Dollar Stayed In Range Ahead Of Key Employment Data

Markets lacked a clear direction last week. The speculations on Fed's tapering, which was a main market drive in August and early September, faded. Markets seemed to be pricing out of October tapering and instead turned focus to whether Fed would scale back the asset purchase in December. Indeed, on Friday, the known dove Chicago Fed Evans even raised the possibility that Fed could delay tapering till January. But, it should be noted again that Bernanke's term as Fed chairman ends on January 31 next year and current vice Yellen is the front runner. As a dove, Yellen could indeed hold the stimulus longer that what markets have been expecting. And, in any case, a string of strong employment figures would be needed to solidify the case of tapering. The first challenge will be the non-farm payroll to be released this week.

With quarter end approaching, and no market moving triggers, focus was reluctantly turned to the concerns that the US government might be shut down by mid-October. The latest development is that, on Friday, the Senate passed and sent to the House of Representatives a bill to fund government operations from October 1 to November 15. None of the Republicans supported the bill. The House Republicans have to, over the coming 3 days to decide whether to support the bill. According to US President Obama, they should decide, "whether to join the Senate and keep the government open or shut it down because they can't get their way on an issue that has nothing to do with the deficit". It is likely that the House would add new measures to the bill, aiming at interrupting implementation of the health law (aka Obamacare). The Senate has indicated that objection to these measures, prolonging the uncertainty in the US budget ceiling.

Elsewhere, in Japan, markets are anticipating prime minister Abe's announcement of the sales tax hike this week. There were speculations that Abe would also announce corporate tax cut to offset the impact. But such hope was dented by comments from the finance minster Aso. Sterling was lifted by comments from Carney that additional QE is unnecessary but there wasn't any follow through buying in the pound. German chancellor Merkel's victory in election was well expected and had little impact on the markets. ECB president mentioned the possibility of another LTRO.

In the financial markets, stocks retreated with DOW extending the decline from 15695.89 but downside momentum diminished a bit as the index hit 55 days EMA. Yields remained soft with 10-year yield and 30 year yield closing lower for another week. Commodities were mixed with gold struggling in tight range between 1300/30. Crude oil also dipped initially but then stayed in range of 102/104. Dollar index also managed to hold above 80 in tight range.

In the currency markets, the greenback was lower against euro and Sterling but was held above prior week's low. Against commodity currencies, dollar has indeed strengthened as risk aversions weighed on the high beta currencies. Yen was engaged in choppy sideway trading throughout the week. EUR/GBP weakened towards the end of the week but also held above recent low. The bigger surprise was found in Swiss Franc, which jumped against both dollar and euro.

Regarding trading strategy, the EUR/CAD's recovery extended last week but is kept below 1.41 so far. Indeed, both the EUR/CAD and USD/CAD showed loss of upside momentum in intraday chart towards the end of the week. We also saw the AUD/CAD dripping back below 0.96, with loss of upside momentum. Thus, we'd believe that Canadian dollar is possibly building up strength for a broad based rebound. And hence, we'd hold on to the EUR/CAD short position with stop at 1.41. And just as a reminder, this is a medium term trade.

While the EUR/USD struggled in range, the corrective price actions did affirm near term bullishness. Thus, we'll hold on to our long EUR/USD strategy. The major concern is euro's lack of strength against sterling and weakness in the EUR/CHF. Nonetheless, firstly, even though the EUR/GBP could make another low, that should be marginal and brief and we'd expect a bottom soon, if not occurred, followed by a strong sizeable rebound. Secondly, the EUR/CHF would very likely receive strong support well above 1.2, possibly at 1.21 level even in case of a fall. So weakness should be relatively temporary. Hence, even in case of a dip, we'll try to add position at around 1.34, with stop at 1.33.