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Forex Market Round-Up

Monday mornings (29 September 2014) forex news from around the web:

Daily Forex Indicators: Markets Gear Up For A Busy Week

- Thrashing In Hong Kong Start Asian Fall
- More Pressure On Yellen
- Data Increases With Importance As Week Unfolds

European markets are set for an incredibly busy week as we see the first week of the new month. Last week’s economic calendar and news flow saw a return to the norm with fears over the ECB and Eurozone recovery, as well as Chinese growth fears return to the markets after being somewhat forgotten during the Scottish referendum. The major announcements of the week will happen later in the week so for the early part it will be a case of waiting and speculating over the major announcements. However this doesn’t mean that the early part of the week is without its data, in fact today’s session sees a whole host of economic data released throughout Europe and the US. Ahead of the open this morning we expect to see the FTSE open lower by 2 points while the German DAX looks set to open lower by 26.

Thrashing In Hong Kong Start Asian Fall

The story overnight is yet again the strength of the US dollar as Asian markets fell led by a thrashing in Hong Kong. The strength of the US dollar is forcing investor to move away from a lot of the stock market assets and put it into the greenback. With a potential rate hike becoming more likely and the data showing constant improvement it’s no surprise we are seeing the positive move and nowhere is this more apparent than in USDJPY. However if anything is going to shift investor opinion about the dollar it could well be this week as the data is incredibly heavy. This afternoon we will get the release of the personal consumption numbers as well as pending home sales figures. Investors will be yet again looking for any kind of positive number that could force Janet Yellen’s hand into an earlier rate hike.

More Pressure On Yellen

The timelines on the movement of rates still looks to be fairly long with no change in language in last months fed meeting. However the better the economic readings the better the more pressure is heaped on Janet Yellen. There seems to be an obsession in the market with pushing rates higher. With a movement in rates seen as a move back to normality after years of hardship. However I would ask the question do we need to raise rates? With the economic data looking so good, and the electorate only just starting to feel the benefit of these lagging indicators, a movement in rates too soon could well undo all of the hard work it has taken to get back to the place we are right now.

Data Increases With Importance As Week Unfolds

As the week moves on the data will increase with its importance. Tomorrow sees the UK GDP take centre stage before traders start to position themselves ahead of Thursday’s ECB rate decision and Friday’s non farm payroll data. Mario Draghi and the ECB’s rate decision is arguably the biggest bit of data of the week as it could be the time we get a full blown asset purchasing plan for the Eurozone. We have seen a number of measures thrown at the eurozones ultra low inflation and low growth issues but so far nothing has worked. It could well be that the last option Mario Draghi has is full blown QE starting potentially the month the US finally finished their plan.

Author: James Hughes


Dollar stays in the driver's seat

On Friday, the price swings in the major USD cross rates were limited during the European trading session. The US Q2 GDP was revised higher from 4.2% to 4.6%, perfectly in line with expectations. Even, so the dollar found again a better bid during the US trading session. EUR/USD dropped below the below the 1.27 barrier, but the 1.2662 key support was left intact. USD/JPY touched a minor new top in the 109.50 area.

Overnight, Asian equity indices show a mixed picture. Mainland China and Japan show moderate gains. Hong Kong is under pressure due to political unrest in the area. The (trade-weighted) dollar is setting a new correction top this morning. EUR/USD is holding within reach of the correction low and of the key 1.2662 support (Nov 2012 low). USD/JPY is setting new correction highs at the moment of writing. The kiwi dollar is again sold aggressively. The RBNZ announced that it sold a net NZ$ 521 million in the currency market in August, reinforcing its assessment that the valuation of the local currency is unjustified and unsustainable.

Later today, the calendar is well filled. In Europe, a further slide in the confidence indicators are expected, confirming the lacklustre picture painted by the PMI’s. In Germany, the Sep. CPI data are expected to show a further decline from 0.8% Y/Y to 0.7% Y/Y. We see a slight downward risk. So, the EMU data won’t reverse the euro downtrend. In the US, the personal income and spending data and the pending homes sales will be published. Income and spending data are expected to rise respectively 0.3% and 0.4% after a rather poor July release. So, the eco data point to a continuation of the trends of a lower euro and a stronger dollar. Of course, also global sentiment on risk and the global equity performance are important for currency trading. A risk off sentiment via lower bond yields tends to slow the USD rally, but for now the impact is limited. We maintain a USD positive bias even as some short-term turbulence in the likes of USD/JPY and EUR/USD is possible. Or will the dollar regain its status of safe haven even without more interest rate support? In this respect, we keep an eye at the developments in Hong Kong. The political bickering on the referendum in Catalonia might pop up in the headlines, too.

From a technical point of view, USD/JPY is extending its rally after the break of the key 105.44 resistance. The Fed statement was balanced, but the rate projections suggest that the dollar might get additional interest rate support. At the same time, the yen remained on the defensive as markets saw a decent chance of more BOJ easing down the road. USD/JPY took a breather last week after setting a correction high at 109.46 the week before. 110.66 is still the next important target. We have a positive bias on USD/JPY, but last week, the pair paused. The dollar looks again better bid at the start of the new trading week. So, there is no reason to row against the tide, but in the short-term some consolidation/correction is still possible. So, the 110 barrier and the 110.66 resistance might be tough to overcome short-term.

The technical picture of EUR/USD deteriorated further after the break below the key 1.3105 level (Sept 2013 low). This level is now the new resistance. The negative deposit rate is a structural negative for the euro. The Fed communication was mixed, but the difference in policy bias and projections of higher official interest rates keep the dollar well bid. The EUR/USD downtrend remains in place and the pair is testing the key 1.2662 support. We are a bid surprised by the pace of the EUR/USD decline. Evens so, the trend remains in place and there is no reason to row against the tide. A sustained break below 1.2662 would bring the 1.2043/1.1877 support in the picture as LT target.

EUR/GBP holding near the 0.78 pivot
On Friday, there was little economic news from the UK. Cable and EUR/USD traded in lockstep as the major moves in the currency market were dollar-driven. EUR/GBP held a tight range in the low 0.78 area.

Later today, the UK money supply and lending data will be published. Lending activity is expected to have slowed a bit in August. A negative surprise might be slightly negative for sterling. However, we have the impression that the focus for currency trading will be on the dollar and to a lesser extent on the euro (e.g. in case of a low German CPI). Recently underlying sentiment on sterling was not that bad, especially not against the euro. Short-term, we might see a slowdown in the EUR/GBP decline as the pair is nearing the 0.7755 support .
Further down the road, the focus for sterling trading should return to the economic fundamentals and to the guidance from the BoE on policy normalization. After the recent rebound of sterling and the soft comments from the BoE minutes, investors are pondering the chances for further sterling gains. In this respect we look out for the UK PMI’s later this week.

Author: KBC Market Research Desk | KBC Bank (Mon, Sep 29 2014, 06:45 GMT)


Dollar hits highs vs euro, yen; Kiwi, HK dollar skid

Kiwi bumps to over 1-year low as RBNZ data confirms intervention

* Hong Kong dollar falters in face of pro-democracy demonstrations

* Dollar trading at nearly 2-year high vs euro, 6-year peak vs yen

* CFTC data show speculators increased dollar bets

* Euro under pressure ahead of data, ECB meeting this week

By Lisa Twaronite

TOKYO, Sept 29 (Reuters) - The dollar touched a fresh four-year high against a basket of currencies and a six-year peak against the yen on Monday, getting a tailwind from data showing higher U.S. growth in the second quarter.

It rose to a nearly two-year high against the euro, held aloft by divergent market expectations for U.S. and European monetary policy.

The greenback also rallied to a 13-month high against the New Zealand dollar after Reserve Bank of New Zealand data showed that the central bank intervened last month to speed its currency's descent.

Asian market attention turned to Hong Kong, where democracy protesters defied volleys of tear gas and police baton-charges in the centre of the financial hub.

The city's de facto central bank said the Hong Kong dollar was stable after the tense situation had earlier pushed the currency to a six-month low in its biggest fall in a single day this year.

The Hong Kong dollar, which is closely pegged to its U.S. counterpart, was last up about 0.1 percent at 7.7623 against the greenback.

"The Hong Kong situation is not a big factor for major currencies now, but it could be one for emerging currencies, which means that probably it will lead to an even higher dollar," said Masashi Murata, a senior currency strategist at Brown Brothers Harriman in Tokyo.

The New Zealand dollar dropped to a 13-month low around $0.7708 and was last down about 1.4 percent at $0.7764 after Reserve Bank of New Zealand data showed that the central bank sold the currency on the open market last month to speed its descent from historic highs.

New Zealand Prime Minister John Key also suggested he would like to see a weaker currency.

That helped drag the Australian dollar as low as $0.8682 , its weakest level in about eight months and within sight of its January low of $0.8660. The Aussie was last down 0.6 percent at $0.8708.


Dollar bulls cheered Friday's report from the U.S. Commerce Department, which raised its estimate of gross domestic product to show the economy expanded at a 4.6 percent annual rate - its fastest pace in 2-1/2 years.

The pick up in the economy was broad-based and highlighted a faster pace of business spending and sturdier export growth than previously estimated.

The latest data from the Commodity Futures Trading Commission released on Friday showed speculators raised their bullish bets on the U.S. dollar in the week ended Sept. 23. The value of the dollar's net long position rose to $35.81 billion from $31.42 billion the previous week.

The dollar added about 0.3 percent to 109.75 yen, its strongest since August 2008.

The dollar index, which tracks the U.S. unit against a basket of major rivals, climbed as high as 85.737. It was last up about 0.2 percent on the day at 85.765.

The dollar index gained for an eleventh straight week, its longest streak since it was allowed to float freely in 1971.

The euro edged down about 0.1 percent to $1.2670, after earlier touching a nearly two-year low of $1.2664, and pressure remained on the European unit ahead of euro zone data this week, as well as a central bank meeting.

"Euro area inflation and sentiment data are expected to remain soft and unlikely to provide a much-needed boost for medium-term inflation expectations," Shinichiro Kadota, chief Japan FX strategist at Barclays Bank in Tokyo, said in a note to clients.

The European Central Bank will meet on Thursday, but is not expected to take any steps after it surprised markets with easing measures at its last meeting, including an interest rate cut. ECB President Mario Draghi is likely to remain dovish, and could reveal clues on the central bank's asset purchase plans.

The key U.S. nonfarm payrolls report on Friday will likely underscore that the U.S. economic recovery has enough momentum for the Federal Reserve to hike interest rates sooner rather than later.

Employers likely hired 219,000 people in September, a rebound from August' s rise of only 142,000.

Author: Lisa Twaronite (Mon Sep 29, 2014 7:17am BST)


Draghi Devaluing Euro Cheers ECB as Inflation Seen Fading

Mario Draghi’s strategy for reviving the euro area looks like devaluation.

While the European Central Bank president says the exchange rate isn’t a policy target, officials aren’t secretive about their approval of the currency’s 9 percent slide. The depreciation increases the cost of imports and boosts exporters’ competitiveness, aiding the effort to revive inflation that data tomorrow will probably show is at the weakest since 2009.

The euro dropped from a 2 1/2-year high in May as officials unveiled a medley of stimulus measures. It consolidated below $1.30 when Draghi cut rates this month and signaled a willingness to grow the ECB’s balance sheet by as much 1 trillion euros ($1.3 trillion). Details of a plan to buy assets will probably come this week after the Governing Council meets in Naples, Italy.

“When Draghi mentioned expanding the size of the balance sheet, I think he was secretly thinking of the exchange rate,” said Martin Van Vliet, senior euro-area economist at ING Groep NV in Amsterdam. “I’m sure he’s happy to see that the euro has been going down. He’s well aware that one important channel of policy transmission is the exchange rate.”

Since the last meeting, Governing Council members have joined a chorus of officials highlighting the role of the euro, while Draghi said the devaluation reflects a divergence between Federal Reserve and ECB policy. Such remarks evoke language used in competitive devaluations, where nations try to boost exports by driving their currencies down.

Naples Meeting

The ECB may look past conventional measures to maintain pressure on the euro after saying this month that interest rates have reached the lower bound. The 24-member council will leave the benchmark rate unchanged at 0.05 percent and the deposit rate at minus 0.2 percent on Oct. 2, according to all economists in a Bloomberg News survey.

The currency slumped as low as $1.2664 today, the weakest since November 2012, after reaching $1.3993 on May 8, just before Draghi said officials were “comfortable” with taking action. He then cut interest rates twice, offered cheap long-term loans to banks and announced a plan to buy asset-backed securities and covered bonds.

“The ECB’s policy has been fairly effective in weakening the euro,” said Nick Matthews, senior economist at Nomura International Plc in London. “Clearly the exchange rate is one channel by which the ECB is measuring the effectiveness of its policy measures.”

Slowing Inflation

Draghi told reporters in March that “as a rule of thumb” each 10 percent permanent effective exchange-rate appreciation lowers inflation by around 40 to 50 basis points.

“One of the major impacts we sought with our decisions was on the exchange rate,” Belgium’s Luc Coene said in a Bloomberg News interview after the September decision. Italy’s Ignazio Visco said a weaker euro is “the right response” to the ECB action.

Whether the policy will also be effective in boosting consumer prices remains to be seen. Inflation probably slowed to 0.3 percent this month, the weakest since October 2010 and a fraction of the ECB’s goal of just under 2 percent, according to the median of 36 estimates in a Bloomberg survey. The bank’s preferred measure of medium-term inflation expectations is near a four-year low.

More Stimulus

In Spain, the region’s fourth largest economy, prices fell 0.3 percent in September, extending the country’s deflation to three months. In Germany, the area’s largest economy, prices probably rose 0.7 percent in September. The statistics office is due to publish the numbers at 2 p.m. in Wiesbaden today.

Draghi has said policy makers will take further action to boost prices if needed. With interest-rate cuts off the table, that puts the focus on asset purchases and targeted loans as he seeks to steer the balance sheet back toward levels seen at the start of 2012, when it totaled about 3 trillion euros compared with 2 trillion euros now.

His plan got off to a weak start this month when banks took just 82.6 billion euros in four-year loans, less than all the estimates in a Bloomberg survey of analysts.

The ECB president left open the question of whether to implement large-scale purchases of sovereign debt, or quantitative easing. That measure could prompt resistance from Germany, the region’s largest economy. Bundesbank President Jens Weidmann has spoken out against government-bond buying, and he opposed the rate cuts and asset-purchase programs this month.

‘Huge Gap’

While exchange-rate developments are being monitored by officials, the success of the ECB’s policies depends “critically” on governments pushing through structural reforms, Draghi said last week.

For now though, with surveys showing economic confidence sinking and the euro-area recovery faltering, the exchange rate may prove to be the best channel for boosting price expectations quickly.

“Foreign-exchange developments are more relevant for the ECB than before,” said Frederik Ducrozet, an economist at Credit Agricole CIB in Paris. “There is a huge gap between the official position and what they intend to do or target in practice.”

Author: Stefan Riecher and Alessandro Speciale (Sep 29, 2014 9:53 AM GMT +02:00)

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