth remains well below a long run average of 2.6%. Upcoming data will provide further insight on housing and the recovery, with Halifax house prices and industrial production due. Recent data has begun to slow and that should keep BoE policy unchanged.
CAD Consensus estimate is for a 25bp hike from the BoC but it is not a clear consensus as only 13 out of 20 economists surveyed voted for 25bp. Investors seem split as well as they are only pricing in 17bp. Our economic team does not expect a rate hike and even if the BoC does hike it may issue a dovish policy statement, similar to its two previous ones issued during the June and July hikes. Should that occur, near-term CAD gains may be short-lived.
TECHNICAL OUTLOOK
EURUSD NEUTRAL Recovery held below 1.2933 thus bringing our focus back on 1.2588. Break of the level would expose next support lying at 1.2434 Fibonacci level.
USDJPY BEARISH Bearish pressures probe 83.60, move below the level would open 79.75 key support. Short-term resistance is defined at 85.91.
GBPUSD BEARISH Push below 1.5324 exposes 1.5125 next. Near-term resistance lies at 1.5584 ahead of 1.5742.
USDCHF BEARISH Momentum is negative; expect extension of bearish trend towards 0.9918 ahead of 0.9786. On the upside resistance holds at 1.0265 ahead of 1.0466.
AUDUSD BULLISH The gains are expected to move towards 0.9222 with scope for 0.9389 next. Only a move below 0.8856 would hurt the positive tone.
USDCAD NEUTRAL Model has turned neutral with 1.0680 and 1.0108 defining the next bull and bear trigger respectively.
EURCHF BEARISH The push below 1.2852 exposes 1.2501 and then 1.2403. Resistance at 1.3163.
EURGBP NEUTRAL 0.8532 and 0.8142 define the key near-term directional triggers.
EURJPY NEUTRAL As long as resistance at 111.19 holds, expect losses to target 105.44 with scope for 100.00, psychological round number support level next.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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