During G20 meetings in South Korea last weekend, finance chiefs concluded a surprise deal favouring a power shift within the IMF to emerging nations. G20 countries also made a commitment to keep current account imbalances at sustainable levels, and promised “to refrain from competitive devaluation”, but failed to come up with anything more specific in regards to FX issues.
The promise not to engage in competitive devaluation helped to distance the risks of currency wars, and might have aided risk appetite at the start of the week.
G20 nations’ pledge to foster more market-determined ex-change rates reflected in more US dollar weakness as investors continued trading the most recent trends. The US dollar continued to weaken as, after the G20, focus is back on anticipating the 2nd round of QE.
EUR/USD trading: up until early this week, it found support at 1.3908 and resistance at 1.4080, but was unable to penetrate and consolidate the 1.4030-1.4159 resistance throughout all the month of October, up to the time of writing.
Analysts at UBS still see USD weakness in the short term on the back of the eventual possible implementation and expectation of further easing. From the Euro’s side it is difficult for the single currency to sustain levels higher than 1.41 because weaker countries would lose on competitiveness and be hurt by a stronger euro.
Some issues with regards to the integrity of the monetary union still persist, even though they seem to have been put aside for the time being. UBS analysts see the EUR/USD staying in the range of 1.30 - 1.40 for the coming year.
Despite the pledge to “refrain from competitive devaluation”, the Japanese Finance minister was still quoted this week as saying he is watching FX markets with great interest and is ready to take decisive action if needed. Economy Minister Banri Kaieda justified this on the grounds that “excessive intervention should be avoided but the government can be allowed to do so if currency moves are volatile and one-sided”.
Monday morning trading was marked by a return of some risk appetite, as most major Asian equity indices were trading in the Green. The Nikkei was down however on cautious trading ahead of the peak of the earnings season and investors seemed to prefer to wait and see what impact the stronger Yen had left. Investors were hesitant of taking on new positions after the Yen hit a 15-year peak against the US dollar.
The USD/JPY had hit lows just below 80.00 back in April 1995 – up till early this week USD/JPY trading was in the range of 80.42-81.46. Data released from Japan last Monday, revealed a slowdown in Japanese export growth, despite of which it still registered a 14.4 per cent rise in the year up to September. However, the actual figure surprised to the upside as it came above the expected 9.6 per cent growth – giving some hopes that damage to exports from the stronger yen may not be as sudden as was feared.
Investors seem to prefer to stay cautious ahead of next week’s Federal Reserve meeting. The Fed is widely expected to engage in monetary easing but as yet there was no clear indication on what the volumes and timing of QE would be.
New York Fed President William Dudley was reportedly saying that the Fed cannot fix the economy overnight, but it can provide “essential” support. His comments highlighted market expectations that the Fed will buy more long-term assets at its next policy-setting meeting, due early November, to try to revive the economic recovery.
However, Kansas City Fed president, Tom Hoenig, ex-pressed scepticism of too loose monetary policies, explaining that further easing would be a “dangerous gamble” that could set in motion another “boom and bust cycle”.
The US GDP figure, due tomorrow, will be closely followed – as investors try to gauge third quarter performance ahead of an important FOMC meeting, but also ahead of upcoming midterm elections.
Economists will be particularly interested in consumption and production patterns. If consumption rises and inventories decline, inventory replenishing ahead of the incoming busy shopping season might bode well for jobs. However, should production be greater than consumption then this could translate into more job layoffs.
Upcoming FX Key events:
Today: German Unemployment Change & EZ Sentiment.
Tomorrow: EZ Unemployment Rate, US GDP & US PCE
FX Technical Key points:
EUR/USD is neutral. USD/JPY is bearish, target 79.50, 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.