- Investors seem reluctant to take directional exposure ahead of this afternoon's key US data
- USD/JPY: With an interest rate hike in the US now completely priced in, we believe that risk is to the downside
- EURUSD: After falling as much as 3.55% since the beginning of the month, the market has become less pessimistic regarding the single currency as traders reduce their downside protection
- The strength of the Swiss franc will continue to give headache to the Swiss National Bank, especially as Brexit talks gear up
- Central Bank of Russia should remain on hold until the end of this year, expecting new data in order to reduce the inflation pressures on the Russian population.
- We nonetheless believe that an inflation below 6%, which should be reached by early 2017, will push the central bank to act in order to lighten the weight on the ruble
- We maintain our bullish stance on the ruble until the end of the year
It was another quiet trading session in the FX market as investors seemed reluctant to take directional exposure ahead of this afternoon's key US data. Like other G10 currencies, the Japanese yen traded within a tight range on Thursday. USD/JPY moved within 104.30 and 104.70, stuck below the 105 resistance level. With an interest rate hike in the US now completely priced in, we believe that risk is to the downside in USD/JPY as yen bulls persist.
After falling as much as 3.55% since the beginning of the month, the euro treaded water at around 1.09 overnight. The strong support at 1.00822 (low from October 3rd) is still untouched, while on the upside the 1.12-1.13 area will act as resistance. Implied volatilities across various maturities remain very even though one-week implied vol ticked up slightly to 7.48%. Looking at the 25 delta risk reversal measure, we notice that the market has become less pessimistic regarding the single futures as traders reduce their downside protection. However, as confirmed by the CFTC speculative positioning, last week traders continued to bet on further euro weakness.
After rallying at a modest pace in the first sessions of the week, EUR/CHF stabilised at around 1.0835 and seemed ready to start moving south again. The strength of the Swiss franc will continue to give a headache to the Swiss National Bank, especially as Brexit talks gear up. The “implicit floor” at 1.08 will remain the strongest support as the SNB systematically intervenes in the FX market when EUR/CHF gets too close.
Asian equities were under pressure on Thursday as investors could not justify pushing company valuations higher. In Japan, the Nikkei was off 0.32%, while the broader Topix index edged down 0.05%. In mainland China, the Shanghai Composite fell 0.14% and the Shenzhen Composite edged down 0.06%. In Europe, equity futures followed the negative lead from Asia and slightly lower. The Footsie was down 0.32%, the DAX 0.27% and the SMI -0.63%.
Yann Quelenn, market analyst: “CBR certain to holding rates until 2017: At its October meeting tomorrow, the Central Bank of Russia is likely to keep its rate unchanged. The path towards a rate normalization is taking time. The oil price rally since the start of this year is clearly not enough to trigger a sustainable Russian recovery. Russia has clearly deeper underlying economic difficulties. In addition, the black commodity is currently stalling below $50 a barrel and we can already distinguish that downside pressures on oil prices are growing as global oversupply threats remain far from over.
In terms of data, Russian inflation is still running at a strong pace, 6.4% y/y. The consequence of this is that disposable income is collapsing. This is why we believe that there is not much the CBR can do at the moment as lowering further interest rates in the short-term would clearly create pressures on the middle class even if Prime Minister Dmitry Medvedev nonetheless recently indicated that interest rates could be reduced in the short-term. We believe that this was only a verbal intervention.
However, we believe that an inflation below 6%, which should happen early 2017, will push the central bank to act in order to lighten the weight on the ruble. At the moment, containing inflation by proposing massive interest rates is boosting the demand for the currency. Against the dollar, the ruble has been strengthening since the beginning of this year even though USDRUB is fading around 62 ruble for one single dollar note. We continue to believe that the CBR will remain on hold until the end of this year as it awaits new data in order to reduce the inflation pressures on the Russian population.
The CBR is therefore playing a very tight game as it tries to lower demand for the ruble without negatively impacting consumer activity, already largely affected from such monetary policy, as a result of strong inflation. We maintain our bullish view on the ruble until the end of the year.” —
Today traders will be watching unemployment rate from Spain; interest rate decision from Sweden and Norway; manufacturing and consumer confidence from Italy; UK GDP; durable goods orders, initial jobless claims, pending home sales and Fed’s Mersch’s speech from the US.