Summary: Sterling extended its gains, boosted by increasing chances of a delay to Brexit’s March 29 deadline. The British Pound outperformed against the US Dollar and its peers in an otherwise dull trading session. GBP/USD rose to fresh 8 month high of 1.3350 before drifting back to 1.3300, up 0.4% from yesterday. The Dollar rallied from 3-week lows but stuck to narrow ranges as Fed Chair Jerome Powell repeated “patience” in deciding further rate increases. Global bond yields climbed off their lows with the US 10-year back up to 2.69% (from 2.64%). The Euro retreated to 1.1368 (1.1400 yesterday). The Dollar Index (USD/DXY) rose 0.13% to 96.153 (95.950 yesterday).
Wall Street stocks were little-changed as risk appetite waned. In a delayed report (35 days) due to the government shutdown, US Factory Orders rose less than expected in December. Pending Home Sales beat expectations.
The Slump in Currency Volatility: The Dollar’s corrective move lower ended, and we find ourselves back into familiar ranges. A Reuters report highlights the current slump in FX volatility. Delays in the outcome of the China-US trade talks and Brexit negotiations have seen a slump in volatility, crucial for traders who make a living out of when prices move wildly. The Fed’s dovish shift has been matched by the ECB and the BOJ. Reuters highlighted Deutsche Bank’s Currency Volatility Index slumped to its lowest since July 2018. The Index has dropped to 6.89 from as high as 9 on January 3. See chart.
- GBP/USD – The Pound added to gains yesterday as traders saw less chances of a no-deal UK departure from the European Union. GBP/USD rose to an overnight and 8-month high of 1.3350 before settling to close at 1.3300 in New York. Sterling has risen almost 4% in 2019. Hmm.
- EUR/USD – rallied to 1.14036 before slipping to close back at 1.1368. The Euro remained confined to recent ranges, trading a relatively narrow 1.1345-1.1403 range.
- USD/JPY – the drop in the US 10-year bond to 2.64% yesterday saw this currency pair drop to 110.355 before rebounding to 111.07 overnight high. The US 10-year yield rose back to 2.69% which lifted the Dollar off its lows. Like the Euro, the USD/JPY has kept to a relatively narrow range.
- AUD/USD – fell back to 0.7138 from 0.7192 yesterday. The bounce in the US Dollar weighed on the Aussie. Today sees Australian CAPEX and Chinese Manufacturing PMI data. Asian currencies were weaker against the US Dollar on the latest political flare-up between India and Pakistan.
On the Lookout: Today sees more data releases which may shake off the market’s doldrums. The Australian Dollar faces an early test. Australia’s Private Capital Expenditure data for Q4 2018 (due at 11.30 am Sydney time) is forecast to rise between 0.8% and 1.0% following a 0.5% fall in Q3. The CAPEX data is a guide for future growth prospects. China’s Manufacturing and Non-Manufacturing PMI’s for January follow next. The report covers the Lunar New Year so it may be skewed. Japanese Annual Housing Starts round up Asia’s data. Europe sees Euro-area Preliminary Flash CPI data. The UK reports on its Nationwide House Price Index. Finally, we have a delayed report (35 days due to the government shutdown) of US Advance Q4 GDP which is expected to have slowed to 2.6% from a downward revised Q3 figure of 3.4%. Perhaps a surprise result in any one of this data may see some good old volatility return? Hopeful..
Trading Perspective: Markets will look for hopeful signs of a break-out in volatility in March. There are a few clouds on the horizon that could “shake it up”. The delay in the voting of the Brexit outcome really means that the risk is just being put back further. Any surprises here could see volatility come back into the Pound. Sterling has risen almost 4% in 2019 and sustainability at current levels remain questionable. In Asia, the flare-up between India and Pakistan threatens to escalate and this could be a real game-changer for risk appetite. Asian currencies weakened across the board, against the trend of the Majors since the conflict started. President Trump may have been better off visiting the heads of India and Pakistan rather than North Korea. Both countries have nuclear capability.
The delayed release of US Q4 GDP will be closely watched.
- AUD/USD – the Aussie Battler underperformed its peers, slipping 0.78% against the Dollar to close at 0.7140. Immediate support lies at 0.7125 followed by 0.7100. A lower than forecast Australian Private Capital Expenditure report could see us back to strong support at 0.7070. The political uncertainty from the India-Pakistan flare-up cannot be good for the Aussie Battler, often the proxy for Asian currencies. Look to trade between 0.7110-0.7160 today.
- EUR/USD – the attempt to break above 1.1400 fell short once again and we are back in familiar ranges. EUR/USD traded to 1.14036 overnight highs before slipping to close at 1.1368. Immediate resistance at 1.1400/10 remains formidable and only a broad-based US Dollar rout could see this broken. Immediate support can be found at 1.1360 followed by 1.1330. Expect a likely trading range of 1.1340-1.1390 today.
- USD/JPY – rallied off its lows at 110.355 to finish at 111.05, up 0.43%. The USD/JPY is the most sensitive currency pair to the US 10-year bond yield and yesterday showed us why. Immediate resistance lies at 111.10 and 111.30. We can find support at 110.70 and 110.40 today. Likely range 110.60-111.10.
- GBP/USD – Sterling added gains, trading to a high of 1.3350 before settling at its current 1.3310. The Pound looks bid even at current levels, but the question remain its sustainability at current levels. Immediate resistance lies at 1.3330 and then 1.3350. The 1.3350 is a strong resistance level and only a sustained break could see 1.3450. Immediate support can be found at 1.3270 and 1.3230. Look to sell rallies with a likely range of 1.3260-1.3320.
Happy trading all.