Right on cue, the next whim of risk aversion has kicked in just as EURUSD looked to be on the brink of threatening the top end of its range at 1.5000. The catalyst today has been a poor session for Asian equities, prompted in part by Standard & Poor’s bleak assessment of Japanese banks; citing Sumitmo Mitsui and Mitsubishi UFJ as among the banks with the weakest capital. The Shanghai Composite is also down nearly 3.5%, allowing the USD to recoup some of its losses from the previous day, ensuring the DXY is now consolidating back above 75 levels. EURUSD is firmly back in the middle of its 1.4800-15000 range, and given the market’s indecision about what good/bad US data means for the USD (see yesterday’s FX reaction to the massive upside surprise in US Existing Home Sales), it seems that only a significant shift in the prospects for US policy and the USD are likely to evince a clear breakout of tight FX ranges.
Today’s data calendar is packed with high profile risk events for the majors, kicking off with Swiss Employment Levels which is forecast to show a continued decline in Q3 at an annualized pace of -0.8%. The primary focus for the SNB (and consequently their currency policy) is normalizing inflation, but given the considerable deflationary drag of rising unemployment, the CHF is likely to suffer on a downside surprise. With USDCHF trading at the lower end of its own range in the past day, the range-bound bias of FX markets also looks poised for a correction upwards in USDCHF.
Next we will see the German IFO survey results which are expected to show modest improvements across each category; however these are unlikely to evoke a strong effect on EURUSD with such entrenched ranges dictating trading. More likely to provide fireworks will be the UK central bank Governor Mervyn King and fellow MPC members testifying to the Treasury on the most recent Inflation Report (released last week). The two key things to watch out for here will be any indications on the likelihood of further QE, or indeed repeated suggestions of a cut to the deposit rate (mentioned in the Inflation report as a possible step in the future to increase sluggish lending). Any shift to favouring more accommodative policy will likely be severely GBP-negative, and we see GBPUSD as the most likely candidate to break out of its range on the downside.
This afternoon’s docket will provide the second reading of US Q3 GDP which is anticipated to be revised lower to 2.8% from the 3.5% initial print, followed by US Consumer Confidence. Although both are significant in stature, we feel there will be limited scope for either release to significantly affect USD ranges as the markets await the FOMC Minutes release later in the evening.
G10 Advancers and Decliners vs USD