Yesterday was a quiet session in FX markets as most currency pairs stabilised against the US dollar. The monetary policy divergence between the ECB and the Federal Reserve continues to act in favour of the greenback. US front-end rates are now running out of steam with US 2-year yields reaching 0.9440% yesterday in New York as traders adjust their positions in anticipation of a tightening in December. However, it seems that investors are turning a blind eye to any information that is not supportive of a lift-off. Indeed, data from the US yesterday did not paint as bright a picture as expected, suggesting that investors may be bamboozled by the Fed’s “everything is just fine” discourse. The Chicago National activity index came in below market expectations, printing at -0.04 versus +0.05 expected, while the Markit manufacturing PMI contracted to 52.6 (vs. 54 consensus) from 54.1 a month earlier. Finally, as expected (see yesterday’s Daily Market Brief) existing home sales fell -3.4%m/m versus -2.7% median forecast, well below the expansion of 4.7% in September.
In Tokyo, the yen was amongst the winners against the US dollar as USD/JPY returned to the bottom of its 2-week range at around 122.70. In the short-term, the low from November 15th, standing at 122.25, will continue to act as a support, while on the upside, the 123.76 level is the closest resistance (high from November 18th). Overall, the risk remains on the upside as the burden stemming from Japan’s inflation and growth issues will prevent the yen from strengthening. The 125.86 level (high from June 5th) is the main resistance on the mid-term.
In Europe, German 3Q Final GDP came in in line with expectations. The German economy grew 0.3%q/q (s.a.) in the September quarter as expected, while on a year-over-year basis the gross national product expanded 1.8% (n.s.a.). The economy was driven by strong domestic and government spending, which offset the weakness of the export sector. Nonetheless, with the upcoming expansion/extension of the ECB asset purchase programme, the German export industry should recover from this summer’s weak foreign demand.
Yesterday, USD/CHF tested for the second time the key resistance area between 1.0230-1.0240. Nevertheless, the greenback should continue to appreciate versus the Swiss franc due to the combined effects of strong anticipations for a rate hike by the Fed in December together with a Swiss economy that is squeezed by a weak euro. We expect the pair to continue to show strong momentum. In case of a break of the 1.0240 level to the upside, the next resistance can be found at 1.0676.
Today traders will be watching German IFO; third quarter GDP from South Africa; in the UK BoE’s Carney will testify to the Treasury Committee; in Turkey the central bank is expected to leave its benchmark rates unchanged; in the US we’ll get the first revision of 3Q GDP, personal consumption, core PCE, S&P/Case-Shiller index, consumer confidence and Richmond Fed manufacturing index.