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The re-opening of the US stock markets after super storm Sandy isn’t causing the wave of volatility or surge in volumes as some had expected. Sentiment has drifted from the markets as we have moved through the London session into the NY morning. It appears like those who can make it into work on the East Coast of the US are mostly squaring up positions ahead of month-end. This has eased some of the upward pressure on EURUSD as it backs away from the key 1.30 level.
Will Sandy disrupt payrolls?
Combine some mixed economic data and news flow with month-end and you tend to get range trading conditions. EURUSD is still trading between 1.2880 – 1.3020. The euro’s apathetic attempt to break above the key psychological 1.30 level didn’t last long. It looks like we may have to wait for payrolls in the US on Friday before direction returns to the market. On that note, we still haven’t had confirmation that the Department of Labor will release the labour market statistics on Friday. Its website says that it is open and its staff will work hard to “ensure the timely release of employment data” this Friday; however that is not confirmation that it will be released. Since the unemployment rate is pivotal to QE3, and thus the direction of the dollar, all eyes will be on the Department of Labor to see if it can get the work done in time to get these key figures out on Friday.
Month-end positioning pushes economic data to the background
Until then range trading is likely to persist. The market continues to be fairly resilient to economic data. The euro managed to brush off a fresh record high in the unemployment rate for September at 11.6% this morning, while inflation fell to 2.5% as expected from 2.7% last month. However, this afternoon as market sentiment turned the dollar managed to sustain a rally even though the Chicago Purchasing Manager survey, a pre-curser of the national surveys released tomorrow, failed to move back into expansion territory and remains below the crucial 50 mark for the second consecutive month. The dollar is moving counter to intuition as weak economic data should surely mean there is more reason for the Fed to continue with QE3, which is dollar negative. The employment component remains above 50, but it fell from 52.1 to 50.4 in October, which may not bode well for the employment data due later this week. Thus, if payrolls are released on Friday it could be a volatile afternoon on Friday.
The Eurogroup kicks the can down the road again
The sell-off towards the end of the London session is due to a couple of things: 1, positioning ahead of month end (see above) and also more kicking the can down the road when it comes to Greece from the Eurozone finance ministers. They held a teleconference earlier today and said that they seek to “conclude” Greece’s review by November 12th, which is just in time for Athens to receive its next tranche of its EU30 billion second bailout to avoid bankruptcy in mid-November. There was lots of talking and not much doing. Although the Eurogroup meeting gave Greece some encouragement, the deadline is very tight and any slip-up could cause Greece to miss receiving its funds and potentially severing its ties to the currency bloc. The market didn’t get a firm commitment that all of Europe’s finance ministers’ would stand behind Greece no matter what. If Athens can’t abide by the programme that it agreed with the Troika then it doesn’t get the money. So there was some more can-kicking by European ministers (no surprise there), and yet again Greece is forced to avoid bankruptcy by the skin of its teeth.
Portugal’s 2013 budget a cause for concern
Yet again Greece could come back to haunt risky assets and neutralise some of the good news from the ECB’s OMT programme. The other periphery to weigh on sentiment is Portugal. Its Parliament approved the biggest tax increases in its history during a Budget vote earlier, which sets the economy on course for another year of economic contraction next year. The Budget is likely to face a court challenge from the Budget Union who is set to argue that it weighs too heavily on the poor. The claim is that it goes against the constitutional principle that all people should be taxed equally. The government’s popularity is already low and a general strike is planned for 14th November, so this challenge may be difficult for the ruling coalition to overcome.
Commodity currencies diverge
The biggest movers today have been the Cad (on the downside) and the NOK (on the upside). Two commodity currencies have moved in opposite directions. The CAD has been weighed down by weak GDP data for August. The economy contracted by 0.1% in August, which caused the annual growth rate to dip to 1.2% from 1.9% in July. This has hurt CAD on a broad-based basis, particularly versus the USD, NOK and GBP.
The NOK is a top performer today after the Norges bank kept rates on hold at 1.5% earlier. Retail sales were also better than expected as was credit growth, which expanded at a 6.9% annual rate in September. The fast pace of credit growth could fuel unsustainable debt bubbles, which may make the CB less dovish than expected, hence the rally in the NOK. USDNOK fell through 5.7 at one point today, although it has found its feet as we end the session and the dollar re-coups some earlier losses. EURNOK is also starting to look oversold below 7.39 – the 55-day sma. This pair is mostly range bound between 7.47 – the 200-day sma, and also 7.35. We still believe this pair is a sell on rallies.
The divergence between the two commodity currencies shows how important central banks have become to the market. A new theme is potentially forming, whereby the market searches out CB decisions and comments that suggest it is no longer dovish and could be prepared to tighten policy. Thus, interest rate differentials could become a big theme as we move towards the end of the year, with less dovish central banks being “rewarded” by strengthening currencies from an FX market hungry for yield.
One to Watch: GBPUSD
The pound was also a strong performer today and managed to hold onto gains versus the dollar. 1.6120 is the top of the daily Ichimoku cloud and a key resistance level. If we can close the US session above this level then we may see to 1.6150 then to 1.6190 in the short term. We are already above the MT trend line resistance at 1.61, which is a bullish sign. Right now we don’t look like we are too overbought in this pair, so there may be more upside to come. The pound is benefitting from safe haven flows and also month end flows that are weighing on EURGBP. Tomorrow there are some fundamental risks for this cross including US ADP data and also UK PMI data. The market expects a weak manufacturing PMI report for October, which could weigh on sterling, so watch out for volatility at 0930 GMT on Thursday.
GBPUSD: daily chart
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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