Market Drivers for September 25 2014

Euro hits 22 month lows

Wheeler threatens intervention sending kiwi below 8000

Nikkei 1.28% Europe 0.33%

Oil $91/bbl

Gold $1210/oz.

Europe and Asia:

North America:

USD Weekly jobless 8:30

USD Durable Goods 8:30

USD Flash Services 9:45

Euro hit fresh 22 month lows as it skidded through the 1.2700 level before rebounding slightly in morning European session. There was no economic data to trigger the move. Rather the selling was simply the resumption of the overall dollar rally as Mario Draghi continued to stress the idea that ECB policy is going to become even more accommodative over the near term horizon.

The selling in the EUR/USD accelerated after it broke below the key 1.2750 level which has served as support four times previously over the past year and a half. The sentiment towards the unit remains extremely negative as markets are beginning to appreciate the divergence between US and European monetary policies.

One key factor that many currency traders will be watching is the final GDP reading for Q2 due out this Friday. Some analysts are predicting a reading of 5% or better which – if proven accurate – would reinforce the dollar bullish argument for tightening sooner rather than later.

Despite the markets unequivocal belief that the Fed will hike in early 2015, many Fed policymakers remain cautious in their outlook. Yesterday Charles Evans stated that the much greater policy error would be to hike prematurely, using 1937 as an example of disastrous Fed action that sent the country back into a Depression.

The trade in the EUR/USD therefore remains highly data dependent. Today’s calendar carries only weekly jobless claims and durable goods. If the jobless claims number remains under the 300K mark that would point to continued strength in the US labor markets and could fuel further dollar buying in North American session with USD/JPY eyeing the 109.50 level as tries to mount the key 110.00 barrier.

Finally in Asia today the kiwi fell through the 8000 level on the back of Governor Wheeler comments that raised the threat of intervention. In masterful example of jawboning Governor Wheeler practiced the art of kicking a man while he was down as he obliquely noted that the exchange rate of the NZD/USD was unsustainable and that unsustainability was a key factor in considering intervention. Given the fact that sentiment was already highly skewed towards the dollar and that liquidity in kiwi was thin, Mr. Wheeler’s comments caused an avalanche of selling that pushed NZD/USD more than 100 points lower off session highs.

The sharp drop in the pair is welcome news to New Zealand monetary authorities that would like to rebalance the exchange rate closer to .7500 level in order to improve the country’s balance of trade, but with some of the highest yields in the industrialized world, the kiwi still represents an attractive value for carry traders and the current dip may be seen as an opportunity for bargain hunters to swoop in.

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