IG Markets Forex thoughts

IG Markets Forex thoughts

Good afternoon,

Overnight, the USD traded in a small range against all G10 currencies with the CHF the only notable exception, falling to a new record low. Traders globally seem convinced that we will see a resolution, but are hedging themselves, buying Swiss franc in case of a worst-case scenario. A break below 80.00 could trigger stops, indicating a sharp move to 79.90. Rhetoric from both parties overnight suggested we really are no closer to a deal. Senate Majority Leader Harry Reid’s plan to push for $2.7 trillion in spending cuts will now not include tax hikes, while the Republicans are looking for a two-step approach. During Asian trade, President Barack Obama addressed the US nation, and while his speech was well-constructed and compelling, it really added no new insight into how a compromise is going to be made; USD selling therefore ensued. Interestingly, USD/JPY (which had been pulling back from 78.39 prior to the speech) fell to 77.98 after Mr Obama started speaking, although found support below the big figure. Republican house speaker Mr Boehner subsequently gave his reply by suggesting he had made ‘sincere effort to work with Obama,’ that the President ‘wants a blank check’ for spending, and that the he had created a ‘crisis atmosphere’ on debt; Mr Boehner’s comments had little effect on the USD. It seems that the main point of contention is the duration of time the debt limit is to be extended for, with Democrats adamant they will not budge on a post-November 2012 election date. The interesting move of the day came at midday when the pair spiked from 77.90 to 78.80, although the subsequent fall to 78.20 pretty much rules out BoJ intervention.

After trading in a narrow range overnight, Asian traders came in and immediately looked to sell EUR/USD, with the pair dropping to 1.4358 before finding good buying support and moving to test 1.4437. It seems that some of the enthusiasm surrounding the new EU Greek bailout has receded, with Greek ten-year bonds halting a four-day decline after a sell-out from investors, pushing up yields 11 basis points. Italian and Spanish yields also moved higher, up twenty-six basis points each, with the latter pushing back above 6%. Not only is there a growing view that the new bailout will not end contagion, but there are suggestions that the Greek bailout plan is facing stiff opposition in the Slovak parliament; if it were to materialise, it could add downside pressure to the pair. The interesting move of the day came around 12pm (Melbourne time), where EUR/USD traded through 1.44. This set off stops in the market, with some suggesting that central banks had also been involved in the move, as disappointment from President Obama’s remarks set in. Interestingly, the downtrend resistance (now at 1.4440) again kept the pair contained, with traders happy to sell there.

Sterling finished Monday’s session lower against the greenback, its second consecutive fall despite opening higher yesterday morning. It traded to a high of 1.6340, before retreating all the way down to a low of 1.6260 and closing at 1.6273. There wasn’t a lot in the way of news, although UK mortgage approvals for home purchases rose to 31,747 in June from 30,803 in May. While this is a positive sign, it had very little impact as traders remained focused on the bigger macro issues in play, especially ahead of tonight’s Q2 GDP release. As it stands, the market is expecting Q2 GDP growth of 0.2%, down from growth of 0.5% seen last quarter. A stronger-than-expected figure would likely see upside for cable as it would combine with the weaker US dollar to attract long positions.

It was a pretty flat session for AUD/USD overnight as it ultimately only finished a few points higher than Friday’s close It traded to a low of 1.0795 during the Europe session, before significant sovereign and real money buying entered the market and pushed it to a high of 1.0875 during the US session. Weakness in the US dollar plus a relatively neutral risk environment was enough to encourage the buyers, as many institutions view a retest of the 1.1011 high as only a matter of time. After opening the Asian session at 1.0843, AUD/USD has soared higher following President Obama’s speech, briefly trading above the 1.09 level as the US dollar continued to be punished across the board. RBA Governor Glenn Stevens also made a speech cautioning against getting too bearish on the domestic consumer, although it’s hard to see the impact on the market given the weakness in the greenback.

Ben Potter
Market Strategist
IG Markets

ENDS

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