Intraday Market Thoughts Archives

Yen crosses simultaneously broke out on a number of fronts on Thursday, hitting long-term extremes. It was an especially active day with GBP leading and AUD lagging.  

The calendar is light in Asia but look for continued focus on Japanese and Chinese stock markets.

Technicals dominated trading Thursday as many major levels were broken or patterns resolved:

Of all the moves, the yen crosses are the most substantial and they have been confirmed by the breakout in the Nikkei. Weekly closes at these levels would add further confirmation.

There was no single catalyst for the moves but the market is growing more comfortable with the idea of a taper in December or January. Initial jobless claims at 323k compared to 335k helped the trade along with a strong Markit PMI but a soft Philly Fed curbed the enthusiasm, especially in bonds. The Fed's Bullard also removed a dovish risk saying a cut in IOER was only being contemplated if a downturn hits.

The weakness in the Australian dollar was product of jawboning from Stevens but anti-currency rhetoric usually only works if the currency is ready to tumble anyway. That it fell so hard on a day when US stocks were up 0.8% is a negative sign.

Early in Asia-Pacific trading, RBNZ assistant governor McDermott tried to talk down the kiwi but had no success. NZD/USD has now wiped out most of Thursday's losses and continues to fight off the head and shoulders pattern on the daily chart.

ECB chatter about negative deposit rates along with a hawkish bent in the FOMC minutes led to a sharp drop in EUR/USD. On the day, the Canadian dollar was the top performer while AUD and NZD were caught in the risk-off downdraft.

EUR/USD crashed by more than a cent just hours after hitting a two week high. The catalyst was a Bloomberg report saying the ECB is investigating moving the deposit rate to -0.10% if policymakers decide more stimulus is justified. EUR/USD promptly fell to 1.3460 from 1.3540.

The second leg of EUR/USD selling come on a broad USD updraft following the FOMC minutes. There was no smoking gun in the report but traders were looking for discussion of looser forward guidance in the form of lowering the unemployment threshold to 5.5% From 6.5% but the minutes said only 'a couple' members would support such a move.

A separate move to draw a line under inflation had the support of 'a few' members and most supported investigating lower interest on reserves. On tapering, the minutes emphasized data dependency, as usual but saw an 'abatement of headwinds' and that was before the most-recent jobs and GDP reports.

Aside from broad USD strength, gold dropped $32 and bonds fell heavily as taper talk heats up.

The near-term focus now shifts to China with the November flash PMI from HSBC due at 0145 GMT. The consensus is for a slight dip to 50.8 from 50.9 in Oct. A speech from RBA governor Stevens is also out at 0905 GMT.

The other main event on the calendar is the BOJ decision which is out around 0400 GMT. Officials are likely in a wait-and-see mode but don't rule out comments to weaken the yen. If USD/JPY breaks 100.61, upside could quickly materialize.

The Fed's Evans put a rough timeline on when QE3 could end as EUR/JPY hit a four-year high. On the day, AUD led while CAD lagged in an unusual commodity currency divergence. A Bernanke speech highlights the upcoming session.  

Evans said QE3 buying, counted from January 2013, could total $1.5 trillion in a rough estimate. That would imply, at most, $85 billion/month in buying for the next 6-7 months or an average of $47 billion over the next 12 months. In any scenario where the pace of purchases continues at the current pace through March, it implies a fairly swift taper to zero.

Personally, Evans said he prefers to continue buying at the current pace and expressed some worries about low inflation. That's no surprise given his dovish leanings.

A bigger surprise hit the markets when the ECB's Constancio said quantitative easing is a possibility. EUR/USD quickly fell 30 pips to 1.3490. He qualified his remarks saying QE hasn't been discussed in detail and that Praet's comments remain the baseline but what was most impressive was the resilience of the euro. It quickly bounced to 1.3440 and closed near the highs of the day.

The euro got a technical lift from EUR/JPY as the pair broke the October top to reach a four-year high. There is growing technical evidence that a broad breakout in yen crosses is near.

Coming up later, Bernanke delivers at speech at 0000 GMT in Washington. The risk is that he strikes an  optimistic tone like Dudley did on Monday. Confidence in the economy could signal a taper before the end of his term in January and help USD/JPY through resistance at 100.61.

If he sounds more like Yellen at her confirmation hearing and laments the unemployment situation, it could weaken the US dollar more broadly, especially against EUR, GBP and AUD.

Also on the calendar is New Zealand Q3 PPI at 2145 GMT. Inflation is an issue so the report could swing the high-flying kiwi. Another report is the September Japan all-industry index at 0430 GMT. It's expected to rise 0.4% but it's a report that rarely moves the market.

Core FOMC member Bill Dudley delivered an optimistic speech on the US economy that helped the US dollar. On the day, the yen led the way while the pound lagged. Up later, the RBA minutes could jolt the Australian dollar. We issued 1 new trade in EURUSD after 1 of 2 longs hit all targets with 180-200 pip profits. See the 2 charts on EURUSD in today's latest Premium Insights.

NY Fed President Dudley has been one of the more cautious core members of the Fed but he tossed that aside Monday in a speech that emphasized good US growth dynamics for 2014 and 2014. He also forecast more substantial improvements in labor market conditions.

Prior to US trading the dollar continued to languish but it found support after the comments. EUR/USD dropped to 1.3500 from as high as 1.3542. Dudley later tempered his comments by saying there is not yet enough growth momentum to five the Fed confidence in the outlook.

Traders are having difficulty reading Fed signals regarding tapering and headline-driven trading has come into favor. With retail sales on tomorrow's US calendar, expect that to continue.

Late in US trading, supposedly on a warning from Carl Ichan, US stocks stumbled and closed down 0.4% to 1791. Earlier in the day, the index hit a record 1800 but six consecutive weeks of gains and an 8% rally since mid-October have left the market vulnerable to a correction. It's a similar story for yen crosses.

The Asia-Pacific calendar is somewhat quiet but there will continue to be a focus on China as optimism builds following the outline of reforms. Keep a close eye on the Shanghai composite.

The top economic data is at 0030 GMT when the RBA releases the minutes of the most recent meeting. Look for anti-AUD jawboning and lamenting the slow transition from investment in resources to other sectors. There is a risk the market is underpricing how soon RBA rate hikes will come, especially if China continues to rally.

Core FOMC member Bill Dudley delivered an optimistic speech on the US economy that helped the US dollar. On the day, the yen led the way while the pound lagged. Up later, the RBA minutes could jolt the Australian dollar.

NY Fed President Dudley has been one of the more cautious core members of the Fed but he tossed that aside Monday in a speech that emphasized good US growth dynamics for 2014 and 2014. He also forecast more substantial improvements in labor market conditions.

Prior to US trading the dollar continued to languish but it found support after the comments. EUR/USD dropped to 1.3500 from as high as 1.3542. Dudley later tempered his comments by saying there is not yet enough growth momentum to five the Fed confidence in the outlook.

Traders are having difficulty reading Fed signals regarding tapering and headline-driven trading has come into favor. With retail sales on tomorrow's US calendar, expect that to continue.

Late in US trading, supposedly on a warning from Carl Ichan, US stocks stumbled and closed down 0.4% to 1791. Earlier in the day, the index hit a record 1800 but six consecutive weeks of gains and an 8% rally since mid-October have left the market vulnerable to a correction. It's a similar story for yen crosses.

The Asia-Pacific calendar is somewhat quiet but there will continue to be a focus on China as optimism builds following the outline of reforms. Keep a close eye on the Shanghai composite.

The top economic data is at 0030 GMT when the RBA releases the minutes of the most recent meeting. Look for anti-AUD jawboning and lamenting the slow transition from investment in resources to other sectors. There is a risk the market is underpricing how soon RBA rate hikes will come, especially if China continues to rally.

Ashraf's seminar in Budapest this Tuesday starts at 4 pm until 7 pm local time. Ashraf will cover the latest tug of war between Federal Reserve lack of clarity and the ECB's internal divisions with respect to monetary policy. Besides his forecasts on FX and metals, Ashraf will cover equity indices, the forint and zloty. Full details and event registration here:

The euro was the best performer last week and that may have encouraged more dovish comments from the ECB's Praet on the weekend. The New Zealand dollar is up nearly a quarter cent to begin the week as the government offloads part of Air New Zealand. Several international housing data points are the early-week highlights with markets off to a quiet start.

ECB chief economist Praet briefly hurt the euro last week talking about quantitative easing and he continued to emphasize the remaining tools in the ECB toolbox on the weekend. He told the German press that 'one has to deploy quantitative measures ' once the zero bound has been reached but he said that 'doesn't have to be' a bond program and could be liquidity injections at banks. For now, he said he doesn't see deflation.

Last week the euro was the best performer while the yen lagged despite Praet's comments. For now, another LTRO looks far more likely than quantitative easing. The undertones in the ECB, however, suggest the strong German influence is waning and that could eventually open the way for more aggressive moves.

The long political career of Silvio Berlusconi is on its last legs after a chief ally abandoned him to form a breakaway party.

Japan 's Sankei newspaper reported Japan's government will compile the second round of its growth strategy in June 2014. That means the BOJ will likely be on its own for the next 9 months, including in April of 2014 when the VAT is set to rise.

The schedule is light to start the new week but housing is in focus with data on Japanese housing loans, UK house prices from Rightmove, Tokyo condo sales and Chinese property prices. Barring a major shock, we don't expect the data to drive any trading.

Commitments of IMM Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +. EUR +17K vs +33K prior JPY -95K vs -73K prior GBP -9K vs -2K prior AUD -35K vs -25K prior CAD -16K vs -18K prior NZD +3K vs +8K prior CHF +3K vs +8K prior US Dollar Index longs at 14K vs 8K prior

Betting against the yen was a winner last week but the trade is getting crowded. Because of the heavy and likely growing speculative interest look for yen crosses to gain gradually but correct abruptly. Interestingly, the spec market is still unsure which way to go on cable. If it ever does pick a direction, it will have plenty of fuel.