Welcome to my Forex Today column where I'll give a brief wrap on the key drivers of Forex markets and throw in a chart of the day.
As ever, feedback welcome....oh and for AUDUSD specifically you can find that in My Australia Today piece each morning on the blog.
And, for a deeper dive into more currencies and the charts please see my daily markets video.
Honestly, that could have been a much bigger day on forex markets than what we have seen in the past 28 hours.
Sure the Lira got dumped, then pumped, then dumped again. Sure the Rand and Mexican Peso went along for the ride - or at least a little of it. And certainly USDJPY yesterday looked as if the funk was really about to begin.
But then it didn't. The Turkish central bank added liquidity and jacked rates a little for forex, European traders figured the path of least resistance was to reverse a little of Asia's panic and we've settled into a range with news that John Bolton and the Turkish Ambassador's meeting settling thing a little further still in late New York trade.
So this morning while the Lira has lost 8%, the South African Rand is down 2.4%, and the Mexican Peso is off around 1.24%, we really haven’t seen things kick off the way they could have.
The Aussie's weakness is interesting though from a risk appetite perspective, as is the fall in the CRB index. The USD index is largely unchanged at 94.34, Euro is back at 1.1400 after trading a 1.1365/1.1433 range. Sterling is at 1.2760, down 0.1% and the Yen has given up most of its gains trading at 110.63 after trading through a 110.15/110.93 range. The Kiwi and CAD are both 0.1% either side of home at 0.6571 and 1.3130 respectively.
EM currencies are under pressure.
I won’t go into too much detail. But I will say is that while EM is under pressure the Yen will retain a bid and the Aussie is likely to remain offered. Both moves are as a result of caution and fear of the outlook. Equally I’d say that the continued strength of the US dollar is going to be an issue for EM. Certainly there there has been a lot of sovereign balance sheet repair in EM. Certainly also the reliance on USD denominated debt has reduced in all but a handful of countries, like Argentina and Turkey, but the issue is still a big one for emerging, and other, markets as what looks like a USD shortage continues to drive the Greenback higher. To many traders, if not most, that implies pressure on emerging markets.
That will keep everyone on edge for a while – until someone blinks anyway.
To the USD then and the weekly close outside the box was bullish enough. Technically it suggests a run to the 61.8% retracement zone in the 97.70/98.00 region. But longer term the width of the inverse head and shoulders set up suggests the USD could run to 102.
Now, of course, there’s a fair bet that the US President and his administration may not like that strength. And I’d bet that there are plenty of folks who are wary of buying the USD, selling other pairs, on that basis and a belief – mistaken in my view – that this stronger dollar will derail the Fed from tightening. Currency movements are very important as part of the overall toolkit of evaluating monetary conditions in an economy. So the Fed will certainly take this into account.
But, if the crisis in Turkey and its residual effects on the EU and EU banks has done anything is highlight once again that the US economy, Fed policy, and the quality of assets – yes even Treasuries – stand out on a global basis. Growth has desynchronised, there is trouble brewing on many fronts. But the US economy has momentum, a momentum lacking in amny other jurisdictions. I remain a USD bull as a result.
Here's the tweet from Danielle Lacalle again I included in my Markets Morning earlier - I agree with him 100%.
That doesn’t mean there cant be a retracement of course. The MACD on the DXY and Euro daily charts suggests a pause as the move has been exceptionally fast. 1.1440, 1.1466 in EURUSD terms wouldn’t surprise me. We may even see 1.1495/1.1500 before the Euro kicks lower once again. Time will tell. But that will impact the other major traded currencies.
Yesterday’s Chinese loans and money supply data suggested the re-liquification efforts of the PBOC might be gaining some traction. But we’ll get proof or otherwise today with the release of the monthly triple-treat of retail sales, industrial production, and fixed asset investment for July. We’ll also get the NAB business survey out here in Australia and Japanese industrial production in our time zone.
Tonight, it’s German Q2 GDP and July inflation data as well as UK employment and the second read on EU Q2 GDP. The ZEW economic conditions and sentiment is also out for Germany while export and import prices are out in the US before the API crude data tomorrow morning.
Have a great day's trading.
Chief Market Strategist
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies