- Commodity currencies badly hit in the Asian session, erasing previous gains
- We believe that the dollar rally is drawing to a close as traders conclude their pricing in of a December Fed rate hike
- EUR/USD continues to slide toward the next support standing at 1.0458, however, a weaker support stands at 1.0521 and will likely temporarily slow the EUR’s fall should US existing home sales come up lower than expected. Over the very short term, we expect a retracement towards 1.0700
- Fed: growing dissension surrounding data quality commands additional evidence to support a monetary change
- The economic situation in the U.S is largely overestimated and the Fed will soon have a hard time justifying the inefficiency of the three quantitative easings they have launched over the past seven years. The greenback is currently strengthening on over exaggerated December Fed rate hike hopes. Over the very short-term, we expect a retracement of the pair towards 1.0700
In the Asian session commodity currencies were badly hit as they erased previous gains. The Australian dollar was the worst performer, with a drop of 0.80% from Friday’s close, as crude oil prices continue to slip further. In spite of a higher open, West Texas Intermediate was off 2.85% to 40.73 in Tokyo. WTI has been unable to break the strong support standing at around 39-40 dollar a barrel. Metals were also under heavy selling pressures with gold losing 0.65%, silver dropping 1.19% and platinum falling 0.50%, while palladium moved below $560, down 1.10%. AUD/USD found a strong support at 0.7150 and is now trading slightly higher at around 0.7170 as the US dollar is running out of steam. The dollar index is testing the key resistance lying at 100 (psychological threshold and April 13th high).
We believe that the dollar rally is coming to an end as traders finish to price in a December rate hike by the Federal Reserve. The probabilities extracted from the OIS swap rose to 64%, indicating that a lift-off before Christmas is likely. However, we think that the Fed’s final decision remained data dependent and that a solid reading of Wednesday’s PCE deflator would anchor a monetary policy tightening in 2015. A strong personal income reading would also be required. The market is expecting the latter to come in at 0.4%m/m (s.a.) in October, up from 0.1% in September, while the Fed’s favourite inflation gauge is expected to rise to 1.4%y/y from 1.3%y/y in the previous month.
EUR/USD continues to slide toward the next support standing at 1.0458 (low from March 16th). Nevertheless, a weaker support stands at 1.0521 and will likely slowdown temporarily the EUR’s fall. The single currency lost almost 8% since mid-October and is set to lose another 1.50% in the next few days.
In the equity market, regional bourses were mixed in Asia as Japanese markets were closed for holidays. In mainland China equities were pairing losses across the board with the Shanghai and Shenzhen Composite down 0.56% and 0.76% respectively. Further South, the ASX and NZX were trading in positive territory in spite of a sump of most commodity prices. In Australia and New Zealand equities are up 0.39% and 1.15% respectively. In Europe, futures are pointing toward are lower open as most indices almost completely recovered from the late summer debasement. The Footsie is down 0.79%, the DAX 0.10%, the CAC 0.17% and the SMI 0.20%. The broader Euro Stoxx 600 fell 0.26%.
***Yann Quelenn, Market Analyst: “The housing market is an important gauge to more accurately appraise the real situation in the U.S even if officially Fed members’ attention is said to remain focused on inflation and jobs data. Indeed, hawkish members claim that employment conditions would fuel inflation, while doves support the idea of a reserve army that would flow back in the job markets as soon as the situation improves. In any case, it is clear that there is growing dissension surrounding jobs market statistics, which are been said to not accurately depict the current situation. Therefore, it is important to get additional evidence that would support a monetary change. We strongly believe that housing data will provide additional evidence that the U.S economy is struggling to recover.
Low interest rates and steady unemployment have provided important traction to underpin the housing market. This is unlikely to stop as last month’s October existing home sales increased by 4.7% m/m against the backdrop of constant jobs creation and mixed economic conditions. The main issue is that the era of zero interest-rate is not over and this adds upside pressures to house prices. On the contrary, the negative global outlook is adding downside pressures to today’s existing home sales, which we expect to print in lower than consensus at -2.7% m/m. The EURUSD is set to gain on this data release. Events outside of the U.S won’t be the only drivers for broad USD trend. The economic situation in the U.S is largely overestimated and the Fed will soon have a hard time justifying the inefficiency of the three quantitative easings they have launched over the past seven years. The greenback is currently strengthening on over exaggerated December Fed rate hike hopes. Over the very short-term, we expect a retracement of the pair towards 1.0700.”***
Today traders will be watching Markit PMI from Germany, Eurozone and the US; Chicago Fed Nat Activity index and existing home sales from the US; SNB sight deposits.