- Risk-off rears its ugly head
- NOK vulnerable to downside unless inflation figures surprise to upside
- Look for another busy day today as volatility begets volatility
- Australia Aug. Home Loans fell -0.9% MoM vs. +0.2% expected
- Japan Sep. Consumer Confidence fell to 39.9 vs. 41.8 expected and 41.2 in Aug.
- Norway Sep. CPI (0800)
- UK Aug. Visible Trade Balance (0830)
- Canada Sep. Net Change in Employment/Unemployment Rate (1230)
- US Fed’s Plosser to Speak (1300)
Risk aversion returned with a vengeance yesterday, and the superstitious might credit the recent blood moon eclipse with portending market mischief, which we have gotten in spades this week.
In any case, the post-Federal Open Market Committee minutes rally in risky assets appears in hindsight to have been nothing but an algo-inspired squeeze the day after Tuesday’s ugly meltdown got everyone looking the other way.
The sheer volatility could have many looking to reduce their general exposure to the market, which can in turn create further volatility as the market seeks liquidity above all else. In FX, this will favour the most liquid currencies (G3) relative to the least liquid if risk conditions deteriorate further.
Yesterday, Ewald Nowotny, governor of the National Bank of Austria and member of the European Central Bank’s governing council, said that it is important to wait and see how the already announced ECB programmes are working before reassessing monetary policy.
ECB member and president of the Bundesbank, Jens Weidmann, also complained about ECB governor Mario Draghi’s specific mention of how much he wanted to grow the ECB’s balance sheet by saying that declaring specific targets. Weidmann says that the ECB risks overpaying for the assets it intends to purchase.
A rare 'blood moon' eclipse was visible in America, East Asia and Australia on Wednesday – does it explain the subsequent lunacy in the markets? Photo: Shane Partridge Thinkstock
Norway reports its latest inflation number today. NOK has been escaping notice lately, but is very vulnerable here to downside unless we get a very loud upside surprise in today’s inflation number.
The price of oil has absolutely collapsed lately and we have to remember that NOK will for a long time to come be. As well, traders have been complacent on NOK because they listened to the Norges Bank’s last meeting, at which the Norges Bank trumpeted a stable policy outlook and the government forecasts $100 oil for its budget next year – and spot Brent just plunged to 85 dollars a barrel.
Norway will face a huge pressure on its economy next year. An apocryphal quote from John Maynard Keynes reads, “When the facts change, I change my mind – what do you do, sir?”
The Norges Bank is going to have to change its mind and it is one of the central banks that seems least concerned about sending consistent signals, so it could do so very soon. Until then, EURNOK may be set for a run to the top of the range on a weak CPI release today.
Chart: EURNOK
NOK is in the spotlight today on Norway’s CPI release. Even if this number comes in stronger than expected, I would expect NOK selling to come in as the market environment is not at all supportive, given ugly risk-off and an extremely deep sell-off in crude oil over the last few months – down over $25 dollars a barrel from the top.
The key upside area starts with the 200-day moving average at 8.27, though 8.30 and then 8.45/8.50 look like the key range resistance levels on which to focus. 
Looking ahead
We have a couple of distractions today on the calendar for NOK and CAD, but the overarching theme at the moment is the raggedness of market nerves, after three furious days of activity.
Again, consider Tuesday’s huge and ugly sell-off in the US S&P500 that looked so ominous because key technical lines were crossed, only to get entirely rejected on a trumped-up reaction to the FOMC minutes the following day.
And then yesterday – that overreaction was in turn entirely erased, reinvigorating the bearish argument. We should look for a busy day today as volatility begets volatility.
Traders should remain cautious and aware of where the currencies they trade stand relative to risk. On that note, if this risk off move extends, be aware of potential JPY and USD (and possibly even EUR to a degree) strength and risks to less liquid currencies, including all five of the G10 smalls (commodity dollars and Scandies).
Later – watch for the Canada employment report after USDCAD has traded back and forth in the 1.1050-1.1250. I am looking for a break through resistance and move to 1.14-1.15 soon, and this report will either accelerate or delay that proposition.
Above all, stay very careful out there.
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