Commodity currencies: the end of the rally?
After a 2-week rally, the market is wondering whether it is time to play the correction or to reload long positions and make good use of the upside potential. Over the period, the Aussie rose 6% and is back above the $0.73 threshold, in New Zealand the kiwi moved above the $0.67 level as it soared 7.80%, while the Canadian loonie and Norwegian krone climbed 4.20% and 6.40% respectively against the greenback. Both are now stabilising around key levels as investors take profits and reassess the remaining upside potential. The risk-on environment will likely persist, in our opinion, as the uncertainties stemming from the timing of the upcoming Fed’s lift-off have been put on the back burner. However, we believe that even though we may not have seen the end of the rally, the upside potential is rather limited due to a lack of support from fundamentals. Economic data from developed economies is still lacklustre, while growth prospects in EM economies continue to keep investors awake at night. We think the recent rally was a necessary adjustment resulting from an overreaction to global growth concerns.
Draghi sends mixed signals
Over the last months, Mario Draghi has dropped a couple of hints suggesting that ECB Quantitative easing may be expanded beyond September 2016, which was the initial end date for the easing program. As a result, we became increasingly dubious about the true efficiency of this monetary policy. Recent Eurozone data does not seem yet very encouraging (industrial production and inflation in particular). Moreover, it is difficult to support a policy that has failed to deliver the desired result in Japan and in the U.S. The latter is still struggling to end its zero interest-rate policy after three different QE programs.
The ECB is trying to reach an inflation target of 2% through its monetary program. If we have to expand the QE beyond September 2016, it only means that we have to even further increase the monetary base than what we intended to do. This definitely shows that even Draghi is concerned about the true efficiency of his program. Therefore, we find it contradictory when Draghi claims that the program is working better than expected and that it will only take longer. If the objectives were realistic, we would not have to inject more money. Draghi is certainly trying to ensure the markets that everything is going well. He is trying to reduce volatility and also to avoid any panic effect that would result if it clearly appears that ECB’s monetary policies are not working. The central bank’s credibility would be at stake.
The EUR-complex strengthened on Draghi’s comments. Expectations for the single currency are improving. Nonetheless, we remain bearish on the EUR/USD, which we consider overvalued. The pair is currently trading around 1.1350, and we will be carefully watching out for some possible euro weakness, which would lead the pair to head back towards the 1.1200 level.
EUR/GBP - Targeting Year-High
Today's Key Issues Country / GMT oct..09 Total Sight Deposits, last 465.3b CHF / 07:00 oct..09 Domestic Sight Deposits, last 399.2b CHF / 07:00 Sep CPI MoM, exp 0.30%, last -0.30% DKK / 07:00 Sep CPI YoY, exp 0.50%, last 0.50% DKK / 07:00 Sep CPI EU Harmonized MoM, exp 0.30%, last -0.30% DKK / 07:00 Sep CPI EU Harmonized YoY, exp 0.40%, last 0.30% DKK / 07:00 Aug Industrial Production YoY, exp 4.80%, last 4.20% INR / 12:00 Sep CPI YoY, exp 4.40%, last 3.66% INR / 12:00 Fed's Lockhart Speaks on U.S. Economic Outlook in Florida USD / 12:10 BOE's Martin Weale speaks in the Netherlands GBP / 13:00 ECB Announces Weekly QE Data EUR / 13:45 Fed's Evans Speaks on Policy and Economy in Chicago USD / 14:30 Bank of Canada's Poloz Speaks at NABE in Washington CAD / 17:05 Fed's Brainard Gives Outlook and Policy Speech in Washington USD / 20:30 Sep Import Price Index MoM, last -0.30% KRW / 21:00 Sep Import Price Index YoY, last -13.60% KRW / 21:00 Sep Export Price Index MoM, last 0.70% KRW / 21:00 Sep Export Price Index YoY, last -1.50% KRW / 21:00 RBA's Lowe Gives Speech in Sydney AUD / 21:40 Sep Food Prices MoM, last -0.50% NZD / 21:45 Sep New Yuan Loans CNY, exp 900.0b, last 809.6b CNY / 22:00 Sep Money Supply M2 YoY, exp 13.10%, last 13.30% CNY / 22:00 Sep Aggregate Financing CNY, exp 1200.0b, last 1080.0b, rev 1082.3b CNY / 22:00 Sep Money Supply M1 YoY, exp 9.80%, last 9.30% CNY / 22:00 Sep Money Supply M0 YoY, exp 3.00%, last 1.80% CNY / 22:00 Sep Exports YoY, last -20.70% INR / 22:00 Sep Imports YoY, last -9.90% INR / 22:00 Sep Foreign Direct Investment YoY CNY, last 22.00% CNY / 22:00 Sep Trade Balance, exp -$11500.0m, last -$12478.0m INR / 22:00
The Risk Today
EUR/USD EUR/USD has moved sharply higher and is now consolidating. Hourly resistance can be found at 1.1460 (18/09/2015 high). Support can be found at 1.1087 (03/09/2015 low). Stronger support lies at 1.1017 (18/08/2015 low). In the longer term, the symmetrical triangle from 2010-2014 favored further weakness towards parity. As a result, we view the recent sideways moves as a pause in an underlying declining trend. Key supports can be found at 1.0504 (21/03/2003 low) and 1.0000 (psychological support). We remain in a downside momentum.
GBP/USD GBP/USD's momentum is fading. Hourly resistance can be found at 1.5383 (22/09/2015 low). Hourly support can be found at 1.5087 (05/05/2015 low). Stronger support can be found at 1.4960 (23/04/2015 low). In the longer term, the technical structure looks like a recovery. Strong support is given by the long-term rising trend-line. A key support can be found at 1.4566 (13/04/2015 low).
USD/JPY USD/JPY is moving sideways. There is no clear momentum. The pair is still moving around the 200-day moving average. Hourly support is given at 118.61 (04/09/2015 low). Stronger support can be found at 116.18 (24/08/2015 low). Hourly resistance can be found at 121.75 (28/08/2015 high). A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 116.18 (24/08/2015 low).
USD/CHF USD/CHF is declining but has failed to hold below 0.9600. Hourly resistance can be found at 0.9844 (25/09/2015 high). Expected target of the hourly support at 0.9528 (18/09/2015 low). In the long-term, the pair has broken resistance at 0.9448 suggesting the end of the downtrend. This reinstates the bullish trend. Key support can be found 0.8986 (30/01/2015 low).
