Market Analysis: North America – Dec 11, 2015 – XE

The dollar has traded mixed today, moderately softer against the euro while gaining against underperforming commodity currencies. Oil prices fell to new seven-year lows, which took a toll on the Canadian dollar. The Aussie and Kiwi dollars, and the Russian ruble, were also down notably. The talk is that the market is trimming commodity currency exposures ahead of a batch of China data releases due out this weekend (including production, fixed asset investments and retail sales). There has been a propensity for Chinese economic numbers to disappoint of late.

EUR-USD, meanwhile, traded slightly firmer, nudging north of 1.0950 but remaining below 1.1000 and well off Wednesday’s six-week peak at 1.1043. BNP Paribas’s forex positioning analysis reckons that following the big post-ECB announcement stakeout long dollar positioning is now comparatively neutral at +6, on a scale of +/-50. To us this points to downside potential for EUR-USD. Most ECB policymakers are likely to maintain dovish-speak following last week’s miscommunication debacle, while the dollar should pick up bids into what is now a near-certain Fed rate hike on Dec-16, which should keep front-end U.S. yields on the up. From a technical perspective, EUR-USD’s run higher earlier this week failed to sustain gains above the 200-day moving average, which is today sitting at 110.34. Resistance is marked by this, while near-term support is at 1.0925-30.

USD-JPY gave up Tokyo session gains, which left a high at 122.23 (just short of a batch of former daily lows at 122.26-30). The run higher in Asia was reportedly caused by real money demand. The risk-off backdrop subsequently underpinned the yen, as per normal correlations, aiding USD-JPY to a low of 121.35. USD-JPY support is now marked at has 121.00-07, which encompasses yesterday’s low, and resistance is at marked by former range lows at 122.26-29. Data out of Japan this week have been encouraging. Japanese core machinery orders numbers showed a jump of 10.7% m/m in October, well up on the market consensus for a 1.5% decline. This followed a big upward revision in Japan’s Q3 GDP this week, to +1.0% y/y from the -0.8% originally reported, which shows that the country didn’t fall into a technical recession after all. The data has softened expectations for the BoJ to expand its QQE policy in January, which is the prevailing market expectation.

The pound remains net softer versus both the dollar and euro in the wake of yesterday’s minutes to the BoE’s December Monetary Policy Committee meeting. Cable is trading in the mid-1.51s, holding comfortably below the 1.5202 high that had been seen ahead of the BoE announcement. The main takeaway from the minutes was the MPC’s observation that pay growth had “flattened off” despite lower unemployment. Wage growth is a key metric that the MCP has been focusing on, so it’s not surprising that markets reacted. The BoE left the repo rate at 0.5% unchanged, as was widely expected. The MPC also noted that inflation should pick up in the new year due to base effects, though also noted that core inflation remains subdued and that headline CPI is expected to stay below 1% until the second half of next year. The follows ugly UK trade numbers, released earlier, which showed the total trade balance falling to a deficit of GBP 4.1 bln in October from the GBP 1.1 bln deficit seen in September. The median forecast had been for a much more moderate deterioration in the deficit to GBP 1.8 bln. The visible goods deficit was the worst figure in October data in 40 years. We expect sterling to remain under the cosh into the new week and next Tuesday’s release of UK inflation data for November.

EUR-CHF has settled in familiar territory in the low 1.08s, above the 1.0802 low that was seen in the wake of yesterday’s franc’s short-lived rally after the SNB announced policy was to remain on hold, which left the Libor target range at -1.25% to -0.25%, and the sight deposit rate at -0.75%. The ECB’s move last week was insufficient to have elicited a response form the Swiss central bank, which had been a thread of conjecture in markets ahead of the ECB’s meeting. The SNB’s press release still noted that despite depreciating “somewhat” in recent months the Swiss franc remained “significantly overvalued.” No surprises there, while the central bank added that it will “remain active in the foreign exchange market … as necessary.” The SNB also said it will regularly re-assess the need for adjustment in the countercyclical buffer to deal with the frothy domestic property market, which has been a side effect of ultra-accommodative monetary policy. The post-announcement low in EUR-CHF left the week’s low at 1.0801 untroubled, which some will see as technically significant. The cross looks set to remain comfortably above the sub-1.0500 levels that prevailed earlier in the year before the SNB cut the deposit rate to -0.75%.

USD-CAD’s long-term rally re-ignited today, sending the pair to new 11-year peak at 1.3679. A renewed leg lower in oil prices provided the spark, with conditions ripe with the U.S. dollar itself generally better bid as the market starts to focus in on the near-certain Fed rate hike next week, which is underpinning front-end U.S. yields. Support is marked at 1.3639 (yesterday’s peak), ahead of 1.3620.

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