We had a busy end of week last week; finally the ECB and the BoE, as was expected, left interest rates unchanged – both at 0.5 per cent. The BoE made no changes to its asset purchases target, and while EU President Mario Draghi took no additional steps towards further easing, overall he came out as quite dovish.
In the currency markets the EUR/USD reacted by hitting session lows of 1.3110 after trading around 1.32 ahead of his comments – as the US dollar took the lead. Yet price action, on Thursday of last week, could not find the necessary motivation, quite normal really, ahead of the much expected US Payrolls data scheduled for Friday afternoon.
In the end, last Friday we saw US unemployment rate tick marginally lower to 7.3 per cent as the US economy continued to create new jobs for the month of August – the only hitch was that actual changein non-farm payrolls of +169k disappointed expectations of the creation of +180k.
Now let’s just take a step back. We need to keep into perspective that investors are currently awaiting for the US central bank to deliver its much-coined QE taper, and these changes may come out as early as the Fed’s next FOMC meeting (scheduled for September17/18) – hence the focus on the US labour market. The Fed has highlighted specifically the level of unemployment rate it is aiming for and is consequently modeling its policy decisions with at least a bias towards that target.
The softer than expected reading does not mean the Fed will not eventually forge ahead with its QE taper plans, but it does create doubts over the timing of it.
Following the Non-farm payrolls data, the EURUSD gained around 70 pips to close Friday’s session at 1.3175. On this week’s first day of trading the euro remained supported against the USD, registering gains of +0.6 per cent for the day.
In these recent weeks we have seen US bond yields largely reflecting expectations that the US Federal reserve will start to unwind or ease its quantitative easing programme soon. Ten-year US yields continue to verge around the three per cent levels, which we had not seen since July 2011.
As these yields continue to rise strongly, the US dollar will likely be pressured as bond holders digest their losses – but on a wider timeframe, the higher yield should give the buck a yield advantage against its major peers.
Even the yellow metal reacted to the US payrolls data last Friday, rising to session highs of $1391.59 from around $1360 prior to the data.
Mid last week the Bank of Canada opted to keep its policy rate unchanged at 1 per cent. In the former part of this week the Canadian Dollar was up +0.40 per cent, according to the Bloomberg Correlation-Weighted Currency index.
The USDCAD, currently trading at 1.03627, has slipped lower by 1.89 per cent since the beginning of the current month - as the CAD garners support.
The GBP remained in support throughout the course of last week. The price for GBP/USD gained +0.86 per cent and EUR/GBP slipped by 1.16 per cent as in both cases the British pound gathered strength.
EUR/GBP is currently trading at 0.84352, the currency pair has traded in the range of 0.8410-0.8453 for the former part of this week. For the current week we were expecting the currency pair to drift lower, below 0.84 levels, to then bounce back to 0.85 levels.
The geo-political tension posed by a possible US strike on Syria remained in the background
To the upside one should expect price action to meet resistance in the 0.8502/0.8575 region; while to the downside expect support at 0.8374/0.8319.
Early this week overall risk sentiment tended towards the favourable, if we look at equities, as a preliminary gauge of sentiment, we see that most equity indices were positive.
The economic docket into Monday and Tuesday was relatively light and price action remained driven by sentiment.
The greater optimism at week start could be attributed to some stronger than expected Chinese data. China reported stronger than expected Industrial production and Retail sales early into Tuesday’s session.
Needless to say the geo-political tensions posed by a possible US strike on Syria remained in the background; but an agreement proposed by Russia managed to ease investor concerns over possible disruptions to oil movements and the overall global recovery.
Under Russia’s proposed arrangement Syria would surrender its chemical weapons.
Upcoming FX Key events:
Today: ECB Monthly report, EZ industrial production and Canadian New Housing Price index.
Tomorrow: US Advance retail Sales and PPI.
Technical Key points:
EUR/USD is neutral.
EUR/GBP is neutral.
USD/JPY is bullish, target 105.60, key reversal point 92.50.
GBP/USD is neutral.
USD/CHF is neutral.
AUD/USD is bearish, target 0.8760 key reversal point 0.9520.
NZD/USD is bearish, target 0.7600, key reversal point 0.8200.
RTFX Ltd is licensed to conduct investment services business by the MFSA.
This information does not constitute advice, should not be relied on as such to enter into a transaction or for any investment decision and is provided for information purposes only.
Rudolf Muscat is a senior trader at RTFX Ltd.