USD strengthens against JPY, EUR; ADP in focus

Forex News and Events

The FX markets price in more USD strength before the US employment data. The September ADP is due today (12:15 GMT), the US unemployment rate and the NFPs are scheduled on Friday. The US 10-year yields trend down to 2.50%, while the DXY index extends gains to 86.145 this morning. Broad based USD strength, combined to strong Tankan survey, sent USD/JPY above 110.00 in Tokyo. Is a significant breakdown above 110.00 underway? In the Euro-zone, EUR/USD consolidates at fresh two-year lows before the ECB meeting tomorrow.

EUR trades under pressure pre-ECB

The ECB gives policy verdict on Thursday and is expected to maintain the status quo. Despite the escalating speculations for more ECB action, we believe that the ECB will likely wait-and-see the impacts of the recent stimulus (TLTROs, ABS and covered bond purchases, negative deposit rates) to materialize. The ECB’s balance sheet rebounds above 2 trillion euros through week ended on 26th September, yet there is still a long way to go before the balance sheet gets back to 2012 levels (roughly 3 trillion euros). The first TLTRO expansion in September has been a sizeable disappointment. The banks took up to 82.6 billion loans verse 100 billion expected, and this amount is clearly very weak compared to the ECB’s goal of maximum 400 billion lending by the second TLTRO scheduled on December. The ECB hopes to see more popularity towards its targeted long-term financing program by December, as the ABS and covered bond purchases (private debt buying) will become effective by next month. Yet even the outcome of this additional stimulus is uncertain. With the softening inflation dynamics in the Euro-zone, Mr. Draghi may be obliged to activate a Fed-like QE program (public debt purchasing) if the recent deterioration in inflation expectations continues. On a side note, we remind that the ECB President Mario Draghi clearly pointed at 5y5y inflation expectations (i.e. 5-year inflation expectations starting in 5 years) falling below the ECB’s 2% threshold. The inflation expectations are important because they have a significant impact on consumers’ behavior today. The 5y5y inflation breakeven swaps finished last week at 1.88%. We closely monitor the progress in expectations to shape our policy forecasts.

EUR/USD hit 1.2571, a fresh two-year low, yesterday. The weak manufacturing PMI print in September pulled the pair shortly below 1.2600 today. We expect the EUR/USD to remain ranged before the ECB meeting tomorrow. Decent option barriers trail below 1.2700 before the ECB decision and Draghi’s press conference.

USD/JPY breaks above 110.00

The strong 3Q Tankan reading sent USD/JPY above the 110.00 psychological threshold in Tokyo. Top sellers quickly jumped in to benefit from downside corrections at the current overbought levels. For days ahead, the option bets are supportive at 109.00/110.00, traders shift focus to 115.00/120.00 as more strength in USD is broadly priced across the globe. In the short-run, the US employment report should define whether there is potential above 110.00 in the coming days. Given the down trending US yields, there is room for improvement if the US economic data keep Fed-hawks alert. Improving US yields should continue giving support to USD/JPY, yet the local companies are somewhat concerned about the rapid weakness in Yen as the imported goods and energy costs weigh on local activity and household consumption. Although Japan wants weaker yen to fight deflation, the cross currency basis drops significantly warning that the markets are not fully comfortable with the speed at which the yen depreciates. We believe that a downside correction / consolidation at the current levels should release tensions on Yen markets. Therefore, we do not expect a Japan-related boost anytime soon as the USD/JPY at 110.00s will perhaps keep the policymakers on hold, as markets/investors digest the current FX levels. The break above 110.00 is still challenging in the very short-run.

Today's Key Issues (time in GMT)

2014-10-01T09:00:00 USD Sep 26th MBA Mortgage Applications, last -4.10%
2014-10-01T10:15:00 USD Sep ADP Employment Change, exp 205K, last 204K
2014-10-01T11:30:00 CAD Sep RBC Canadian Manufacturing PMI, last 54.8
2014-10-01T11:45:00 USD Sep F Markit US Manufacturing PMI, exp 57.9, last 57.9
2014-10-01T12:00:00 USD Sep ISM Manufacturing, exp 58.5, last 59
2014-10-01T12:00:00 USD Sep ISM Prices Paid, exp 57, last 58
2014-10-01T12:00:00 USD Aug Construction Spending MoM, exp 0.50%, last 1.80%
2014-10-01T14:00:00 EUR IT Sep New Car Registrations YoY, last -0.20%

The Risk Today

EUR/USD has broken the strong support area between 1.2755 and 1.2662, confirming persistent strong selling pressures. Hourly resistances can now be found at 1.2664 (29/09/2014 low) and 1.2715 (29/09/2014 high). In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. The break of the strong support area between 1.2755 (09/07/2013 low) and 1.2662 (13/11/2012 low) opens the way for a decline towards the strong support at 1.2043 (24/07/2012 low). Intermediate supports are given by 1.2500 (psychological support) and 1.2466 (28/08/2012 low).

GBP/USD continues to retrace the rebound that started from the low at 1.6052. The hourly support at 1.6162 (16/09/2014 low) is challenged. Hourly resistances are given by the declining channel (around 1.6252) and 1.6287. In the longer term, the collapse in prices after having reached 4-year highs has created a strong resistance at 1.7192, which is unlikely to be broken in the coming months. We favour a medium-term consolidation phase with supports at 1.6052 and 1.5855 (12/11/2013 low) and a resistance at 1.6644.

USD/JPY has broken the resistance at 109.46 (19/09/2014 high) and is now close to the major resistance at 110.66 (15/08/2008 high). Hourly supports can now be found at 109.50 (intraday low) and 109.13 (29/09/2014 low). A strong support stands at 108.26. A long-term bullish bias is favoured as long as the key support 100.76 (04/02/2014 low) holds. The recent new highs confirm a strong underlying bullish trend. A break of the major resistance at 110.66 (15/08/2008 high, see also the 50% retracement from the 1998's top) is eventually favoured. Another resistance can be found at 114.66 (27/12/2007 high).

USD/CHF has made new highs, confirming persistent buying interest. Hourly supports can be found at 0.9489 and 0.9433 (18/09/2014 high). From a longer term perspective, the technical structure favours a full retracement of the large corrective phase that started in July 2012. The break of the strong resistance at 0.9456 (06/09/2013 high) confirms this scenario. Another key resistance lies at 0.9751 (09/07/2013 high). Supports can be found at 0.9301 (16/09/2014 low) and 0.9176 (03/09/2014 low).

Resistance and Support: