FX trading was fairly quiet in the overnight session by the standards of recent weeks, despite large falls in equity markets in China (-4.7%) and Japan (-1.8%).
USD/JPY has been heavy since yesterday’s London close reflecting falls in New York and Asian equity markets. While equity markets travel through their current nervous phase, adjusting to the prospect of reduced Fed stimulus and Chinese policy concerns as the authorities deal with slowing unsustainable rates of total-system credit growth, USD/JPY will face headwinds and remain somewhat heavy. But the collapse of Japan’s current account surplus has significantly reduced the JPY’s safe-haven status, so a large “safe haven” driven decline in USD/JPY is unlikely. We believe USD/JPY will continue to consolidate between 98.70 and 96.30 before heading higher, driven by both a firmer USD and a narrower Japanese current account surplus.
AUD and NZD were heavy in Asia, tracking the weakness in the Chinese equity market. Concerns about China’s “liquidity squeeze” and high inter-bank interest rates remain a headwind to large gains in AUD and NZD, despite the fall in SHIBOR from 60% to 5.8%. We caution becoming too bearish about China’s growth prospects because the liquidity squeeze is a deliberate part of the Chinese authorities attempt to rein in very rapid credit growth. Should the PBoC feel that credit growth is easing as desired, they may act to ease the strain in the interbank market, which would help reduce broader Chinese growth concerns and help generate a modest lift in both AUD and NZD. AUD and NZD have rallied in the London morning but still face resistance at .9300 and .7800 respectively.
EUR/USD eased slightly ahead of an array of ECB speakers. Coeure said the ECB’s exit remains distant and monetary policy will stay accommodative. President Draghi and Liikanen also speak today. Should it be discussed, we would expect the ECB officials to reiterate that the Eurozone economic recovery will remain drawn‑out and subdued, and that further policy support remains an option should the recovery disappoint or if the inflation outlook deteriorates. While we think EUR/USD can continue to edge up towards 1.3200 during the current period of USD consolidation, any overly dovish comments by the ECB members should act as a headwind to substantial near-term EUR gains.
AUD & NZD Today
Nice busy 1 cent moves in AUD & NZD overnight however NY open up with both close enough to levels where we left them yesterday … session lows for both came when Chinese equities sold down to session lows before a gradual pick up in risk since then has seen both pairings test the upper side to the ranges …. AUD; 0.9250 strike talk dominates this morning, Exporter buyers have re-emerged with interest in the 0.9180/0.9220 region with a mix of stops and further buyers below here … 0.9300/40 holds plenty of selling interest with intraday accounts still favouring selling rallies but possibly not as confidently as they have been over the last few days. NZD by comparison is starting to look a little weaker with AUDNZD attempting to break back over 1.20c which has not occurred for nearly 2 weeks now … we still expect 0.7680/0.7720 to continue to offer strong support with sellers still up near 0.78c. No data in NZ/Aust tonight.
Thoughts from our Trading Team
Aud/usd: trapped .9200-.9300 at moment. Demand from Corporates sub .9200 holding the downside at moment. Stop losses above .9320 resistance loom. Prefer buying still into the .9200-.9150 region with a s/l below the .9135 big fibo level I mentioned yesterday.
JPY: 100 day MA at 97.00 lending support and Asian offers at 98.50 containing the market in the short term. Recent global equity weakness has weighed on the JPY crosses. I expect that trend to continue until we see turnaround.
EUR/CHF: Good technical support at 1.2230. I favour buying the cross on dips to that level with a stop below 1.2180
Fixed Income Comments
The massive moves in bond markets have brought us into “free air” – well away from any previously established positions or technical levels. After running a massive sell‑off yesterday, the Australian curve has abruptly reversed course and rallied back most (though not all) of the way.
As I write the 10Y has rallied 22bp today after yesterday’s 29bp sell‑off. The Australian rally started overnight but has continued throughout the day. (See Figure.) The 3Y has also rallied today, the yield falling 12bp and seeing the curve flatten to 92bp.
There was no underlying driver of today’s moves. There was no data to speak of and the overnight lead from the US was a much smaller rally (10Y down about 10bp from this time yesterday). The main unfolding story remains concern with China’s liquidity squeeze, which saw Chinese equities off another 2.7% today.
As suspected, the long‑end got carried away yesterday. The timing on our AUS‑US 10yr spread contraction call is looking good, tightening from 144bp at implementation yesterday to 132bp today. But we’ll see what happens tomorrow...