Forex Market Update

Germans discipline the market with a summit reality check

The week got under way with an attempt to build on Friday’s already euphoric levels, but German officials rained on market expectations surround the Oct. 23 EU summit. This will be a nervous couple of weeks, to say the least.

The rally/squeeze had reached remarkable proportions last week, and yet we saw market participants trying to take it even higher today – all the way to the bleeding edge of a few of our indicators we spoke of last week and just beyond in a couple of places before the reversal set in intraday (more on the cause of that shortly). These included the highest S&P500 levels since the early August crash (about 1235 on the cash, which is about where the implied future took us at the early Europe highs), the 200-day moving average in AUDUSD (1.0374 high missed the 1.0380 level by just a few pips) and the 2.25% area in Bunds and US Treasuries, which was taken out by a bp or two intraday but has more or less “survived” the squeeze across markets.

In any case, the rally/squeeze was rudely interrupted when German Finance Minister Schaeuble and a Merkel spokesperson announced that the upcoming EU summit would not produce a definitive solution to the EU sovereign debt crisis. This was particularly disappointing after the weekend’s G20 statement “giving the EU a week” to come up with a plan. It was no surprise to see “peripheral” EU debt spreads widening again and basis swaps heading the wrong way for the first time in two weeks or so, etc.  German bunds were absolutely on fire, and global equity markets corrected very sharply ahead of the US open, as the USD naturally also took back lost ground in these days of scary correlation across asset classes.

Chart: AUDUSD
AUDUSD crossed the 55-day moving average, but then immediately ran into the 200-day moving average just as the German warnings on the EU summit were crossing the wires. This will be an important resistance area for the pair as we may switch to consolidation before more details are known on the EFSF and other plans.



Odds and ends
Stagnating Swedish house prices: the September data showed weakening Swedish house prices, which were down sharply for the month and on a smoothed basis have been rather flat for some time. It appears that the housing market may finally be turning over there, particularly given new noise on the need for higher bank reserves being required on bank mortgage loans

The US regional manufacturing surveys got off to an ugly start this month once again as the Empire number was worse than expected, registering its fifth negative reading in a row, though some of the internals were more positive than previously – at least stabilizing. The odd decoupling in the regional surveys (most of them negative with a very strong Chicago component that has so far kept the overall ISM manufacturing from dipping below 50) has been an interesting development. The Philly Fed survey is up on Thursday. The Sep. Industrial Production data registered a modest +0.2% increase as expected, but the August number was revised down by the same amount to 0.0%