Summary: FX took a breather on Monday following Friday’s stellar US Jobs report heading into this week’s Fed and ECB meetings, and President Trump’s tariff deadline. Currencies reverted to tight ranges with little net movement. The Dollar Index (USD/DXY) was barely changed, closing at 97.661 from 97.677. The Greenback’s rally stalled with markets expecting Fed officials to leave policy unchanged after more recent upbeat economic data. Future guidance will be key. The Euro steadied to 1.1065 (1.1060) with Christine Lagarde, incoming ECB head expected to maintain status quo at her first rates policy meeting. Sterling ended little changed at 1.3148 (1.3138), after trading to an overnight and fresh May high at 1.31806. Hopes that Boris Johnson will win the upcoming election this weekend stayed high. USD/JPY ended at 108.60, virtually flat after trading in a narrow 25-point range. Japan’s Final Q3 GDP growth beat forecasts, rising to 0.4% against an expected 0.2%. The Aussie and Kiwi both eased mildly to 0.6832 (0.6840) and 0.6552 (0.6560) respectively.
Wall Street stocks declined at the close on a lack of trade news. While negotiations appear headed to a first phase, doubts abound. The DOW drifted 0.44% lower to 27,886 (28,008) while the S&P 500 slipped to 3,132 from 3,145 yesterday. Treasuries saw a late rally. The US 10-year bond yield eased to 1.82% from 1.84% yesterday.
There were few data releases yesterday. Germany’s Trade Surplus climbed to EUR 20.1 billion, beating forecasts of EUR 19.0 billion. Eurozone Sentix Investor Sentiment Index improved to 0.7 from the previous -4.5. Canada’s November Building Permits fell unexpectedly to -1.5%, against forecasts of 3.5%.
Also on the news was the passing away of former Federal Reserve Chair Paul Volcker at 92. This writer and many who traded FX in the late 70’s and 80’s remember Volcker with respect and fondness. Volcker fought raging inflation at the time, pushing up US rates to 20%, maintaining the US central bank’s independence, and helped shaped the US economy. FX in those days rocked and the markets profited as a whole, both in trading experience and knowledge. May he rest in peace.
Attached is a short excerpt from Bloomberg Opinion, on Volcker.
(Bloomberg Opinion) — Paul Volcker’s leadership of the U.S. Federal Reserve was enormously consequential. The former chairman — who died Sunday in New York at the age of 92, according to the New York Times — bequeathed to his heirs and the global economy two major legacies: one from which subsequent Fed chiefs benefit and another that central bankers have sought to dismantle.
The benefit is an economic system from which inflation has been wrung. Surging prices were the biggest challenge facing American post-war dominance. In the months after Volcker was appointed Fed chairman in 1979, consumer prices were increasing at about 15 percent. It’s almost hard to grasp how different things were, with inflation now struggling to hold above 2 percent.
Volcker pushed interest rates to 20 percent to wrest control of inflation. A deep recession followed, as did an economic spurt in the 1980s when the medicine worked and borrowing costs came down. Inflation was just never the same again and has been steadily receding as a pernicious force ever since.
- EUR/USD – The shared currency reverted to a narrow range trade after falling to an overnight low of 1.10553, before settling to close at 1.1062. EUR/USD topped out at 1.10779.
- USD/JPY – The Dollar rose moderately against the Yen to finish at 108.62 despite better-than-expected Japanese Final Q3 GDP. USD/JPY reverted to a tight trading range between 108.43 and 108.677.
- GBP/USD – Sterling edged up at the New York finish to 1.3148 from 1.3137 yesterday. The British currency traded to a fresh May 2019 and overnight high at 1.31806 before easing. All eyes turn to this weekend’s UK general election where Boris Johnson and his Conservative Party are expected to win and finalise a Brexit deal with the European Union.
- AUD/USD – The Aussie eased a touch to 0.6832 from 0.6840 on the lack of positive trade developments between China and the US. Today sees Australian Q3 House Price Index as well as Chinese annual November CPI and PPI data.
On the Lookout: Data releases increase today ahead of this week’s key events. The risk tone is on the defensive following the lead from North American markets.
Today’s data reports begin with Australia’s Q3 House Price Index and National Australia Bank’s Business Confidence Index for November. Earlier RBA Governor Philip Lowe spoke at an Australian AusNetPay summit. Lowe skipped any mention of the economy or monetary policy. China’s Annual CPI and PPI for November reports follow. Japan’s Preliminary Machine Tool Orders round up Asia’s data for the day. Europe starts off with French and Italian Industrial Production, German and Eurozone ZEW Economic Sentiment Index’s. The UK reports on its November GDP, Manufacturing and Industrial Production, and Goods Trade Balance.
Trading Perspective: Heading into potentially the biggest week for markets before the Christmas lull, we look at FX positioning, which will be crucial for any potential fireworks. The latest Commitment of Traders report (Saxo Bank) saw speculators increase their long US Dollar bets for the fourth consecutive week (ended 9 December) to the highest total in 7 weeks. The increase came mainly against the Euro and Yen. Net Sterling, Aussie and Kiwi shorts were pared. Speculators increase their Canadian Dollar longs (the only Major where specs are long the currency/short USD).
- EUR/USD – The Euro traded a relatively tight range between 1.10553 and 1.10779 before finishing at 1.1062. The shared currency steadied ahead of Thursday’s ECB meeting with Christine Lagarde on her first chair. Markets are expecting her to maintain status-quo. Meantime, net speculative Euro shorts increased by a whopping -EUR 7,633 bets to a total of -EUR 69,049. While the risk from market positioning is for a stronger Euro, sentiment remains decidedly bearish. EUR/USD has immediate support at 1.1050, just under the overnight low (1.10553) followed by 1.1030. Immediate resistance can be found at 1.1075 followed by 1.1100. Look for consolidation today between 1.1055 and 1.1085. The risk is for a higher Euro.
- USD/JPY – the Dollar rallied 0.14% against the Yen to finish at 108.63 (108.57). The higher US 10-year yield buoyed the Dollar despite the market’s defensive risk stance and better Japanese Q3 GDP data. The latest COT report (week ended 9 December) saw speculative JPY short bets increase to total -JPY 47,823 from the previous week’s -JPY 39,591. This spells danger for Dollar bulls. USD/JPY has immediate resistance at 108.70 (overnight high at 108.677) and 109.00. There is immediate support at 108.40 (overnight low 108.43) followed by 108.20. Expect further consolidation today with a likely range of 108.30-108.80. Any positive signs of a first phase trade agreement could see an attempt to take Dollar Yen higher. Look to sell any rallies.
- AUD/USD – The Australian Dollar drifted lower overnight, extending its drift this morning to 0.6822 from 0.6832 New York close. The defensive risk stance and an overall bearish market will continue to weigh on the Battler. On the other hand, market positioning remains short of Aussie. The latest COT report saw speculators trim the short Aussie bets (after the RBA kept policy unchanged) to -AUD 36,433 contracts from -AUD 45,355 the previous week. Look for an initial drift lower with today’s likely range 0.6810-0.6850. With the market short, prefer to buy dips toward 0.68 cents.
- USD/CAD – This currency is interesting and caught my attention because it’s the only major currency where the speculators are long the Canadian Dollar (short USD). On Friday, Canada’s Employment slumped, losing 71,200 jobs against median expectations of a 10,000 gain and a previous loss of 1,800 jobs. The Unemployment rate jumped to 5.9% from 5.5%. If one wants to buy USD, this is the currency to do it against. The latest COT report saw net speculative CAD longs increase to +CAD 21,471 from the previous week’s +CAD 20,344. USD/CAD closed at 1.3233 (1.3255 yesterday). Immediate support lies at 1.3220 (overnight low 1.32226) followed by 1.3180. Immediate resistance can be found at 1.3250 followed by 1.3280. Look for a likely range today of 1.3225-1.3275. Buy dips.
Happy Tuesday and trading all.