Equities & USD Rally

Forex News and Events

In Foreign Exchange USD is King

In the Forex market, the only trading strategy that matters is to buy USD. The USD continues to go from strength to strength. Yesterday Q3 GDP came in at a healthy 3.5% verse 3.0% expected. While the Feds hawkish statement increased the slope of the US curve, further attracting yield starved investors. Yet in Europe, most core nations are exhibiting significantly disinflationary forces, increase the likelihood of the ECB expanding its balance sheet. And somewhat unexpectedly (see our Weekly market Report), the Bank of Japan, following this week’s decision by Riksbank and RBNZ to keep monetary conditions ultra-loose. As the Fed heads toward normalization of monetary policy, most G10 nations are heading in the opposite direction. As divergence intensifies, exaggerated by Fed actually raising rates, USD will continued to be the currency of choice for most investors. Our forex trading strategy is to be long USD in the mid and long term. USDJPY was the big mover overnight, rallying to 111.47 (multi-year highs). Gold was punished as CTA trend-following commodity trading strategies, sell orders were triggered on the break of $1183. Supply in gold feels heavy so we are looking for further downside.

Trick-or-Treat from the BoJ

A brief recap the Bank of Japans unexpected move last night. The BoJ announced an increase speed of expansion in its monetary base by about JPY80 trn per year (verse JPY60-70 trn). Previously the expansion was conducted through a combination of JGB purchases, liquidity through loan support programs and purchase of other assets. However, now it looks as if a vast majority will be straight JGB purchases. Importantly to equities, the speed of ETF and J-Reit purchases will increase as well (three-folds). The vote was close at 5-4. The JPY came under immediate heavy selling pressure as traders had been waiting for a catalyst to drive JPY lower. In addition, Japanese media (later confirmed by the GPIF panel) reported that the Government Pension Investment Fund will report alterations in its asset allocation structure today. The percentage are still influx but rough domestic equities will be increased to 25%, and domestic bond ratio would be lowered to 35%, and ratio of foreign equities would be doubled to 25%, greater than the 15% expected. With a total size of JPY127trn GPIF portfolio allocation rotation is an significant event. The Nikkei reacted as expected rallying a massive 4.83%.

RUB to Free-Float?

Volatility has been increasing in the RUB, but went ballistic on Thursday (1 month implied vol spiked to 22 from 12). Since September the RUB has lost nearly 29% verse the USD (13% verse the CBR basket). The aggressive RUB depreciation is the primary reason for the monetary policy tightening. The market is currently pricing in a 50bp rate hike form the central banks today yet given the wild exit from RUB its more likely to be 100bp. Anything smaller is unlikely to halt the current flight from RUB or stabilize the financial instability taking place. There seem to be two key reason why RUB continues be deprecate. First is the weakness in oil prices which is the backbone of the Russian economy and second is the private sectors attempt to build up a reserve of FX ahead of Q4 debt repayments. And this is occurring with a backdrop of an unresolved situation in Ukraine and corresponding western sanctions. Outside of the rate adjustment, there is plenty of market speculation that the CBR possibly could give up intervention mechanism completely and thereby letting the RUB freely float. For the last 3 months the RUB has consistently reached the upper-bound of the CBR non-verbal band which has force the CBR to raise the upper after intervene with $350mn before adjusting the non-intervention band by RUB0.05. According to external analysis this would suggest that the CBR has already interview to the tune of $24bn in October alone. However, given the near panic like trading a sudden move towards a free-float might only exacerbate the current flight from RUB. A slight delay would see the a improvement in current account due to winter fuel export revenue and avoid the colliding with external debt repayments allowing a more stable transition.

Commodity Trade Idea

Swissquote SQORE Trade Idea:

Break Out Daily Model: Sell XAUUSD 1185.46.

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Today's Key Issues (time in GMT)

2014-10-31T09:00:00 NOK Oct Unemployment Rate, exp 2.60%, last 2.70%
2014-10-31T09:00:00 NOK Sep Credit Indicator Growth YoY, exp 5.30%, last 5.30%
2014-10-31T09:00:00 NOK Nov Norges Bank Daily FX Purchases, last -250M
2014-10-31T10:00:00 EUR Sep Unemployment Rate, exp 11.50%, last 11.50%
2014-10-31T10:00:00 EUR Oct CPI Estimate YoY, exp 0.40%, last 0.30%
2014-10-31T10:00:00 EUR Oct A CPI Core YoY, exp 0.80%, last 0.80%
2014-10-31T12:30:00 USD 3Q Employment Cost Index, exp 0.50%, last 0.70%
2014-10-31T12:30:00 CAD Aug GDP MoM, exp 0.00%, last 0.00%
2014-10-31T12:30:00 CAD Aug GDP YoY, exp 2.30%, last 2.50%
2014-10-31T12:30:00 USD Sep Personal Income, exp 0.30%, last 0.30%
2014-10-31T12:30:00 USD Sep Personal Spending, exp 0.10%, last 0.50%
2014-10-31T12:30:00 USD Sep PCE Deflator MoM, exp 0.10%, last 0.00%
2014-10-31T12:30:00 USD Sep PCE Deflator YoY, exp 1.50%, last 1.50%
2014-10-31T12:30:00 USD Sep PCE Core MoM, exp 0.10%, last 0.10%
2014-10-31T12:30:00 USD Sep PCE Core YoY, exp 1.50%, last 1.50%
2014-10-31T13:00:00 USD Oct ISM Milwaukee, exp 60, last 63.18
2014-10-31T13:45:00 USD Oct Chicago Purchasing Manager, exp 60, last 60.5
2014-10-31T13:55:00 USD Oct F Univ. of Michigan Confidence, exp 86.4, last 86.4

The Risk Today

EURUSD EUR/USD is approaching the key support at 1.2501. The short-term bearish momentum is intact as long as prices remain below the hourly resistance at 1.2632 (intraday high). Another hourly resistance lies at 1.2685 (28/10/2014 low). In the longer term, EUR/USD is in a downtrend since May 2014. The break of the strong support area between 1.2755 (09/07/2013 low) and 1.2662 (13/11/2012 low) has opened the way for a decline towards the strong support at 1.2043 (24/07/2012 low). As a result, the recent strength in EUR/USD is seen as a countertrend move. A key resistance stands at 1.2995 (16/09/2014 high).

GBPUSD GBP/USD is consolidating after the successful test of the key support at 1.5855. However, the succession of lower highs since July 2014 remains intact, indicating persistent selling pressures. The short-term momentum is negative as long as prices remain below the hourly resistance at 1.6038 (30/10/2014 high). Another hourly resistance stands at 1.6088 (28/10/2014 low).In the longer term, given the significant deterioration of the technical structure since July, the strong resistance area between 1.6525 (19/09/2014 high) and 1.6644 (01/09/2014 high) is expected to cap any upside in the coming months. Monitor the current consolidation phase near the strong support at 1.5855 (12/11/2013 low).

USDJPY USD/JPY has broken the major resistance at 110.66 (15/08/2008 high), confirming the long-term underlying uptrend. A support can be found at 109.90 (03/10/2014 high). A long-term bullish bias is favoured as long as the key support 100.76 (04/02/2014 low) holds. The break of the major resistance at 110.66 (15/08/2008 high) opens the way for further rises towards 114.66 (27/12/2007 high) and possibly 120.04 (61.8% retracement of the 1998-2011 decline). A key support lies at 105.44 (02/01/2014 high).

USDCHF USD/CHF has broken the key resistance at 0.9562, which improves the short-term technical structure. Monitor the test of the resistance at 0.9625. Hourly supports lie at 0.9544 and 0.9511 (28/10/2014 high). A key resistance stands at 0.9691.From a longer term perspective, the technical structure favours a full retracement of the large corrective phase that started in July 2012. As a result, the recent weakness is seen as a countertrend move. A key support can be found at 0.9301 (16/09/2014 low). A resistance now lies at 0.9691 (06/10/2014 high).

Resistance and Support:a