By GCI Forex Research
Fundamental Outlook at 0800 GMT (EDT + 0400)
USD
Price action during the Asia session was governed by two major policy surprises: the RBA kept the cash rate on hold despite market expectations of a +25bp hike; AUDUSD lost over 70pips on the announcement. The BoJ eased policy by much more than expected, effectively cutting the policy rate by replacing the existing policy target of 0.1% with a range of 0-0.1%. EURUSD traded 1.3637-1.3695, USDJPY 83.33-83.99. Earlier, during the US session data included a slight disappointment in factory orders mixed in with a pick-up in pending home sales. Factory orders were slightly below expectations in August at -0.5% but July orders were revised up. Our analysts note their 1.5% real GDP growth forecast for Q3 has assumed a 10% pace for real equipment and software spending, which is close to the data reported so far. Meanwhile, the pending home sales index rose more than expected in August Leading up until July, the weakness reflected payback for the expiration of the home buyer tax credits at the end of April. Looking beyond this period of volatility, we still expect support for home sales over the medium-term as the employment situation improves, mortgage rates remain near historically low levels, and affordability remains favorable. Though Fed comments were relatively limited, QE2 is still on investor minds ahead of the larger data releases this week, with non-manufacturing ISM up next.
EUR
The euro did not manage to regain lost ground during the overnight session as there was little to counteract the reports that the Irish central bank reportedly views risks to the ECB staff growth forecasts as slightly tilted to the downside and global economic uncertainty is regarded to have increased. Another report also weighed on the euro, where a major Austrian bank is looking to change existing CHF loans into EUR loans, which, if it triggers a trend, would provide the franc with structural support versus the euro.
The ECB announced that €1.344bn worth of sovereign bond purchases settled last week under the ECB’s Securities Market Program. This represents a very significant increase on the tally for the week before and clearly suggests that sovereign bonds yields amongst issuers on the Eurozone periphery would have been significantly higher last week were it not for the ECB’s intervention.
We expect EURUSD upside to become increasingly limited again by structural weakness in the periphery. We also remain cautious on risk sentiment, as a sudden return of risk aversion cannot be excluded in an environment of heightened global economic uncertainty. Going forward we expect EURUSD to approach 1.28 in the medium-term.
JPY
In a surprise move the BoJ was much more dovish than expected, and effectively cut the policy rate target by replacing the existing target of 0.1% with a range 0-0.1%. No changes were made to the BoJ’s monthly intake of JGBs which will continue to accumulate on the BoJ’s balance sheet at a rate of ¥1.8 trn per month. However, the BoJ has set up a new “temporary” facility specifically to purchase short-term assets with a maturity of 1-2 years. The aim will be to use this facility to buy ¥3.5trn in short-dated JGBs and T-bills and about ¥1trn in CP, ABCP and corporate bonds.
AUD
Against consensus expectations, the RBA held the cash rate unchanged at 4.5% for the fifth consecutive meeting. However, our Australian economics team note that the RBA maintains is tightening bias, noting that rates are “appropriate for the time being” and that “it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target.” Our analysts now expect the next hike will come in November.
TECHNICAL OUTLOOK
USDCAD focus on 1.0108.
EURUSD BULLISH Bull pressure held below 1.3818/96 ahead of 1.4194. Near-term support comes in at 1.3560 ahead of 1.3381.
USDJPY BEARISH Look for a break below 82.88 for extension of bearish trend towards 79.75. Resistance remains at 84.50 ahead of 85.40.
GBPUSD BULLISH Move above 1.5999 and 1.6069 would expose 1.6276. Support at 1.5670 ahead of 1.5503.
USDCHF BEARISH Clearance of 0.9709 exposes 0.9590 and 0.9500 next. Resistance at 0.9918 breakout low.
AUDUSD BULLISH Sharp decline pressures 0.9559 ahead of 0.9463, but overall model is bullish with initial resistance defined at 0.9751 ahead of 0.9850.
USDCAD BEARISH Focus is on downside; initial support lies at 1.0108 ahead of 0.9931. Resistance comes in at 1.0380.
EURCHF NEUTRAL Following the pullback from 1.3467, model has turned neutral. Support at 1.3165 ahead of 1.2991.
EURGBP BULLISH Next resistance above 0.8738 lies at 0.8808. Support holds at 0.8563 ahead of 0.8510.
EURJPY NEUTRAL Expect gains to extend towards 116.68 and 119.33 next. Near-term support comes in at 112.98 ahead of 115.53.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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