Summary: “What goes down must go up, wheel that turns.” Just another day for you and me in the forex markets as risk turned to risk. The Chinese government injected a total of CNY 120 billion ($ 18.6 billion) in short-term liquidity into the banking system to allay concerns about an Evergrande group debt crisis, according to Bloomberg. The VIX Index, also known as the “fear” gauge, fell 10.75% overnight to 18.63 from 20.21 (and a high of 28 earlier this week).
The Australian dollar, the main risk currency, jumped to 0.7295 from 0.7240 on a typical short squeeze, initiated by improving sentiment. The pound, which has been under pressure in recent days, rebounded 0.76% to close at 1.3720 from 1.3615 yesterday. The Bank of England kept its official discount rate unchanged (0.10%) as was widely expected but there was one more vote, in total 2 who wanted to decrease the stock of asset purchases. The euro appreciated 0.44% against the greenback to 1.1738 (1.1688) at the end of trading in New York. The Dollar Index, which measures the value of the greenback against a basket of 6 major currencies, fell to 93.10 from 93.45 yesterday. USD / CAD fell to 1.2658 from 1.2775, a loss of 0.90%. Canadian retail sales topped median estimates in August after falling in July. Against the safe haven sought by the Japanese yen, the dollar recovered, however, up 0.51% to 110.34 (109.80). A clear signal of an improvement in risk sentiment in FX. The greenback was mixed against Asian and emerging market currencies. The USD / CNH (Dollar – Offshore Chinese Yuan) dipped to 6.4615 from 6.4650. The greenback fell against the Singapore dollar (USD / SGD) to 1.3490 against 1.33532. Stocks extended their rebound as investors looked past risky events earlier this week. The DOW climbed to 34,807 from 34,310, a gain of 1.45%. The S&P 500 was last at 4,452 (4,400). Treasuries were sold and bond yields rose. The benchmark yield on 10-year US Treasuries jumped 14 basis points to 1.43% (1.30%). Two-year US Treasuries fell 0.26% from 0.24% yesterday. The 10-year German Bund yield rose 7 basis points to -0.26% from -0.33%. The British 10-year Gilt fell 0.91%, against 0.80%.
Data released yesterday saw September manufacturing Australia’s flash rise in PMI to 57.3 from 52.0. The services PMI fell from 42.9 to 44.9. French September Flash The manufacturing PMI plunged to 55.2 from 57.5 while the services PMI matched expectations at 56.0. Germany’s manufacturing PMI fell to 56.0, missing estimates at 60.2 and 60.8 previously. The German services PMI slipped to 56.0 from 60.8, missing the forecast at 60.2. The eurozone flash manufacturing PMI fell to 58.5, lower than estimates at 60.3. The Eurozone services PMI slipped to 56.3 from 59.0, the missing forecast at 58.5. The UK Flash Manufacturing PMI for September fell to 56.3 from 60.3, lower than expected at 59.0. The UK services PMI was also down, to 54.6 from 55.0 previously. Canada’s overall retail sales fell to -0.6%, improving the forecast to -1.2%. Canadian core retail sales were at -1.0%, beating estimates at -1.5%. Weekly jobless claims in the US rose to 351,000 from 332,000 the previous week and higher than forecast at 320,000. US September Markit Manufacturing PMI dipped to 60.5 from 61.1 and estimated at 60, 7. The US services PMI in September fell to 54.4 from 55.1.
Earlier today, New Zealand released its August trade balance. New Zealand’s trade deficit increased to – NZD 2.144 billion from – NZD 0.397 billion in July. NZ August Exports fell to NZD 4.35 billion from NZD 5.77 billion while imports climbed to NZD 6.49 billion from NZD 6.17 billion. The Kiwi (NZD / USD) was little changed from its New York close at 0.7071 following the result.
AUD / USD – The Aussie, under pressure at the start of the week, soared as risk sentiment improved as speculative short positions sought to hedge. AUD / USD closed at 0.7295 after opening 0.7240 yesterday. The night high for the Aussie Battler was 0.7316.
GBP / USD – The British pound rebounded to close at 1.3720 in New York City from 1.3615 yesterday. While the Bank of England kept interest rates unchanged as widely expected, there was an additional vote added to the total of 2 Monetary Policy Committee members who wanted to reduce the stock of asset purchases . GBP / USD traded overnight high at 1.3751.
EUR / USD – The euro rallied to end at 1.1738 against 1.1688 yesterday. Risk-taking and an overall weaker US dollar against European currencies boosted the euro. Earlier in the session, the euro slipped to an overnight low of 1.1683 before a rebound ensued.
USD / JPY – The greenback settled higher against the sought-after Japanese yen at 110.35 against 109.80 as risk appetite increased. The thirteen basis point rally in the US 10-year bond yield to 1.43% took the dollar above 110.00 against the yen. The Japanese 10-year JGB yield was unchanged at 0.03%. Overnight USD / JPY traded low at 109.71.
On the lookout: Today’s economic calendar is light and will allow the markets to breathe a bit for now. Japan has just released its national CPI report for August. Japan’s annual headline CPI in August slipped to -0.4% from -0.3% in July. Japan’s core annual CPI in August was 0.0% compared to -0.2% in July. forecasts corresponding to 0.0%. USD / JPY changed little after the data. The next item on the calendar is the flash manufacturing PMI of the Japanese bank Jibun Bank (f / c 52.5 vs. 52.7 previously – Forex Factory). Jibun’s Japanese September Services PMI follows (no f / c given, old was 42.9). European data begins with the German Ifo business climate index for September (f / c 98.9 vs. 99.4 – ACY Finlogix). Italy then follows with its consumer confidence index for September (f / c 115.8 against 116.2 – ACY Finlogix). Next come the sales of new homes in the United States in August (f / c 0.714 million against 0.708 million – ACY Finlogix).
Silvana Tenreyro, MPC member of the Bank of England, speaks at a virtual conference organized by the National University of Cordoba (Spain). Federal Reserve Chairman Jerome Powell is due to deliver the keynote address at an online event hosted by the Fed). US FOMC member and New York Fed Chairman John Williams is due to speak at a virtual conference hosted by the Swiss National Bank on the international coordination of monetary policy strategies.
Commercial perspective: The 0.42% drop in the Dollar Index (USD / DXY) was the result of a risk-free compression of long positions in the USD, as market sentiment improved to become riskier. This followed the news of the intervention in Evergrande of China Inc. Which was not entirely unexpected. According to Bloomberg, Evergrande’s onshore real estate unit said it plans to repay interest owed yesterday on its local bonds. The PBOC injection was intended to allay market concerns.
The 13 basis point rise in the benchmark US 10-year bond yield to 1.43% from 1.30% as Treasury prices fell on improving risk sentiment is huge (see graph below -joint) and will support the greenback at current levels.
Markets will be looking for further clues as to when the Fed will fall when Fed chief Jerome Powell and FOMC member John Williams speak at various events.
AUD / USD – The Aussie kept this strong support level at 0.7220 despite strong selling pressure. In Battler fashion, AUD / USD jumped to an overnight high of 0.7316 from opening at 0.7240 before falling to 0.7295 at the end of New York. On the day, immediate resistance is found at 0.7320 followed by 0.7350 and 0.7380. Immediate support can be found at 0.7270 and 0.7245 and 0.7220. Expect the Aussie to consolidate in a likely range of 0.7270 to 0.7320 today. You prefer to sell rallies at current levels.
EUR / USD – The split currency rallied against the US dollar to end at 1.1738 versus 1.1688. Risk taking and an overall weaker US dollar supported the euro. Overnight the euro traded low at 1.1683 providing strong support. Immediate support for the day stands at 1.1710. The next level of support is found at 1.1685. Immediate resistance is at 1.1755 followed by 1.1775. Expect the Euro to trade in a likely range of 1.1710-1.1770 today. Prefer to sell rallies.
USD / JPY – Against the Japanese yen, the dollar extended its rally to 110.34 against 109.80 yesterday. Earlier this week, USD / JPY traded low at 109.12. For today, immediate resistance stands at 110.40 followed by 110.70. Already this morning, the USD / JPY has drifted higher to 110.40. Immediate support can be found at 110.10 followed by 109.80. Look for a consolidation of the USD / JPY in a likely range today of 109.90-110.50. Just swap the range shag on this one today.
USD / CAD – Against the Canadian loonie, the US dollar fell to 1.2658 against 1.2775 in choppy trading (love it!). Widespread weakness in the US dollar and better-than-expected Canadian retail sales pushed the loonie higher. USD / CAD traded overnight low at 1.2633. Overnight, USD / CAD hit a high at 1.2797 before dropping to its New York close. Immediate support for today sits at 1.2630. The next level of support is found at 1.2600 and 1.2560. Immediate resistance can be found at 1.2680 followed by 1.2710 and 1.2750. Expect USD / CAD to consolidate in a likely range today of 1.2640-1.2740. I prefer to buy USD lows towards 1.2630 / 40.
It’s been a huge week for FX and the financial markets. And there is more to come, September is not over yet. But for today, thank goodness it’s Friday!