Buying Pullbacks in the Dollar

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Daily FX Market Roundup 08.26.14

Buying Pullbacks in the Dollar

Increased Geopolitical Tensions Keeps EURO Under Pressure

USD/CAD Backs Off 1.10

CAD: Burger King in Talks to Buy Tim Horton

NZD: Reports First Trade Deficit this Year

AUD: Supported by Rebound in Commodity Prices

JPY: Small but Important Change in Cabinet’s Economic Assessment

Buying Pullbacks in the Dollar

Throughout the European trading session, investors continued to buy pullbacks in the dollar and their demand only grew with today’s positive U.S. economic reports. Durable goods rose 22%, consumer confidence hit a 6 year high and manufacturing activity in the Richmond area expanded at its fastest pace in more than 3 years. Although there was some underlying weakness (durable goods ex transportation declined and house prices fell according to S&P/CaseShiller), investors completely the ignored the negatives and focused only on the positives. This lack of concern should surprise no one because earlier this week, traders were buying dollars and U.S. assets when data was weak. The record-breaking moves in stocks and the steadiness of Treasuries indicate that there is a voracious appetite for U.S. assets. While we generally focus on the gains in the dollar, the big story today is that the Dow, S&P 500 and Nasdaq all climbed to fresh all time highs. Clearly it is not about yields right now because 10-year rates have barely budged in the past 4 days. Instead, the attractiveness of U.S. assets stems from the problems abroad such as the ongoing tensions between Russia and Ukraine and weaker New Zealand trade data. At the end of the day, the direction of the U.S. economy and monetary policy is positive for the dollar and as the divergence widens around the world, U.S. assets will become more attractive. So the trend of buying dollars on a pullback should remain intact. If the Fed follows through with their pledge to keep monetary policy relatively accommodative, it would provide an ideal environment for a stronger U.S. recovery. There are no U.S. economic reports scheduled for release tomorrow but revisions to third quarter GDP, personal income, personal spending and Chicago PMI are due later this week.

Increased Geopolitical Tensions Keeps EURO Under Pressure

While the euro ended the day unchanged against the U.S. dollar, it is clear that the currency pair is under pressure. There were no Eurozone economic reports released over the last 24 hours but increased geopolitical uncertainty is making it difficult for investors to find a reason to buy euros. Russian forces crossed over the Ukraine border overnight and while sources close to the matter say it was a “mistake,” Ukraine managed to capture some of the soldiers and now it remains to be seen how Russia will respond. A meeting was also held between Ukraine President Poroshenko and Russian President Putin today but very little progress was made. We have already seen how much damage Russia and Ukraine’s conflict can have on the Eurozone economy so if the tensions continue to escalate, it would add pressure on the region and harden the case for ECB easing. There has been a lot of talk about Quantitative Easing and this remains an option for the central bank when they meet next week, but it is important to realize that they still want to see how the economy responds to the stimulus measures introduced in June. Remember, the two targeted longer-term refinancing operations (TLTROs) have not been rolled out yet – they are scheduled for September and December. With this in mind however, the central bank will pledge to keep all options open, which in of itself could be enough to keep EUR/USD under pressure. From a fundamental and technical perspective, the currency pair is vulnerable to a decline towards 1.30. Having broken through the 38.2% Fibonacci retracement of the 2012 to 2014 rally at 1.3250, there is now minor support at 1.3200 followed by more significant support at 1.3025, the 50% Fib retracement of the same move. However with speculative short positions at 20-month highs, we do not expect a smooth one-way decline for the EUR/USD.

USD/CAD Backs Off 1.10

Between the rise in oil prices, recent improvements in Canadian employment and retail sales along with the large CAD positive M&A flow that could come from a Burger King – Tim Horton deal, it is no surprise to see USD/CAD trade lower today. Although the currency pair came within a few pips of the key 1.10 level, this is a difficult level to break without a major U.S. dollar rally. No economic data was released from Canada today but the lingering impact of the factors mentioned has and should continue to influence the pair. Along these same lines, the Australian dollar benefitted from a rebound in commodity prices. Interestingly enough, while New Zealand’s weaker trade balance report drove NZD/USD to fresh 5 month lows during the Asian trading session, the currency pair rebounded strongly to end the day unchanged. There was no specific catalyst but with the deeply oversold nature of the currency pair and the lack of additional market moving New Zealand economic reports scheduled for release this week, a rebound is not unusual. As we expected the decline in dairy prices took a big toll on New Zealand’s exports and terms of trade. For the first time this year, the country reported a deficit of -692 million which was larger than anticipated. Exports fell for the first time in 10 months with dairy exports in particular falling 4.7% on a value basis and 4% on volume basis. If the terms of trade do not recover next month, Q3 GDP growth could be exceptionally weak. The only economic reports that are scheduled for release from these countries over the next 24 hours is New Zealand food prices and Australian construction work – neither of which are expected to have a significant impact on their respective currencies.

Sterling: A Trade to Consider

With no major U.K. economic reports scheduled for release today, there was very little action in the British pound. According to the British Bankers Association, fewer loans were approved in the month of July but this was not unexpected given that more stringent lending rules were introduced in April and as a result, sterling traders completely ignored the report. Taking a look at the charts, it is quite clear that 1.66 is an important resistance level for the GBP/USD (it tested it every day for the past 4 days) but we continue to believe that sterling is due for a stronger recovery and the best way to trade it could be through GBP/CHF. Despite the weakness in U.K. data, policymakers are rallying behind the idea of an earlier rate rise and even with the disappointments the U.K. has an economic lead against other major economies. Next week the PMI reports are scheduled for release and if the indicators stabilize or improve, it could be just what sterling traders need to see to reinitiate their long trades. At the same time, the Swiss Franc is getting dangerously close to intervention territory. The Swiss National Bank is committed to maintaining a minimum exchange rate of 1.20 in EUR/CHF and on Monday, the currency pair dropped to a 20 month low of 1.2072. We haven’t heard a peep from the SNB but if the Franc continues to rise in value, at minimum we expect verbal intervention. So with the upside in the Franc limited and sterling poised for a stronger recovery, we believe that GBP/CHF will break above 1.52 and head towards it monthly highs. Technically, there is a small ascending triangle forming in the currency pair that reinforces its upward bias and the importance of a 1.52 break.

JPY: Small but Important Change in Cabinet’s Economic Assessment

There was very little consistency in the performance of the Japanese Yen today. Most of the Yen crosses including USD/JPY ended the day virtually unchanged. The only movement was in AUD/JPY and CAD/JPY, which edged slightly higher and NZD/JPY which moved lower but that was not a function of the performance of the Yen but rather the performance of the base currency. The Japanese Cabinet released its latest assessment of the economy and the summary remained unchanged. According to the report, “The Japanese economy is on a moderate recovery trend and a reaction after a last minute rise in demand before a consumption tax increase is easing.” However if you read the details of their survey, the government sounded slightly more cautious. Previous monthly reports described industrial output as having “weakened recently” but this month they removed the word “recently” which suggests that a more cautious view on industrial activity. The tweak was small but raises some eyebrows ahead of Friday’s industrial production report. Meanwhile small business confidence also took a turn for the worse. Economists had been looking for a rebound but instead, confidence declined, reinforcing the market’s overall concern that the recovery in Japan is losing momentum.

Kathy Lien
Managing Director

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