- Selling pressure remains heavy on EURUSD trading to a post-payroll low at 1.065 as news stemming from Athens failed to produce a positive Euro bounce
- We remain constructive on the CNY, not based on economic conditions, but expectations for inclusion in the IMF SDR and resulting demand
- We remain constructive on the USD over CHF, CAD and EURO
- Australia RBA minutes indicated that the outlook for inflation remained subdued providing scope for further easing
- AUDUSD bearish conditions persist as downward trend remains intact suggesting a retest of September lows at 0.6896
- Easing inflation pressure and dovish BoE has pushed out the first rate hike (into 2017) indicating that a weak read should support further GBPUSD sell-off back to 1.5027
In the FX markets the USD was stronger in the G10 and Asia EM. The recovery in risk appetite was driven by a reversal 1.5% decline in S&P 500 in the futures markets. US 10 year yields rose to 2.27%, recovering recent loses. AUDUSD slipped marginally from 0.7110 to 0.7080 after the unrevealing RBA minutes were released. EURUSD traded to a post –payroll low at 1.065 and selling pressure remains heavy. News that Athens and creditors had reached an agreement over the next tranche of bailout out funds failed to produce a positive bounce in Euro. NZDUSD weakened through most of the session from 0.6496 to 0.6453 as inflation expectations dropped. Regional equity indices were broadly higher with the Nikkei and Hang Seng up 1.22% and 1.42% respectively. The Shanghai composite was flat after spending much of the session higher, while PBoC lowered the USDCNY fix by 10 pips to 6.3740. We remain constructive on the CNY, not based on economic conditions but expectations for inclusion in the IMF SDR and the resulting demand.
Overnight, New Zealand 2-year inflation expectations declined to 1.85% in 4Q from 1.94% in 3Q. However, 1 year inflation exception increased to 1.51% in 4Q from 1.46%. In Singapore October non-oil domestic export contracted 0.5% y/y, from 0.3% prior expansion, as demand for electronics decreased (-3.2% y/y ). Singapore regional trading was significantly soft indicating that trade lead recovery is unlikely near term. The Australia RBA minutes indicated that the outlook for inflation remained subdued providing scope for further easing. The minutes suggested that economic conditions had marginally improved as the weakened AUD had help supporting falling external demand. Elsewhere in Australia, RBA’s Assistant Governor Christopher Kent indicated that commodity prices would have limited upside as China's development path had shifted. AUDUSD bearish conditions persist as the downward trend remains intact suggesting a retest of September lows of 0.6896.
***Yann Quelenn: German economic conditions keeps on declining. The ZEW, economic sentiment indicator which includes economic data such as inflation, is likely to reveal the truth behind this statement today. Data is expected to print in line with the October figure, 55.2. Sentiment has already declined sharply from September when the indicator stood at 67.5.
The European outlook seems evermore uncertain. The current political situation in Portugal and Spain is weighing on the ECB monetary policy as peripheral bonds yields are soaring. In addition, the refugee crisis is far from being over and the Paris attacks may amplify this crisis. The geopolitical situation is extremely tense. In Greece, creditors have reached an agreement for the next tranche payment. Nevertheless, we still believe that Germany remains the most competitive European economy. From our point of view, Germany is the only European country capable of controlling its debt-to-GDP ratio, which remains below 80%. Other European countries struggle to debase the currency and are faced with continually mounting debt. We remain bearish on the EURUSD. During the night the pair was headed below 1.0700 and we view 1.0600 to be the next target.”***
Traders will be facing a data filled day. In the European session, German ZEW expectations is anticipated to improve to 6.0 from 1.9 however, recent weakness in German data and sluggishness in European trading partners provides scope for a disappointing read. In the UK, CPI inflation is expected to stay flat at -0.1% y/y (core 1.0% y/y). Easing inflation pressure and dovish BoE has pushed out the first rate hike (into 2017) indicating that a weak read should support further GBPUSD sell-off back to 1.5027. Norway GDP growth is expected to fall to 0.1% q/q from 0.2% q/q in 3Q. A surprise uptick in growth, plus prospects for ECB easing could give the EURNOK a downside push to 9.1517. In the afternoon session, the US will release CPI, which should rise 0.2% from -0.2% m/m. Core CPI is forecasted to increase 0.2%, which puts y/y rate at 1.9%. Finally, industrial production should increase to 0.1%, ending its two consecutive monthly decline. We remain constructive on the USD over CHF, CAD and EURO.