Awesome growth numbers from the US yesterday fuelled the bullish dollar trend, we saw new recent highs for the dollar vs several currencies, indeed DXY, the dollar index, achieved 10 month highs. Economists had expected 3.1% growth for Q2, but in fact the numbers came it at 4%! Not surprisingly there were sharp spikes in fixed income yields following the data, and Emerging market currencies weakened accordingly. One has to wonder about whether a US leveraged currency like the Mexican peso won’t eventually be a beneficiary of a stronger US economy. But for now, with the rate outlook at a possible inflection point, the safe course is to be wary of risky currencies. We all need to get a better understanding of which economies, indeed which corporates have unwisely feasted on a low rate environment, and not taken adequate precautionary steps to cope with a normalisation process. Still, one sobering note on the GDP data… we should expect revisions in coming months, and recently those revisions have had a downward bias. Later revisions tend to have better data on sectors like housing, exports and healthcare which are initially factored into the estimates as assumptions derived from historic trends. But who cares, we view the market now and we observe the price action as it unfolds!


FOMC didn’t supply anything new really. The pace of bond purchases slowed, but that was expected, and the Fed reiterated its plan to keep rates low “for a considerable time” after the purchases end. There were tweaks in the language as we’ve come to expect.. they did acknowledge that the unemployment rate has fallen steadily but they observed that there are still unspecified weaknesses in the labour market. The Fed also noted that their concerns about deflation have receded, although they aren’t afraid of inflation as of yet.


What does this all mean? Risk markets have to adjust to a world of potentially higher yields, and so we should probably exercise caution where beneficiaries of carry are concerned – emerging market currencies and bonds spring to mind, as do corporate bonds; it’s not my wheelhouse, but I wouldn’t be surprised if corporate bonds come under some pressure, and spreads widen. Ironically this sort of environment will add a bid to treasuries. In the short term we’ve seen decent dollar moves so pullbacks wouldn’t be a surprise. I would favour the majors over emerging markets in this type of scenario though.


Jobless claims in the US this afternoon and Eurozone unemployment later this morning are amongst the data points to watch for. I’m not sure anything is bigger than non-farm payrolls on Friday though. That’s one to watch for


Big day today with the FOMC announcing in the early European evening – 7pm London. Obviously no one’s expecting rate hikes, but any new nuance in the committees views on the US economy will give us all further insight into the proximity of the exit strategy. The fireworks – if any – may not actually occur until Friday though, as we then get non-farm payrolls. I could easily see a scenario where the comments today are conditional on further strength in US data, and then, lo and behold, on Friday we get employment numbers that are far in excess of expectations. For what it’s worth, consensus for Friday is for a 6.1% unemployment rate and 233,000 for non-farm payrolls. Imagine a scenario where the unemployment rate is 5.9%, or the non-farm payrolls number is over 350,000? It doesn’t take much to get those sorts of numbers, but trust me… the reaction is likely to be big!


Asian equity markets seem to have reached over-extension territory. At the very least the bullish momentum seems to have run out for now. In all probability this is caution in front of the big data that’s coming our way. Let’s not kid ourselves, if the reaction is negative in European and US markets, Asian markets will follow. The one constant appears to be dollar strength. Cable is near the lows, EUR/USD is just pips away from attaining a 1.33 handle, the USD/JPY bullish run continues, and the pair is approaching the first target around the 102.25 level. And those are the majors I’ve mentioned…. Emerging market currencies fared even more poorly against the dollar, as traders switched to protection mode, or added to bullish dollar bets.


I don’t anticipate we’ll get much excitement during the European day as caution is likely to be the main theme. This might not be the right time, but more and more, as we see these big data events approaching, there will be more fear than greed at play. It’s musical chairs guys, and we all know the music is about to stop, everyone’s still pretending to dance but we’re all edging closer to the chairs. No one wants to be the one left standing when the music stops! No one wants to be long carry when the massive carry unwind begins…


Retail sales data from Southern Europe keeps coming in and it’s far from inspiring – Spain today, Italy previously. The case for a weaker euro can only be enhanced by this. As I’ve mentioned in recent blogs, we could realistically see some sort of short term EUR/USD bounce before the downtrend reasserts itself. But hold on… we may actually be seeing what constitutes a pause in the trend with the consolidation that’s been in force for the last few days. The key top side levels to watch for are 1.3466 and 1.3485.


Asian equity markets are looking very bullish at the moment, whether you’re looking at the Shanghai Composite, Hang Seng or even the Nikkei, the price action is unashamedly exuberant. Perhaps this is catch up, as these markets lagged Western equity markets for some time. But as I’ve mentioned before, this is most certainly not universally translating into local currency strength. USD/JPY briefly achieved a 102 handle today, and I would look for further attempts to claim and sustain this level over the next few sessions, as the double bottom would indicate.


GBP/USD has been relatively quiet so far. I suspect after the recent washout those who profited from others pain have moved on to better things, and those who capitulated don’t even want to think about the currency pair for a while! 1.6920 is the next key support, the lack of direction in the pair may be an indication that there are still some people getting out of the long trade. If the bullish case is to hold, I wouldn’t expect us to go below that support. We’ll keep an eye out, but my bias for the next impulsive move remains to the topside.


Not much on the data front today as the market is poised for Yellen and co tomorrow. I would expect another session with few decisive moves. This will definitely be a week of two halves!

A – B – C

Great start to the week for risk markets. The culprit seems to be the Shanghai Composite which has surged on the back of strong corporate earnings. As with last week, currencies are largely unaffected by all the good cheer. It’s fascinating but the implications could be sobering as well… one would normally expect risky currencies to correlate highly with this sort of positive equity market environment, either via the flow mechanism or direct investment, but it’s not really working right now. Of course it could be just as simple as macro funds having done terribly this year, so their appetite for risk is low. Who knows!?


After the capitulation of cable, GBP/USD, over the last week, I’m wondering if we get a breather here. The personality of the move reminds me of what one would expect of a wave ‘C’ impulsive move lower in Elliott wave technical speak, as the currency pair has traced an A-B-C corrective pattern throughout July. The ‘B’ wave would have been the move to a new high, which was off fading momentum. Should that conjecture be accurate, we should look out for signs of recovery in the near future, with a re-test of the highs to follow.


While EUR/USD looks due some period of consolidation soon, the momentum has been much stronger to the downside than with cable, I would therefore expect EUR/GBP to come under pressure again in the coming sessions. Indeed this seems by far the higher conviction cross of the three, and I continue to look for this move to extend towards the 0.7780 area.


There really is very little data of note today. Retail sales and business confidence in Italy is probably the most noteworthy. Looking further out into the week, in the US, we have the Federal Open Market Committee (FOMC) rate announcement on Wednesday, as well as sentiment data for the Eurozone. Anticipation of FOMC is likely to mean that not much happens before the middle of the week. Frankly, if a surge in Asian equity markets isn’t enough to get currencies to join the party, it’s hard to see anything but sluggish price action leading up until Wednesday!


Risk continues to rally, but we’re seeing the effects primarily through the equity and fixed income markets. Currencies largely did their own thing yesterday. NZD/USD has suffered on the back of a pause in the rate hiking cycle of the RBNZ. AUD/USD has pulled back from its inflation induced (or China PMI?) surge and began to pull back yesterday. In fact, a quick glance at emerging market FX highlights a general weakness yesterday that belies the exuberance we saw in equity markets as yet again the S&P 500 made new record highs.


I can’t say I’m particularly shocked about Asian currencies (USD/KRW, USD/TWD etc), mercantilist economies have a tendency to be resistant to their currencies appreciating generally, and coupled with the weakness we’ve seen in the Chinese currency this year, and the Japanese yen over the last 18 months, it’s hard to see them standing by and letting nature take its course. For this reason, I’m expecting a EUR/USD bounce or at the very least greater resistance to its continued decline in the coming days, as central banks recycle their intervention dollars to get their portfolios back in line.


USD/JPY did as expected and bounced yesterday, it’s move above last weeks high could be viewed as confirmation of a double bottom from a technical perspective. If that’s the case this upsurge could target the 102.40 area in the first instance. We’ll be observing on the side-lines. Inflation data that came out this morning was broadly flat and continues to be substantially inflationary. What a strange world we live in where rises consumer prices are something to aspire to! God help us if they end up thinking they’ve gone too far..


The move that felt like pain though was sterling. We’ve all seen this so many times before! Sterling has a way of tempting investors into a position and making them suffer for it. One has to concede that the price action has been brutal for advocates of sterling strength, but I wouldn’t be shocked if sterling strength continues and GBP/USD rises like a phoenix from the ashes of short term trading losses. As mentioned in previous blogs, GDP numbers today could see the UK economy surpass the pre Global Financial Crisis peak. I find it hard to believe that that’s going to have any impact on the currency, the numbers are seriously lagging after all. But perhaps it will allow people to take a step back and look at the recovery in British economic prospects from the doldrums.


Other data to enter the macro-sphere today include IFO in Germany, durable goods in the US and money supply data for the Eurozone as a whole.


All that time hovering just above support, and gravity has finally had its way (funny how often that happens). And it can’t even be blamed on EUR/USD, which was broadly flat yesterday. Sterling (read GBP/USD in this specific instance) underperformed plain and simple. One can only conclude that longs were disappointed by the BOE minutes. Not quite sure what they were expecting, these things take time! I’m not yet ready to concede the end of the GBP/USD bull trend though. My main reason is the monthly close above resistance last month. There’s no rule that says you can’t pull back from a break before the trend continues, and the fundamentals – GDP out-performance relative to developed economy peers, central bank mulling an exit strategy from ZIRP etc – do support sterling strength. However if we do close back below former resistance then it’s fair to ask.. was it just a false break? For now cable’s recent moves have more of the feel of over optimistic (weak?) longs retreating. Let’s see what impact the retail sales numbers have on sterling later on this morning.


We have seen some bullish breaks in risky FX though. USD/ZAR is the poster child of that. Emerging market currencies were strong yesterday moving in step with US equity markets, which again posted intra-day highs. It only makes EUR/USD’s performance stand out all the more, and European FX along with it. This morning, not surprisingly sees the market pulling back a bit from its exuberance of yesterday, as short term players take profits.


On the data front, Japanese trade numbers are considerably worse than expected, with an annual export decline of 2% versus consensus expectations of a 1% rise. This follows on from a decline 2.7% previously. 2 obvious things to take from that: Japanese export markets are weaker than expected – obvious implications for global macro there; and the resulting larger than expected trade deficit doesn’t harm the argument for a softer yen going forward. One other observation – and I’m sure more can be gleaned from the break down which I haven’t had a chance to look at yet – is the (as expected) strong import numbers are a plus for Mr Abe in his attempts to get the Japanese domestic economy going again. USD/JPY hasn’t done too much in recent days. From an Elliot wave practitioners perspective (and this is only after a quick glance at the intra-day chart), we may be in a corrective wave (ii) of 3, with an impulsive move higher to come. No doubt some short term traders will have stops just below 101.20 to see if this pattern plays out, so for me.. that’s the level to watch today. As I write the currency pair trades at 101.44, so a decent looking risk reward trade.


We have jobless claims and home sales to come later on today in the U.S. Consumer confidence in Mr Draghi’s homeland might be something to keep an eye out for as well this morning. For now EUR/USD and other euro crosses continue to look like the sick dogs. A fairly important support level, representing the year to date lows, in EUR/USD has gone now. I’m not sure what’s going on in vol space, but I wouldn’t be surprised if there are knockout barriers that could be vulnerable below in EUR/USD. It’s going to be very interesting to see how this plays out.


The price action was interesting yesterday. Participants were clearly adding to risk as the S&P 500 made an intra-day high, but the euro was weak. And it dragged the other European currencies along with it. Cable yet again dipped below its support zone, although I see it hovering just above again. The real action was in the crosses.. from EUR/GBP to EUR/ZAR the euro was weaker across the board. As I’ve said before, the trend in EUR/GBP is a thing of beauty at the moment! For now I don’t see any sticky zone for the cross until we get to the 0.7755 – 70 zone. In trader speak there’s nothing but free space from here to there. Of course it doesn’t mean it gets there, but if you’re looking for a potential target zone that would be a good area. The ECB has got to like this euro weakness, but the irony is that it’s very existence might reduce the odds of them doing something to justify it (Werner would be so proud! *)… let’s not forget that from a trade flow perspective the force remains with the euro!


US inflation numbers were benign yesterday, which happily for Mr Market doesn’t aid the exit strategy narrative. But of course that’s inflation in the narrow sense of the word… asset price inflation is inflation in my book! Emerging market currencies certainly had their fun with USD/ZAR getting to within a pip of a double top confirmation, it will be interesting to see what happens if it gets below 10.53, technicians would probably target a move down towards 10.20 in that scenario, but from a fundamental perspective the lower than expected inflation numbers – this morning – probably don’t help the cause.


Another interesting move in risky FX space has been AUD/USD overnight. Probably on the back of the higher than expected inflation numbers (at least on the basis of the trimmed mean). The price action yesterday in full risk on was uninspiring but that’s certainly changed with the surge this morning. I’m not sure it alters the bigger picture dynamic for the currency pair, but at least we could see a test of recent range highs.


Bank of England minutes today might enable sterling to differentiate itself from the euro, apart from Canadian retail sales later on, I struggle to find anything else interesting data-wise. So we’ll just keep an eye on EUR/USD and see if it has any legs.



(*) Werner Heisenberg


Not much has happened with the major currencies over the last 24hrs, for example GBP/USD is within a few pips of where it was at yesterday’s close. Support/ resistance zones have broadly held, and the same could be said for the main US equity markets. USD/JPY and USD/ZAR offer some small variation from this theme, but only in so far as they’ve moved a little bit more than some other notable currencies. USD/JPY has had a minor bounce from its support zone around 101.20ish and is currently at 101.50, meanwhile USD/ZAR has continued to drift lower, but as I said yesterday, the move would only become noteworthy if it goes below 10.53, USDZAR is currently trading at 10.63 within a large corrective complex.


The truth is, currency markets feel a bit stale at present. We have BOE minutes tomorrow which could shed some light on exit strategies, certainly not harmful for GBP! And we have inflation numbers in the US today another data point which could add fresh colour to exit strategy narratives. The market needs more information to propel assets one way or another. Of course a higher than expected inflation number would not be positive for risk markets, quite the opposite in fact. But I’m not expecting that.


For now, we stay in wait and see mode. To see the data, and to observe how the market reacts to it.


GBPUSD spent some time below my initial support zones 1.7060 – 70… one might say it followed where EURUSD had gone before. This doesn’t have an impulsive feel to it though. And it would be difficult to find a justification for big moves right now. At the end of the week GDP numbers should help Mr Cameron celebrate his policies of fiscal austerity with UK GDP finally exceeding pre-crisis levels. Nicely done! But as they say.. better to be lucky than good. In any case GBPUSD has been indecisive for the last couple of days, and hovers just above said levels. Perhaps anticipation of good numbers could yet see cable bounce from here. July has looked like a consolidation period with trend continuation most likely. A move above 1.7225 could see stops being taken out.


Other currency pairs continue to give mixed signals with USDJPY hovering around support while USDZAR and other emerging market pairs have moved quite a bit lower in recent sessions. I would only consider USDZAR interesting if we move through the June lows though, we seem to be in a complex that in all likelihood is a large corrective pattern.


I don’t see currency markets as leadership candidates at the moment. Fixed income and equities have more interesting stories to tell, but as I’ve said many times, summer months tend not to be so exciting. In a previous blog, I pointed out a slight discrepancy in the technical’s for the Dow versus the S&P with the latter going below trend support, well it turns out that was only temporary. We saw a fairly aggressive bounce back above supports, so we can only conclude we’re still in trend with confirmation of generally bullish markets.


Some decent macro later in the week could help the market gain some clarity, but I wouldn’t hold your breath. Durable goods in the US, the aforementioned GDP numbers in the UK are just some of the nuggets that will help us all make some sense of the macro-scope. But these are lazy summer months, it probably takes more than that to get the juices flowing. For now we’ll continue to watch the levels and note any interesting price action


The charts look designed for summer and indecision. The S&P 500 appears to have broken trend-line support, while the Dow its first cousin held it’s trend-line support. So what’s it going to be? A bounce back into trend or should we listen to the S&P? Decisions decisions…


And it’s not just equities. Currencies aren’t making any headway today. Cable is within pips of where I saw it at the close yesterday, I could say the same about EUR/GBP. The easy conclusion to draw from recent EUR/USD weakness is the disappointing Eurozone macro combined with exit strategies in the US and UK are starting to influence the currency pair. But it could be as simple as significant optionality at the 1.35 level. I believe EUR/USD vol markets are being dominated by exotics, and the recent moves are the result of gamma trading.


Yesterday’s tragic news in the Ukraine may have influenced sentiment, but markets are amoral creatures that are ultimately forward looking. It’s hard to see how what we all hope is a tragic accident can have application, but we must all be vigilant. What we do know is that USD/JPY hovers above key support levels again, as does EUR/USD. And a quick look at more exotic pairs like USD/MXN and USD/ZAR… and I come away thinking… not much right now.


In terms of data, this morning current account data for the Eurozone has just come out… it’s not exactly helping the case for a bearish EUR! Inflation data in Canada and Leading Index in the US to look forward to this afternoon. So…. Not much to change hearts and minds on that front.


Post 3pm London time might be of interest to observe – as we see how EUR/USD trading handles the post option cut. Not a super exciting close to the week…