Trading news

USD broadly in demand amid Draghi's dovish comments, Japan Manufacturing PMI declines slightly

- In the FX market, the USD is broadly in demand this morning as safe-haven currencies and the euro go south
- Today’s crude oil recovery will undoubtedly push equities higher
- Mario Draghi’s dovishness should have a limited effect on the single currency as traders want to avoid over-pricing a potential extension/increase of the QE
- Most EUR crosses will therefore remain in a volatile range, with asymmetrical risk to the downside, until D-day on March 10th.
- Don’t be surprised to see a reversal of commodity currencies versus the euro once pressure on commodity prices has eased and financial markets stabilised
- EUR/AUD may find support at 1.5341 but once broken, the road will be wide open toward the next one lying at around 1.50
- We believe that Japan’s current respite should be temporary as a weakening PMI will also push GDP further down and deflationary pressures are definitely set to continue
- Amid the PMI release, the yen has weakened to 118 against the greenback on concerns for Japan's recovery and this shows no sign of stopping
 
As broadly expected the ECB left its rates unchanged. The market, however, wasn’t expecting such a dovish message from Mario Draghi. ECB’s president emphasised downside risks to inflation, citing: “heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks". "In this environment, euro area inflation dynamics also continue to be weaker than expected”. As a result, EUR crosses dropped sharply during the press conference as Draghi made clear that a reconsideration of the ECB’s monetary stance will be necessary at the next meeting in March. EUR/USD fell one figure and a half, down to 1.0778, while EUR/JPY plummeted to a 9-month low at 126.17. 
 
Nevertheless, we have the feeling that the market took Draghi’s comments with a grain of salt this time, in an attempt to avoid repeating the mistakes of December 3rd. As a result, EUR crosses returned to their pre-ECB meeting level; however, the bias is now on the downside for the single currency, especially against the USD and the JPY. In addition, we wouldn’t be surprise to see a reversal of commodity currencies versus the euro once pressure on commodity prices has eases and financial markets stabilised. EUR/AUD has already dropped 2.40% since the press conference, a support can be found at 1.5341 (low from January 13th) but once broken, the road will be wide open toward the next one lying at around 1.50.
 
In Asia, regional equity indices are wearing green this morning as a wind of optimism is blowing across financial markets. Obviously, today’s recovery of crude oil is undoubtedly push equities higher. Futures on the West Texas Intermediate were up 4.27%, while ones on the Brent climbed 5.0%, both back above $30 a barrel. In Japan, the Nikkei gained 5.88%, while in Hong Kong, the Hang Seng was up 3.14%. In mainland China, the rally is less pronounced with the Shanghai and Shenzhen Composite rising 1.25% and 1.46% respectively. In Europe, futures are pointing to a higher open with the Footsie up 1.49%, the DAX +2.19%, the CAC +1.76% and the SMI +1.76%.
 
***Yann Quelenn, market analyst: “Preliminary January figures for Japan's PMI have been released at 52.4 - below an expected 52.8 but still above 50 for the seventh consecutive month. A print of this threshold indicates an underlying expansion of the economy. However, we remain sceptical especially when we look at sub-index, new exports and new overall orders. Our belief is that domestic demand may in fact be softening while exports are being spurred by a weak yen.
 
The deflationary battle is a hard one to win for Japan and the decline in raw prices is causing manufacturers to cut selling prices. We therefore believe that Japan’s current respite should be temporary. A weakening PMI will also push GDP further down. Deflationary pressures are definitely set to continue. Concerns regarding commodity prices will keep on adding downside risks on inflation against the backdrop of China’s slowdown. Amid the PMI release, the yen has weakened to 118 against the greenback on concerns for Japan's recovery and this shows no sign of stopping.”***
 
In the FX market, the USD is broadly in demand this morning as safe-haven currencies and the euro go south. As explained above, Mario Draghi’s dovishness should have a limited effect on the single currency as traders want to avoid over-pricing a potential extension/increase of the QE. Most EUR crosses will therefore remain in a volatile range, with asymmetrical risk to the downside, until D-day on March 10th.
 
Today traders will be watching Markit manufacturing PMI from France, Germany the Eurozone and the US; retail sales from Germany, Canada and the UK; mid-month inflation report from Brazil; CPI report from Canada; existing home sales and Leading index from the US.

Friday, 22 Jan, 2016 / 1:24

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Source : http://en.swissquote.com/fx/news

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