Can US Data Extend the Rally in Risk FX?

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Market Drivers for October 17 2014

UK Employment Data mixed

Equity Rally takes all yen crosses higher

Nikkei -1.40% Europe 1.97%

Oil $83/bbl

Gold $1239/oz.

Europe and Asia:

No data

North America:

CAD CPI 08:30

USD Building Permits 08:30

USD Housing Starts 08:30

USD U o M 9:55

Big short covering squeeze in European equities helped fueled a rise in high beta currencies today with yen crosses all rising nearly 100 points off session lows as risk appetite returned to the capital markets. On a night marked by a complete absence of economic news for most of the G-10 calendar risk flows were the primary driver of trade after several days of very turbulent price action.

The investors fears about global slowdown, deflation in the Eurozone and the threat of ebola – all of which roiled the markets this week – appeared to have eased as the week came to a close and a short covering rally in stocks spilled over into currencies with USD/JPY rising above the 106.50 level as a result. Just yesterday the pair plunged to within a few pips of the 105.00 level as panic gripped the markets.

Newswise, the session has been very slow with just a few key headlines hitting the screens. In UK BoE’s chief economist Andy Haldane stated in a speech that recent data favors a later rate hike as results have been “gloomier” than expected. Mr. Haldane noted that the data suggests that rates may remain lower for longer than the market expects.

His comments echoed sentiment of St. Louis Fed President James Bullard yesterday who suggested that US policymakers should consider delaying the end of QE given the current conditions in the market. Mr. Haldane’s rhetoric indicates that G-7 monetary authorities are becoming increasingly concerned with the slowdown in the global economy and are starting to redraw their timelines for the exit from the near zero interest policies that are currently in place.

Cable tumbled to a low of 1.6029 on the initial reaction to Mr. Haldane’s comments, but then rebounded to fresh session highs as risk flows trumped any concerns about monetary policy.

In North America today the market will get a look at housing starts and building permits as well as U of M data. Housing and consumer sentiment have been sore points in the recent datasets as they have trended down despite the generally robust employment picture. Given the decline in gasoline prices, sentiment may improve, although the market anticipates a flat reading. Any uptick in US data could provide further fuel to the short covering rally as the day proceeds and could take USD/JPY towards the 107.00 level. However, if the numbers disappoint the equity rally could quickly lose steam and take down risk currencies with it, reversing much of the rally we have seen in Europe so far.

Boris Schlossberg
Managing Director

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