Risk aversion eased earlier this week as China reported upbeat industrial activity and retail sales. Even the financial sector had a sigh of relief as banking regulation, agreed upon over the weekend, was more accommodating than what had been expected.
The new Basel III agreement raised minimum capital requirements, but gave a very reasonable timeline for the full implementation. The new rules are to be phased in between January 2013 and January 2019 – this continued to ease investor’s concerns.
The euro was generally gaining support up until early this week and even though it slightly breached the 1.2900 level against the US dollar, it did not manage to consolidate above this level. For the week, RTFX TraderTip sees resistance at 1.2871/1.3030 on the upside, and support at 1.2598/1.2484 on the downside.
A look at the daily movements for the major currency pairs shows that, despite the easing risk aversion, support was not clearly cut in favour of the “riskier” currencies or against the “safe haven” currencies, in fact, it was rather mixed. On Monday the euro (a “riskier” currency at the moment) was gaining considerable support but the GBP (another “risky currency”) was not enjoying the same levels of support – and while one would have expected the CHF to lose some ground on the back of this renewed risk appetite, the Swiss franc was up.
Against the major counterparts, the single currency was up 0.43 per cent, the GBP was down 0.36 per cent, the USD was down 0.73 per cent, CHF was up one per cent, and the yen was up by 0.47 per cent – at the time of writing.
The euro was lifted by relief over banking regulations and Chinese production data, but it gained more support than the British pound - explainable by the fact that euro stands to benefit more from upbeat Chinese data (through the German exports) than would the United Kingdom.
The Swiss franc maintained support even though there was an improvement in risk appetite probably because the relief was rather short term and the longer term concerns on the global economic recovery remained. Apart from that the Swissie was also gaining on expectations that the Swiss National Bank would increase interest rates early next year.
The Aussie and the Kiwi benefited from the better than expected Chinese production data, as China is seen as a commodity-consuming heavyweight, which thus is expected to keep boosting commodities to the benefit of the commodity bloc.
The improved Aussie and Kiwi reflected negatively on the Japanese yen on Monday due to the yen’s function in financing carry trades to the benefit of high yielding currencies such as the AUD and NZD.
However the NZD suffered reduced support on Tuesday as figures released for July retail sales showed an unexpected contraction. On Tuesday, as well, the yen enjoyed renewed support as Prime Minister Kan won the ruling Democratic Party leadership race. His opponent Ichiro Ozawa had vowed to curb the yen’s strengthening, but even though PM Kan had expressed concerns on the yen’s strength he had until now refrained from acting upon it. Speculation that Japanese officials would thus not act immediately on the yen’s rise drove support for the Japanese yen.
The British pound also gained some ground Tuesday as CPI data from the UK came in above consensus, showing that inflation was steady during August and surprising those investors that were expecting prices to fall. However, gains over CPI data were soon overshadowed by decreasing house prices which ate away from CPI-led support.
A much weaker than expected Zew Economic Sentiment Index from the eurozone and also from Germany last Tuesday dampened the euro’s support. The disappointing news from Germany drove investor sentiment lower, negativity which reflected, as well, in the major European equity indices at the time of the release.
Data for Advanced Retail Sales, released Tuesday, from the United States came out slightly better than expected keeping hopes for the global economic recovery alive. The USD managed to pare some of the losses against the yen on Tuesday after the release, as it gave a breather to the concerns on the state of the US economy. The USD/JPY had reached lows of 83.08 throughout the day, at the time of writing.
Upcoming FX Key events:
Today: Switzerland SNB Interest Rate Decision & US PPI.
Tomorrow: German PPI, US CPI & US Michigan Confidence
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 98.00, key reversal point 84.00.
NZD/USD is bullish, target 0.78, key reversal point 0.6800.
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Mr Muscat is senior trader at RTFX Ltd.