PBoC allows sharply stronger Yuan overnight, pushing USD to fresh lows

GBP close to tipping point vs. EUR and CHF?  

Key week ahead with Fed rate announcement midweek. Can risk party continue much longer?

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• The People's Bank of China allowed the Yuan to strengthen 0.3% vs. the USD overnight, one of the largest moves since the 2005 de-pegging of the currency 
• Australia's NAB Business Confidence Index for Q4 out at 9 vs. 12 in Q3.
• Japan Retail Trade in September rose YoY 0.5% vs. -0.7% expected

THEMES TO WATCH – UPCOMING SESSION

Key event risks today:

• UK Mortgage Approvals and lending data for September (0930 GMT)
• Germany Oct preliminary CPI
• New Zealand Building Permits (2145 GMT)
• Japan Jobless Rate and Household Spending Data (2330 GMT)

Market Comments

The risk appetite bonanza continues as global equity markets blast ever higher despite the spike in crude prices and faltering outlook for the US economy. Again, we wonder how long this can continue, but see no specific signs of an imminent halt of this theme. The record closes of the major Brazilian (Friday) and Indian (Monday) stock indices are emblematic of what is transpiring here as global liquidity continues to slosh in the direction of emerging markets. As we have discussed before, as long as these types of gains persist, it would likely keep JPY under pressure and the USD as well. The immediate cause of the USD weakness overnight was the PBoC's setting of the Yuan reference rate at a very large 0.3% stronger vs. the USD, as the signs that China will allow further strengthening of the Yuan at a more rapid rate. One might propose that this is more Yuan bullish than USD bearish as it makes little sense in the larger scheme of things that EURCNY is up almost 5% since mid-August. Eventually, we should be seeing a strong Asia story  - also versus other currencies than the USD.

Looking at the event risks for the coming week, the obvious highlights for the US include the Consumer Confidence data on Tuesday (remember that this number has plummeted sharply for the last two months - but is expected relatively unchanged this time around), the key Fed rate announcement Wednesday (market looking for -25 bps as certainty), the PCE and ISM on Thursday and the employment data on Friday. It doesn't seem that data has been much of a catalyst lately, however, so the most volatility for the USD may occur around the Fed announcment and any new wording in the monetary policy statement. If the market continues to aggressively sell the USD into the meeting, it will be very interesting to see what the Fed has to say about this as it introduced rhetoric about the implications of a weak USD the last time around.

Other data highlights this week include the latest round of mortgage and lending activity data from the UK - already up today, and some house price data on Wednesday. EURGBP has been back closer to the 0.7025 tipping point again, and may follow through soon to the upside. GBPCHF is a bit more difficult matter as CHF has been caught up in the entire carry trade phenomenon. But on any downdraft in risk appetite and continued negative developments from the UK, the pair may be a spectacular performer to the downside. This week's Fed cut aside, the market is forecasting almost as much easing from the BOE as it is from the Fed 1-year forward.

Another focus this week is likely to be the Scandies (SEK and NOK) as both central banks there are set to raise their rates - Norges Bank (on Wednesday) to 5.00% and the Riksbank (Tuesday) looking to hike to 4.00% and therefore taking it to interest rate parity with the ECB. EURNOK looks undervalued on a rate differential basis compared to historic valuations despite the expected hike as oil prices are a key support for NOK. EURSEK, on the other hand, could be set for new lows if the Retail Sales data is supportive (other Swedish data has tended towards disappointment recently despite the rate trajectory). The huge recent Ericsson and Electrolux disappointments have added to the recent relief rally in EURSEK - but those effects may fade. Have a look at the chart below.

Charts: EURJPY and EURSEK

EURJPY looks likes it may be a bit of a technical crossroads here, as the flatline resistance area comes in close to current levels, and the 0.618 Fibo retracement level comes in just shy of 165.00. A break through these levels and supportive developments elsewhere could accelerate the pair towards the 166.00 level. To the downside, 164.00 was a key resistance area on the way up, and is therefore the support level to watch. The cycle low at 160.46 was just below the converging 55-day and 200-day SMA's, which are key for the longer term technicals.

 

EURSEK recently rejected the rally right at the 200-day SMA (in black) and is poking at 9.1750 support this morning after creating an evening star-like formation late last week. The rate announcment tomorrow is likely to either trigger a more decisive resumption of the previous bear trend, or begin to threaten the layers of resistance in the 9.2500 area. We give the downsidethe edge here if Retail Sales data is also supportive for the SEK.

 

Note: the support/resistance levels used in the matrix’s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.