By GCI Forex Research
Fundamental Outlook at 0800 GMT (EDT + 0400)
USD
Price action on Friday evening was dictated by the US payrolls report. Both the headline print and the private payrolls component disappointed expectations. US 2y yields fell to another lifetime low of 33.5bp, which piled further downward pressure on USDJPY, and took the pair to a new 15-year low. The euro saw some erratic price swings immediately after the numbers, but soon settled back to pre-announcement levels. EURUSD traded 1.3834-1.3986, USDJPY 81.73-82.57. Our US economics team now believe that the FOMC will formally announce renewed balance sheet expansion on Nov 3. The change in forecast comes after a week in which Fed officials continued to express concern about the state of the US recovery, and to make the case for a pre-emptive monetary policy response.
Nevertheless, our analysts see a risk that, after rallying hard on the prospect of QE, the US Treasury market could yet be disappointed if the Fed fails to commit to buying a large and specific sum of Treasury securities over several quarters. The September payrolls report confirmed that the trend in private employment growth was fairly steady in Q3. However, the report also showed a sharp decline in government payrolls which was much broader than Census-related effects could explain. The weekend G7/IMF/World Bank meetings ended without any specific agreement on FX matters and the issue will likely resurface at the G20 meeting of finance ministers and central bankers which begins on October 22. More specifically, there was no official criticism of Japan’s decision to intervene in the FX market by selling yen. We believe this increases the chance of a further round of intervention should the yen continue to appreciate.
EUR
ECB President Trichet said he does not believe the term “currency wars” reflects the current reality, a view also expressed by ECB Governing Council Member Weber. Both agreed that exchange rates should reflect economic fundamentals. Eurogroup Chairman Juncker said that the dollar is currently not in line with economic fundamentals and that he is not happy with the euro having reached $1.40. ECB Governing Council Member Nowotny said that the euro’s increase is not helping the Eurozone recovery.
Juncker added that there is no need for a new global currency deal. France’s Finance Minister Lagarde said that, as far as currencies are concerned, the G7 agreed that concerted action is preferable to unilateral action.
ECB Executive Board Member Stark continued to take a moderately hawkish stance, noting that the risks to the inflation outlook remain “slightly tilted to the upside”. He expressed concern that maintaining accommodative monetary policy for too long can pose serious risks both to the economy and to price stability. He did concede though that the phasing out of unconventional measures would need to be gradual. An IMF spokesperson implied that the recent tightening of Greece bond yields suggests that Greece will be able to return to international debt markets in 2012 and would then be able to fully cover its external financing needs. However, she added that, were refinancing concerns to linger, the IMF and the EU have the option to extend Greece’s loans further out. ECB Executive Board Member agreed, but noted that no extension had yet been finalised.
EU Economic and Monetary Affairs Commission Rehn said that he sees risks that the fiscal consolidation plans of some European countries lack specifics, and include over-optimistic macroeconomic assumptions.
JPY
There was no specific public criticism of Japan’s FX intervention policy at the series of weekend meetings, which raises the risk of further intervention in our view. Finance Minister Noda emerged from the G7 meeting to say that “we did not discuss anything about the future, but I believe we’ve gained understanding on our basic stance”.
Noda and US Treasury Secretary Geithner met separately for a bilateral meeting, at which Noda explained the details of Japan’s fiscal stimulus steps. Noda said no specific mention of Japan’s intervention policy was made.
CAD
Canada’s Finance Minister Flaherty said that IMF/G20 countries need to work towards “rules of engagement” on the circumstances that would justify FX intervention. Flaherty said that although he is concerned about Canada’s weak export growth, no currency intervention is being considered. Looking ahead to the upcoming G20 meetings, he said he does not expect any complete resolution of currency discussions even then.
Employment declined by -6.6K in September, falling well short of consensus expectations. However, the unemployment rate unexpectedly ticked lower to 8.0% (cons. 8.1%, prev. 8.1%). The BoC’s senior loan officer survey showed an overall easing in business lending conditions to Q3. This was the fourth successive quarter in which loan availability improved.
AUD
On Friday, RBA Deputy Governor Battellino said it would be a mistake for Australia to try to manage the AUD, effectively ruling out the possibility of FX intervention. He pointed to the important role a strong currency plays in helping the economy.
TECHNICAL OUTLOOK
EURGBP stalled at 0.8808.
EURUSD BULLISH Violation of 1.4029 will trigger further acceleration to 1.4194. Near-term support holds at 1.3799 ahead of 1.3637.
USDJPY BEARISH Bearish trend remains intact; break of 82.88 exposes 79.75. Resistance remains at 83.99 ahead of 85.40.
GBPUSD BULLISH Sustained break of 1.6018/69 would expose 1.6276. Support at 1.5670 ahead of 1.5503.
USDCHF BEARISH Next support below 0.9500 lies at 0.9078. Resistance at 0.9739 ahead of 0.9918 breakout low.
AUDUSD BULLISH Upside potential held at 0.9918 ahead of 1.000 psychological resistance. Pullback clears 0.9773 exposing 0.9542.
USDCAD BEARISH Recovery has resistance at 1.0380. Violation of 1.0108 shifts focus to 0.9931 with scope for 0.9820 next.
EURCHF BULLISH Clearance of 1.3482 puts odds in favor of bullish trend; expect gains to target 1.3697 measured objective. Support at 1.3265.
EURGBP BULLISH Bullish pressure stalled in front of 0.8808 with next resistance at 0.8894. Support holds at 0.8689 ahead of 0.8563.
EURJPY BULLISH Upside potential capped at 116.68 ahead of 119.33. Near-term support comes in at 113.89 ahead of 111.47.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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