The pound is winning the race to the bottom among major currencies at the moment, apparently triggered by fresh polls released yesterday indicating that the Scottish independence vote on September 18 is a far more uncertain affair than previously believed.
I still consider it extremely unlikely that the polls result in a vote in favour of independence. Of course, any chance at all of a Yes vote is weighing heavily on sterling, because there has been no credible discussion of the division of debt and what currency an independent Scotland would use. Even with a Yes vote for independence, however, we have to realise that a process to define the terms of nationhood and rolling out a new currency arrangement would take a very long time, so traders may begin to consider whether the market is getting over-excited on this issue.
I still see overwhelming odds for a No vote and a snapback in sterling at some point now that so much air has been taken out of the previous rally, though more weak data out of the UK could still inflict a bit more damage on the likes of EURGBP on the idea that the UK can’t escape the malaise affecting the mainland economy.
Reserve Bank of Australia Governor Glenn Stevens was out last night expressing a strong desire to keep interest rates steady in order to avoid a “build-up of risk in the financial sector”. Australian rates jumped a couple of bps on this, as a few bps of easing are priced into the next 12-months, but there isn’t much more to get out of this story, as Stevens will be very reluctant to signal any tightening as long as AUDUSD is over 0.9000.
The Australia Q2 GDP data overnight slightly exceeded expectations, with the Australian economy growing at 3.1% on a year-over-year basis.
A weak Services PMI out of Sweden this morning builds the case for a test higher in EURSEK, though both ECB and Riksbank are meeting tomorrow.
Looking ahead
Today’s US calendar is mostly silent, as we watch Europe today for the peripheral August Services PMI readings in Europe for further signs of a decelerating EU economy.
Later, do watch for the Bank of Canada, where there is very little anticipation and Governor Poloz will do everything possible to make it a non-event. Generally, USDCAD appears very well supported with the bounce back above 1.0900 as the focus shifts to whether 1.1000 will be challenged in the wake of the US and Canadian employment reports on Friday.
USDCAD
USDCAD appears well supported after the pair snapped back into the range and above the 200-day moving average (black line in chart below). Looking higher, the round 1.1000 level is an obvious focus, with possible upside-down head and shoulders implications as well, though we’ll also have to rely on the fundamental inputs from the US and Canadian employment reports on Friday in the wake of today’s Bank of Canada rate decision.
Technical notes
EURUSD upside gets uncomfortable for the bears if the 1.3150/75 area can’t keep a lid on the action today as the market holds its breath ahead of the ECB.
USDJPY saw bulls over-reaching above 105.00 as we need to get to the other side of the Bank of Japan and the US data tomorrow and Friday to decide if there is enough fundamental support for a firm break to new multi-year highs above 105.45. Support comes in around 104.87 (daily pivot) and then 104.50.
GBPUSD - should be plenty of room for a sizable bounce today to above 1.65, with the 1.6540/50 zone the key resistance higher, though it’s tough to know whether there is more downside to wring out of the Scottish independence vote poll from yesterday. A tactical buy on dips, particularly if UK Services PMI beats expectations?
AUDUSD needs to follow through lower after yesterday’s ugly candlestick. The bear isn’t growling until 0l9250 is taken out, and we may need the economic data out of the US to do the trick. Reversal risk if 0.9325 trades today.
Economic data highlights
- Australia Aug. AiG Performance of Services Index out at 49.4 vs. 49.3 in Jul.
- China Aug. Non-manufacturing PMI out at 54.4 vs. 54.2 in Jul.
- Australia Q2 GDP out at +0.5% QoQ and +3.1% YoY vs. +0.4%/+3.0% expected, respectively and vs. +3.4% YoY in Q1
- Japan Aug. Markit Services PMI out at 49.9 vs. 50.4 in Jul.
- China Aug. HSBC Services PMI out at 54.1 vs. 50.0 in Jul.
- Sweden Aug. Services PMI out at 54.2 vs. 60.1 in Jul.
Upcoming economic calendar highlights (all times GMT)
- Spain Aug. Markit Services PMI (0715)
- Italy Aug. Markit Services PMI (0745)
- France Final Aug. Markit Services PMI (0750)
- Eurozone Final Aug. Markit Services PMI (0800)
- UK Aug. Services PMI (0830)
- Eurozone Jul. Retail Sales (0900)
- Canada Bank of Canada Rate Decision (1400)
- US Jul. Factory Orders (1400)
- New Zealand Aug. QV House Prices (0000)
- Australia Jul. Trade Balance (0130)
- Australia Jul. Retail Sales (0130)