Hurricane Sandy grounds US markets
Currency markets were quiet and mostly range-bound at the start of the week with the US Treasury and stock markets remaining closed as Hurricane Sandy slammed into the East Coast of the United States.
The biggest Atlantic storm hit the New York City area on Monday causing havoc, and brought cities in the East Coast, including New York and Washington, to a very wet standstill.
Global risk sentiment started the week on a sour note as signs of weakness and a grim outlook in the global economy fuelled risk aversion. Weak US corporate earnings last week overshadowed a stronger-than-expected growth reading from the world’s largest economy. Economic data released last Friday showed US Advanced GDP grew at a faster pace in the third quarter, by two per cent against market consensus for a 1.8 per cent increase. The Japanese yen was the biggest mover at the start of the week, and extended its rebound against its major peers after it posted its largest one-day gain in over two months last Friday. The yen suffered heavy losses throughout last week except Friday, as expectations that the Bank of Japan will add more stimulus weighed. The yen’s rebound, which started on Friday and continued on Monday, gathered pace as the uncertain global outlook increased demand for safe-haven assets.
Furthermore, despite expanding its Asset Purchases Programme by a further 11 trillion yen at its monetary policy meeting on Tuesday, the BOJ fell short of satisfying market expectations of a more aggress-ive increase in asset purchases. This led to a very sceptical response from forex investors, as demand for refuge assets was lifted and the yen rallied.
USD/JPY fell sharply to a one-week low by 79.28 on Tuesday, and breached its 200-day moving average of 79.52, a key technical support. Last Friday’s four-month peak at 80.38 now represents an import-ant near-term resistance. EUR/JPY also dropped to a two-week low on Tuesday, to 102.18, but reversed its course during the European session and rose to 103.20 by the time of writing.
Risk appetite recovered on Tuesday. European shares and the single currency rose as the initial estimated damage inflicted by the powerful storm on the US seemed to be far less severe than many were expecting. Sentiment was also lifted by better-than-expected corporate earnings from Europe and stronger demand at an Italian bond auction. The euro was initially lifted after data from Spain showed the economy contracted at a lower rate than had been the preliminary forecasts.
The single currency and other higher-yielding currencies continued to push higher after the Italian Tesoro met strong demand at a five- and 10-year debt sale. The Tesoro allotted €7 billion, at the maximum of its target, at lower costs than at a previous sale for the same maturities on September 27.
Italian government bonds rallied higher after the results from the auction were issued and the yield on existing 10-year debt fell to 4.959 per cent. EUR/USD jumped to a session high of 1.2974 shortly after the Italian bond auction. But gains for the common currency were still seen capped by uncertainty over when Spain will request aid and over concerns on whether Greece will agree a deal on greater austerity measures.
Spanish Prime Minister Mariano Rajoy, following a meeting with his Italian counterpart Mario Monti, said he will only seek a credit line from the eurozone’s bailout fund “when he thinks it is in the interests of Spain”.
Investors will now be looking at the official jobs report from the US tomorrow for crucial signs on the health of the economy. Signs of stabilisation in the US economy and perhaps evidence that Spain is moving towards an official financial bailout may lift appetite for risk and extend a rally in riskier assets.
Cable recovered from its lows near 1.60 against the greenback on Tuesday as traders trimmed their short positions amid a slightly brighter mood. Bank of England’s Ben Broadbent spoke of a recovery in construction activity in the UK, and was undecided on the need for further QE.
GBP/USD rose to 1.6085, but the sterling’s overall strength was weighed by strong demand for EUR/GBP which climbed to 0.8068.
Upcoming FX key events
Today: UK Manufacturing PMI and US ISM Manufacturing PMI.
Tomorrow: EZ Manufacturing PMI, US Change in non-farm payrolls, US Unemployment rate and Canadian Unemployment change.
Technical key points
EUR/USD is bullish, target 1.3350, key reversal point 1.2550.
EUR/GBP is neutral.
USD/JPY is neutral.
GBP/USD is bullish, target 1.6400, key reversal point 1.5750.
USD/CHF is bullish, target 1.00, key reversal point 0.91.
AUD/USD is neutral.
NZD/USD is neutral.
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Mr Xuereb is a trader at RTFX Ltd.