FX Volatility Subsides, Comm Dollars Wobble

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Market Drivers December 6, 2016
RBA leaves rates on hold
NZD tumbles on stops
Nikkei 0.47% Dax 0.11%
Oil $51/bbl
Gold $1172/oz.

Europe and Asia:
AUD RBA leaves rates at 1.50%
EUR GDP 1.7% vs. 1.6%

North America:
USD Trade Balance 8:30
CAD Trade Balance 8:30

Price action in the FX market was decidedly more subdued on the second trading day of the week with most pairs contained to 50 point ranges for most of Asian and European trade.

The EUR/USD which made a near 300 pip round trip in post Italian referendum trade yesterday, first dropping to a low 1.0504 and the spiking to 1.0798, was much calmer today but remained near the two day highs and within striking distance of the 1.0800 figure. There was little data from the region except EZ GDP figures which came in at 1.7% versus 1.6%, but yesterday’s price action suggests that the pair may have made a near term bottom and could continue to squeeze higher even possibly towards the 1.1000 figure especially if ECB President Mario Draghi offers no definitive calendar extensions to the QE program.

Ultimately the euro may be headed to parity as the policy divergence between the Fed and the ECB begins to kick in. But for now the market is still looking for the Fed to affirm its intention to tighten continuously in 2017 rather than the one-and-done December hike that is already priced into the market. Meanwhile if the ECB simply sticks to its current QE targets and doesn’t extend or expand the program, the short squeeze in the EURUSD could continue as expectations are adjusted on both sides of the trade.

Elsewhere today, the RBA kept its rates on hold and generally provided a modestly upbeat assessment of the situation on the ground, but Aussie drifted lower in the wake of the announcement as it was well anticipated by the market. Meanwhile the kiwi took a tumble in Asia dropping sharply below the .7100 figure after dealers pulled some bids ahead of the RBA announcement and a spate of selling triggered a stop avalanche. The unit recovered somewhat in European trade but remains weaker on a relative basis ahead of the Dairy Auction results due later today.

With only US trade data on the docket, the focus of the market will once again turn to rates. If US yields could creep higher, USD/JPY which has been well bid all night could make another run as the psychologically key 115.00 level. However another failure today, could prompt a more serious correction in the pair which has been overbought for days and will need continued support from fixed income market to push higher.

Boris Schlossberg
Managing Director

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