FOREX TRADING

Market Outlook

JPY: heading for BoJ intervention?

Resilience in high yield and commodity currencies took us by surprise as demand for risk staged an early September comeback and US payrolls proved better than feared. However, with the outlook for the US not ceasing to cloud over (services ISM, new manufacturing orders) but Washington mulling tax breaks, demand for AUD and NOK will stay sensitive to incoming US data and broader appetite for risk. The week ahead features central bank meetings at the BoJ, Bank of Canada and RBA. BoJ intervention may prove the only effective ammunition to reverse demand for the JPY, but may be delayed until after September 14. The emergence of cracks in the UK do not spell good news for GBP and confirmation of softening industrial activity next week could see sterling extend one of the worst starts to a month since January. We look for the BoE to stand pat on BR and APF target. Our special note this week discusses the outlook for the JPY and CHF.

Recap

USD fell against most G10 currencies as risk appetite resurfaced in the lead up to Friday’s non-farm payroll numbers and major equity and commodity markets rallied strongly. GBP continued to lose ground and dropped against every G10 currency. Among the most watched currency pairs, after dropping initially during the week, EUR/USD rallied 1% to 1.2886. GBP/USD recovered to 1.5444 after slumping by 1.3% at one stage to 1.5327, finishing the week down 0.6%. JPY remained firm against USD (+0.9%), GBP and especially EUR against the backdrop of continuing speculation about possible policy intervention by the BoJ, possibly after the September 14 DPJ leadership challenge.

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Market Outlook

Tactical view:

• EUR/GBP: return to June low?

Comments by ECB council member and 2011 candidate president Weber on the possible extension of unlimited liquidity until year-end have not gone unnoticed, casting a shadow of the ST outlook for the EUR. In a market short of liquidity and marked by a retreat of risk, Weber’s comments may hasten the decline in EUR/USD from the August highs. With risk beating a retreat, the success of Japanese officials to temper the decline in USD/JPY can be questioned and indicates that the cross may be settling in a range around 85.0. The perceptible weakening of the US economy in Q2 is showing signs of spilling over in Q3 and means the USD is set to remain a safe haven magnet along with the CHF. Unrevised UK Q2 GDP data next week may add fuel for a return in EUR/GBP to the June lows. (more…)

Market Outlook

Tactical view:

• EUR/CHF: lurch lower on SNB liquidity decision?

A rally in risk assets was accompanied by a fall in ST volatility this week, boosting demand for AUD, NZD and CAD. A rejection of key resistance targets and a lack of conviction in stocks leaves many participants pondering whether to further reduce risk exposure until clearer trends emerge. The performance of sovereign debt and talk of a yuan reval will dictate near-term direction, though Q2 corporate updates from the US will soon appear on the radar as we move into the second half of June. A more hawkish inflation message from the SNB next week or a decision to drain liquidity could cause selling of EUR/CHF to resume. We continue to treat rallies in EUR/G10 with suspicion and reiterate our mediumterm EUR/USD target of 1.15.

Recap

The fx summary virtually reads like a copy of two weeks ago with the AUD outclassing the G10 table backed by a relief bounce in risk assets and a recovery from technically oversold conditions. The currency rallied 2.9% vs the USD through 0.84 and gained 2.6% vs the JPY and 2.5% vs GBP below 1.72. Supportive comments by China briefly lifted EUR/USD over 1.21 but the cross ran into profit taking on Friday. A poor overall performance for GBP resulted in sterling losing ground against all but two currencies of the G10, namely the USD and the JPY. GBP/USD hit a 1.4759 high on Friday but reversed sharply into the close to finish below 1.4550, near the middle of the 4-week trading range. EUR/GBP bounced off a 0.8211 low to close over 0.83. (more…)