Forex Daily Outlook Wednesday To Midday GMT Thursday: EU Stocks Diverge From FX,... |
Bias to safety currencies with exceptions. Strongest over the past 24 hours: USD, CHF, CAD in that order. Weakest: NZD, EUR, GBP in that order. Note or top 3 strongest and weakest have barely changed over the past 48 hours.
Risk off day again from increased risk aversion over the past days based on a combination of cautious Fed comments about US conditions, recent credit downgrade warnings for Belgium and Spain, tepid Portuguese bond auctions, and uncertainty ahead of the EU summit.
Both warnings are significant. Spain is considered too big to bail out and Belgium is viewed as a core rather than PIIGS-type economy, and the news suggests the EU crisis could be spreading beyond the PIIGS group to the core economies. These factors have overwhelmed positive German and EZ ZEW sentiment surveys.
Political turmoil in Italy has not helped, though the PM did survive a no confidence vote and riots over austerity spending cuts have subsided.
US Dollar Daily Outlook: Up vs. all for the second straight day over the past 24 hours from ongoing EU concerns noted above and other bearish factors boosting demand for safe haven currencies. Thus far Thursday the USD is holding its gains overall though the GBP, JPY, and CAD have recovered some of yesterday’s losses vs. the USD.
Yesterday the dollar index ran to a session high just short of 80.30 from its 8 AM ET low of 79.46. Multiple factors weighed on the euro with its selloff intensifying as Ireland's Parliament passed a vote that approved the European Union/International Monetary Fund bailout. The EURUSD closed the day down nearly 150 pips at 1.3220. A weak jobs report weighed on the pound, and an easing of inflationary pressures has some thinking more stimulus may be necessary. GBPUSD closed off 230 pips to 1.5540. The USDJPY added 0.60 to finish the session near 84.25 as it moves to breakout above current resistance levels.
Euro Daily Outlook: Down vs. all except up vs. the NZD, barely higher than the GBP but losing those gains thus far Thursday, flat vs. the AUD.
The EU Summit begins today and with the Euro-zone debt crisis back in focus following threats from Moody’s of a potential downgrade to Spain and Belgium, we can expect attempts to calm bond markets and keep PIIGS bond yields from spiking, though it will be hard given the ongoing general selloff in sovereign bonds that includes the US, Japan, and Germany.
FT.com quotes Pimco head El-Erian saying that Germany is in a tough lose-lose situation, German voters are reluctant to offer any more support, but at the same time, Germany cannot turn its back on the rest of the Eurozone given the benefits to German business. This puts the country in a bad position where politics take precedence over economic prudence.
As we have noted before, whether or not Germany stays or leaves the EZ will depend upon whether the consensus is that the benefits of the EU outweigh the bailout costs. Not an easy question given that different elements of German society have different interests. Average citizens need stable currency for savings yet benefit from the jobs growth, businesses want growth and advantageous access to EZ export markets.
Yen Daily Outlook: Up vs. all except down vs. the USD and CAD, though recovering yesterday’s losses somewhat against these thus far today.
British Pound Daily Outlook: Down vs. all, except up vs. the NZD and flat vs. the EUR.
The GBP was hit hard in Wednesday trade. There were a number of factors weighing on the Pound, and the rise in the ILO unemployment rate by more than expected didn’t help. As noted before coming spending cuts are expected to hit GDP yet inflation remains stubbornly high. We expect the GBPUSD to fall in the coming weeks, though much depends on developments in Ireland, the EU, and the US.
Australian Dollar Daily Outlook: Flat vs. the EUR, down vs. the USD, CHF, CAD, JPY up vs. the GBP, NZD.
Aussie consumer inflation expectations eased for the second month in a row and fell below the RBA’s target 2-3% band. The lower inflation expectations should provide further evidence to the RBA that the decision to leave policy on hold is justified.
New Zealand Dollar Daily Outlook: Down vs. all on a combination of general risk aversion and New Zealand confidence readings continue to show signs of deterioration.
Canadian Dollar Daily Outlook: Up vs. all except down vs. the USD for the second straight day on an overall flight to safety theme over the past 48 hours. The CAD is recovering most of yesterday’s losses vs. the USD thus far today.
While still overall weaker than the USD over the past 48 hours, thus far Thursday outperforming even the Greenback, perhaps on better US data and the positive implications for Canada.
Swiss Franc Daily Outlook: Up vs. the EUR, NZD, GBP, down vs. the USD, JPY, CAD, AUD, (though recovering vs. the AUD thus far today.
The CHF has soared to fresh record highs vs. the Euro, but simultaneously is finally showing some weakness against the USD, potentially warning of Franc weakness ahead, as event risk today could inspire the reversal
SNB Event Risk: While no change to rates is expected (on hold at 0.25%), we need to watch for any official comments relating to the latest round of Franc appreciation which has been a concern of the central bank in the past. With the EUR/CHF cross now trading around record lows, and with the daily RSI well oversold, we could consider going long the pair around 1.2785; stop around 1.2665, in anticipation of a correction that very well could be triggered if there are warnings from the SNB on excessive appreciation in the local currency. Even if there are, however, overall risk aversion could keep the franc buoyant regardless of the SNB, as we’ve seen in the past during times of fear.
About the author: Ava FX Analysts Department
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