The EUR/USD pair reached an eight-month high of 1.4159 last Friday. It gained momentum following Thursday’s move by Singapore to widen currency trading bands, but the immediate push to reach the 1.4159 came shortly after Fed chairman Ben Bernanke was delivering his speech last Friday.
Towards the end of last week the Monetary Authority of Singapore announced the widening of the policy band – equivalent to a tightening of policy. In its policy statement the MAS pointed out that the economy is operating close to full employment and that it was expecting labour cost pressure and food and commodity prices to persist – costs that could be passed to the consumers.
In its statement the MAS said “the balance of risks is weighted towards inflation going forward”, in fact analysts believe that the urge to contain imported inflation has led MAS to tighten. The MAS sets policy by managing the Singapore dollar in a secret trade-weighted band against a basket of currencies, instead of setting interest rates. The Singapore dollar’s gradual appreciation opens the possibility of more strengthening in Asian currencies.
In Mr Bernanke’s speech last Friday, he reiterated that the Fed is ready to do more to stimulate the economy - his comments were the best confirmation that the Fed might step up QE. After Mr Bernanke’s speech the EUR/USD spiked up to its latest highs at 1.4159. However, this did not last long as, following the mixed US data (flat CPI and better than expected retail sales), the USD retraced some losses ahead of the weekend. Investors also seemed to be questioning recent euro highs against the USD.
Following weeks of USD selling and with talks that the most extensive expectations for QE had already been priced in, last Friday the USD was recovering ahead of the weekend on reported short covering and scaling back of the most drastic QE expectations. The unknown factors, with regards to future QE from the US, are volume and timing of this easing – given that Mr Bernanke did not give out such details.
Some investors might be interpreting that QE will most likely come out gradually, and this explains the motivation to re-scale and cover short USD positions. Earlier this week the USD still continued to enjoy short covering support, reaching lows of 1.3831 on Monday. The euro attempted to pare its losses against the USD, as the price went close to the 1.40 level, however the recovery eased back after a while and the pair closed at 1.3933 on Monday, managing to break the major bullish sequence of 28 consecutive closes higher than the previous daily low.
EUR/USD trading on Tuesday seemed to be quite volatile, however. Comments by Treasury Secretary Timothy Geithener helped support the USD, by saying that the USA would not engage in USD devaluation and that they needed to work to preserve confidence in the US dollar.
In an effort to calm some of the heat from the economy, on Tuesday, China’s Central Bank announced it would be raising its benchmark one-year lending and deposit rates by 25 basis points, effective October 20. A move which may lead investors speculating that the US and China have reached some agreement, and which could lead the US to take a more gradualist approach to QE. Also pointing towards a possible US-China deal is the United State’s recent decision to delay an international economic and exchange rate policies report to Congress.
Earlier this week, RBA minutes for the October 5 policy meeting helped the Aussie climb up against the USD to reach 0.9958. The text from the minutes revealed that the RBA could not wait indefinitely to tighten given the long-term risks of inflation. The spike up did not manage to hold for long as gains were pared as the AUD/USD dived lower after a while – maybe investors scaled down their rate hike expectations for November on remembering how the RBA was hawkish prior to the October meeting and at the end still decided to hold rates.
USD/JPY trading was in the range of 81.13-81.69 earlier this week. Traders are not expecting Japan to intervene for the time being given this weekend’s G20 meetings, where Forex is expected to be a main topic.
Meanwhile a monthly report, published by the Japanese government, sees the Japanese Government cutting its view on the economy, saying it is at a standstill as the rising Yen and slow exports are threatening the economic recovery.
Upcoming FX key events:
Today: EZ PMI & UK Retail Sales.
Tomorrow: German IFO, Canadian CPI & Retail Sales
FX technical key points:
EUR/USD is neutral.
USD/JPY is bearish, target 80.00, key reversal point 90.00.
GBP/USD is neutral.
USD/CHF is bearish, open target, key reversal point 1.0200.
AUD/USD is bullish, target 1.00, key reversal point 0.8900.
NZD/USD is bullish, target 0.78, key reversal point 0.7000.
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Mr Muscat is senior trader at RTFX Ltd.