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Quiet Open in FX, Draghi sends mixed signals, Commodity currencies: the end of the rally?

Risk appetite opened stronger in the Asian session. Regional equity indices were broadly higher on good Chinese data and expectations for the Fed to delay hikes. The Shanghai composite rose 3.06% and Shenzhen composite increased 4.10%, pulling the Hang Seng up 0.92%. Japanese market were closed for holidays. In the FX markets, the USD was sold-off as emerging market and commodity currencies continued to attract bargain hunters. Fed Reserve Vice Chairman Stanley Fischer sounded hawkish, stating that policymakers are still likely to raise interest rates this year. He added that this view was contingent on the global economy, which could push the US economy off course. Markets shrugged off Fischer’s hawkish view. EURUSD climbed to 1.1378 from 1.1354 as Mario Draghi suggested that ECB’s quantitative-easing program is working well, decreasing the likelihood of additional easing. As quoted in Bloomberg, ECB president Mario Draghi commented that the ECB QE program was working better than anticipated, despite having taken longer to reach the intended inflation goal. In an interview he stated: “It presently appears that it will take somewhat longer than previously anticipated for inflation to come back to, and stabilize around, levels that we consider sufficiently close to 2%,” and this was due primarily to the sizeable fall in oil prices. The current trend of ECB speak seems focused on breaking the market’s view that more easing is a forgone conclusion. However, subdued European data suggest that an extension of current program is in fact likely.
***Yann Quelenn: “Over the last months, Mario Draghi has dropped a couple of hints suggesting that ECB Quantitative easing may be expanded beyond September 2016, which was the initial end date for the easing program. As a result, we became increasingly dubious about the true efficiency of this monetary policy. Recent Eurozone data does not seem yet very encouraging (industrial production and inflation in particular). Moreover, it is difficult to support a policy that has failed to deliver the desired result in Japan and in the U.S. The latter is still struggling to end its zero interest-rate policy after three different QE programs. The ECB is trying to reach an inflation target of 2% through its monetary program. If we have to expand the QE beyond September 2016, it only means that we have to even further increase the monetary base than what we intended to do. This definitely shows that even Draghi is concerned about the true efficiency of his program. Therefore, we find it contradictory when Draghi claims that the program is working better than expected and that it will only take longer. If the objectives were realistic, we would not have to inject more money. Draghi is certainly trying to ensure the markets that everything is going well. He is trying to reduce volatility and also to avoid any panic effect that would result if it clearly appears that ECB’s monetary policies are not working. The central bank’s credibility would be at stake. The EUR-complex strengthened on Draghi’s comments. Expectations for the single currency are improving. Nonetheless, we remain bearish on the EURUSD, which we consider overvalued. The pair is currently trading around 1.1350, and we will be carefully watching out for some possible euro weakness, which would lead the pair to head back towards the 1.1200 level.”***
NZDUSD rose to 0.6707 from 0.6673 as REINZ house sales increased 38.3%y/y, down from previous increase of 41.7%. A softer read but still a very solid number as national median house prices set a new record at NZ$484,650. With markets closed (US bond market holiday) US yields curves were unchanged as the 10yr trsy yields held at 2.08%. Commodity prices remain firm, led by a recovery in copper, gold and oil prices (helped by Glencore's announcement to sell copper mines in Australia and Chile).Sentiment has clearly shifted in the commodity complex as opinion leader are now talking about having hit the bottom in prices.  
Over the weekend, the PBoC announced plans to expand its credit asset pledged lending program. The program would increase from original two to ten provinces. This program creates a procedure for banks to obtain liquidity from the PBoC. The expanded program should limit worries of a liquidity squeeze on banks and support general risk appetite. This move potentially triggered the PBoC deputy governor to indicate that China's stock markets corrections was “almost over.” The PBoC fixed USDCNY 87 pips lower at 6.3406, while USDCNY fell to 6.3218.
With the US on Columbus Day holiday and a lack of first-tier data, trading activity will be subdued. Participates will be focused on unfolding events in the commodity markets. Despite dire warning, oil prices continue to find demand as US drillers cut oil rig production for a sixth straight week, suggesting that the bull trend might not be finished. In the US markets, we will hear from a batch of Fed members Atlanta Fed President Lockhart, Chicago Fed President Evans and Fed Governor Brainard. The rate markets is now pricing in a March interest rate hike (61% no hike in Dec). With fear of a near term Fed hike now gone investors demand for high yeilding beta currences should continue.
*** Arnaud Masset: "After a 2-week rally, the market is wondering whether it is time to play the correction or to reload long positions and make good use of the upside potential. Over the period, the Aussie rose 6% and is back above the $0.73 threshold, in New Zealand the Kiwi moved above the $0.67 level as it soared 7.80%, while the Canadian loonie and Norwegian krone climbed 4.20% and 6.40% respectively against the greenback. Both are now stabilising around key levels as investors take profits and reassess the remaining upside potential. The risk-on environment will likely persist, in our opinion, as the uncertainties stemming from the timing of the upcoming Fed’s lift-off have been put on the back burner. However, we believe that even though we may not have seen the end of the rally, the upside potential is rather limited due to a lack of support from fundamentals. Economic data from developed economies is still lacklustre, while growth prospects in EM economies continue to keep investors awake at night. We think the recent rally was a necessary adjustment resulting from an overreaction to global growth concerns."***

Monday, 12 Oct, 2015 / 9:29

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