The first few days of September were generally in favour of the “riskier currencies”, namely the euro, British pound, Canadian dollar, Australian dollar and New Zealand dollar. The upbeat was mainly on the back of better than expected data for the Chinese PMI, Australian GDP and Jobs Data from the United States; but also due to increased M&A activity.
However enthusiasm for the riskier currencies started to fade last Monday throughout the day due to lack of economic data coming out, but also due to thinner volumes because the United States and Canada were on holiday.
The euro dipped overnight (between Monday and Tuesday), losing close to 90 pips in two hours over reports published by Wall Street Journal that rekindled doubts on the viability of the previously- held European Stress Tests.
Monday’s economic docket was not very busy, leaving sentiment to drive the markets, however with the last boost to risk appetite dating back to Friday’s US nonfarm payrolls – this WSJ report struck the market at a time when risk appetite had lost much of its steam.
The article alleged that some “banks excluded certain bonds, and many reduced the sums to account for ‘short’ positions they held”. The banks that were named said they were acting in accordance with the rules set by the European authorities.
On Tuesday EUR/USD broke below the 1.2778 level (the 38.20 per cent retracement level from June lows to August highs) and was possibly eyeing the 50 per cent retracement at 1.2606.
Other negative events weighed on Europe as well. Last Tuesday more than two million workers in France took to the streets in protest over the government’s pension reform plans –severe disruption was expected across the country.
Even in the United Kingdom workers of the underground rail system staged the first of a series of strikes as unions were fighting job losses they claimed would compromise safety. These political issues tend to weigh on investors’ negativity as they highlight the evils and risks associated with the adopted austerity measures.
A worse than expected German Factory Orders for the month of July, released earlier this week, came out as a decrease of 2.2 per cent against an expected +0.5 per cent, and a previous +3.6 per cent. This continued to foster risk aversion and pushed the single currency lower.
The Bank of Japan kept interest rates unchanged at 0.1 per cent in its monthly policy meeting, offered no policy stimulus and highlighted uncertainty over the US economic outlook. However the BoJ vowed to take timely action when needed, thus leaving room for possible future easing whenever the effects of the stronger yen on the economy and the issues over political leadership become clearer. Japan’s PM, Naoto Kan, is to face a ruling party leadership race on September 14; polls put Mr Kan ahead of rival Ichiro Ozawa.
Given that BoJ Governor Shirakawa offered no tangible solutions to curb the yen’s strength, the yen rallied further on speculation that no aggressive easing was due too soon.
The USD/JPY traded lower to 83.87 at the time of writing, getting closer to lows reached in August at 83.58 - which level is also a 15- year low.
In Australia, Labour’s Julia Gillard managed to secure a minority government with a majority of just one seat. With four of the five cross-bench MPs supporting Labour, but guaranteeing no support for Labour policies and reserving the right to vote independently – Labour will need to use all its persuasion to survive the three-year term.
The Royal Bank of Australia kept rates on hold as expected. Comments were generally upbeat but they disappointed some who, given the past run of strong data expected comments to be more hawkish.
The commodity bloc (AUD, CAD & NZD) keeps trading mostly in line to the prevailing risk sentiment. Bank of Canada took a decision on interest rates yesterday and a release of the unemployment rate is due tomorrow.
At a Labour Day event in Wisconsin last Monday, President Obama revealed a $50 billion plan to boost employment, by embarking on revamp projects for US roads, railways and airports.
It was also reported that President Obama was also expected to propose allowing businesses to deduct from their taxes the full value of new equipment purchased throughout 2011, in an effort to increase demand and create jobs.
Upcoming FX Key events:
Today: German CPI, Australian Unemployment Rate, UK BoE Interest Rate Decision and Asset Purchases Target.
Tomorrow: UK PPI, Canadian Net Change in Employment & Unemployment Rate.
FX Technical Key points:
EUR/USD is bearish, target 1.1800, key reversal point 1.3400.
USD/JPY is bearish, target 80.00, key reversal point 90.00.
GBP/USD is bearish, target 1.4000, key reversal point 1.6500.
USD/CHF is neutral.
AUD/USD is bullish, target 94.00, key reversal point 84.00.
NZD/USD is bullish, target 0.78, key reversal point 0.6800.
www.rtfx.com
Mr Muscat is senior trader at RTFX Ltd.