Daily FX Market Roundup 10.15.15

EURO – Is 1.15 the Top?

EUR/USD raced to a high of 1.1493 today, just a few pips shy of 1.15 before falling sharply to end the North American trading session below 1.14. While Europe is plagued by its own troubles the euro performed well on short covering and a lack of desire to own U.S. dollars. However Europe’s problems is finally catching up to the currency with policymakers talking about the need for more stimulus. Everyone in the region is worried about low inflation and weak growth but ECB member Nowotny is one of the few policymakers to step up and say that with inflation targets clearly being missed, “its quite obvious that additional sets of instruments are necessary.” His words are resonating amongst the investment community because we are a week away from the next ECB meeting. There is not enough support within the central bank for stimulus to be increased but if a change were to be made it would be to extend the end date for QE beyond September 2016. Tomorrow’s Eurozone CPI and trade balance reports will confirm that something needs to be done about the low inflation environment and if the ECB eases EUR/USD will crash. However our bearish outlook for the euro is not the only reason why we believe 1.15 is a top.

After falling to a low of 118.05, the U.S. dollar rebounded strongly against the Japanese Yen to end the day virtually unchanged. Investors were bracing for another round of weak U.S. data and when the jobless claims and CPI report came in better than expected, there was a wave of relief in the FX market. While the dollar was beaten down after the Philadelphia Fed manufacturing index came out it recovered strongly following the European close. Economists were looking for CPI growth to turn negative and while prices fell -0.2% in the month of September on an annualized basis CPI stagnated. Excluding food and energy prices actually rose 0.2% last month. More importantly jobless claims dropped to its lowest level in 4 decades. The hope that this decline in layoffs will translate into stronger payroll growth and spending overshadowed the weakness in manufacturing activity in the NY and Philadelphia region. The dollar’s price action tells us that investors do not want to give up on the long dollar trade. Industrial production and the University of Michigan sentiment index are scheduled for release tomorrow.

With no news out of the U.K., GBP/USD retraced after a strong day. Not only is 1.55 a psychologically important level for the currency pair but it is also trendline resistance which means either it holds or gives way to a much stronger move above 1.56.

Economic data out of New Zealand continues to surprise to the upside, leading to further gains in NZD/USD. Manufacturing activity gained strength and consumer prices rose more than expected. These improvements along with the rebound in dairy prices minimize the need for another rate cut from the RBNZ.

In contrast Australian data continues to surprise to the downside. More than 5k jobs were lost in the month of September. All of the jobs lost were full time and this deterioration in labor activity caused the participation rate to drop to 64.9% from 65%. Although the market completely shrugged off this report we believe that AUD/NZD will see further losses as the divergence between Australian and New Zealand’s economies grow and investors price in another rate cut from the RBA.

USD/CAD extended its losses on the back of rising oil prices. As we mentioned at the start of the week the lack of market moving Canadian reports meant that the loonie would take cue from oil and the appetite for U.S. dollars. The recent correlation between oil and the CAD has been high especially today when the minor reports on the calendar were mixed. House prices increased but existing home sales dropped 2.1%. Manufacturing shipments and International Security Transactions are scheduled for release on Friday.

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