• Markets continue to be increasingly volatile without much news behind it. Today it was back to “risk on” in what could be characterized as a “washing-machine market” – going back and forth violently but not really going anywhere. WTI was up 4.5% over the last 24 hours. That follows -5.3%, +4.4% and -3.6%. WTI has moved an average of 4.2% a day one way or the other over the last two weeks. Oil rallied Thursday despite a large rise in inventories and the success of the Iranian nuclear accord in the US Senate because the Energy Information Agency (EIA) reported that US oil production fell to nearly a one-year low in August and was likely to keep falling well into next year.

Fundamental Daily Market Analysis

Fundamental Daily Market Analysis

  • Adding to the favorable sentiment was a Wall Street Journal article by their esteemed Fedwatcher, Jon Hilsenrath, saying that “divisions and uncertainty” among FOMC members may restrain them from hiking rates next week. “A middle-ground choice now could involve signalling more strongly the Fed’s intent to raise rates this year once officials become comfortable recent market moves aren’t a sign of deeper problems in the global economy.” Personally, I think that the Fed is the central bank of the US, not the world, and so it do what it sees necessary for the US economy, not the global economy. I think they could hike rates to 25 bps with a statement reassuring the markets that this was not going to happen at every meeting, that the pace of rate increases will be extremely gradual and the terminal rate will be well below the historical norm. In my view that would actually reduce tensions in the market as everyone could stop wondering about the timing of the first Fed rate hike. It would also reassure the markets that the Fed was confident about the strength of the US recovery. But then again, I’ve never spoken directly with any FOMC members, so this is just my guess against his view. In any event, Fed funds rate expectations were unchanged across the curve yesterday, suggesting that Hilsenrath’s view is what the market is expecting anyway.

Fundamental Daily Market Analysis
  • In China, the source of much volatility now, the People’s Bank of China (PBOC) appears to be trying to drive the CNH down so that it’s equal to the CNY. They apparently want the two currencies to converge so that central banks can fix the value of their RMB assets on one clearly defined price. That would aid in having the CNY included in the SDR when the SDR composition is reviewed in November. The idea that China is still trying to accomplish this goal suggests that they are going to work towards stability, although of course they may need to use substantial reserves to achieve that stability and that has implications for the US Treasury market as well as the domestic monetary base. Nonetheless this was another factor adding to the risk-on sentiment.

Fundamental Daily Market Analysis
  • As greed conquered fear, oil-related currencies, such as NOK and RUB, did best, followed by other commodity currencies such as AUD and ZAR. There was generally good demand for EM currencies. The exception to both rules was BRL, which plunged after S+P downgraded the country’s bonds to non-investment grade. The safe-haven JPY also did poorly as nobody was interested in safety. The dollar was down in this environment, even against the EUR, which runs somewhat counter to my theory of EUR being used as a funding currency during risk-on events.

  • During the Asian day, New Zealand’s BusinessNZ manufacturing PMI for August rose to 55.0 from 53.5

  • Today’s highlights: During the European day, we get the final German CPI data for July. As usual the final figures are forecast to confirm the preliminary estimates, thus the reaction in the market is likely to be modest.

  • From Sweden, the final GDP for Q2 is expected to confirm the preliminary reading, and show that the economy grew 1.0% qoq in Q2. Following the country’s further dip into deflation on Thursday, any upward revision in GDP is likely to keep SEK strength limited. Sweden’s official unemployment rate for August is also coming out. The PES unemployment rate rose yesterday, which increases the likelihood that the official rate could rise as well.

  • In the US, the PPI data for August are coming out. The headline rate is forecast to have turned negative, while the core PPI, excluding food and energy is expected to have slowed. These data increase the risk of a decline in the CPI coming out on the 16th of September. The headline CPI rate is currently at +0.2% yoy and a possible negative PPI could increase the risk for a negative CPI. The preliminary U of M consumer sentiment index for September is also coming out along with the surveys of 1-year and 5-to-10 year inflation expectations.

Fundamental Daily Market Analysis
  • As for the speakers, ECB Executive Board member Benoit Coeure and BoE MPC member Kristin Forbes speak.


The Market

EUR/USD broke above 1.1245

EURUSD

  • EUR/USD moved higher on Thursday and broke above our resistance-turned-into-support level of 1.1245 (S1). On the daily chart, this happens to be a break above the 200-day simple moving average, which makes it an important level. So if the bulls prove strong enough and aim for another attempt to push the rate higher, we could see EUR/USD testing the 1.1360 (R2) resistance zone anytime soon. However, the fact that the advance was halted few pips below our 1.1315 (R1) resistance zone make me take a wait-and-see stance for a break above that level to support the case for further advances. Our short-term momentum studies detect positive momentum and support the case for a move higher. In the bigger picture, given the fall on the 26th of August below 1.1500 and the advance on Thursday above the 200-day moving average, I would maintain my neutral stance. The move below that psychological hurdle confirmed that the surge on the 24th of the month was a false break-out. Therefore, I would like to see another move above 1.1500 before assuming that the overall outlook is back to positive. On the downside, a break below the 1.0800 hurdle is the move that could shift the picture to negative.

  • Support: 1.1245 (S1), 1.1200 (S2), 1.1130 (S3)

  • Resistance: 1.1315 (R1), 1.1360 (R2), 1.1390 (R3)

GBP/USD broke above 1.5410

GBPUSD

  • GBP/USD broke above the resistance-turned-into-support of 1.5410 (S1), after the Bank of England’s optimistic message that the recent financial markets turmoil and the Chinese slowdown does not fundamentally change their view of the economy. Following the break, there were two attempts to surge above the 1.5460 (R1) hurdle, but none of them found the necessary strength and the pair fell back below it. It is worth mentioning that the aforementioned level coincides with the 80-day exponential moving average that had been a reliable tracker of the price action since August 2013. A strong and clear break above the 1.5460 (R1) resistance zone is needed to trigger further upside extensions.

  • As for the bigger picture, the collapse on the 26th of August brought the rate below the 80-day exponential moving average, which is a bearish move in my view. Therefore, we need a strong break above the 1.5460 (R1) area to shift the broader trend somewhat to positive.

  • Support: 1.5410 (S1), 1.5330 (S2), 1.5250 (S3)

  • Resistance: 1.1.5460 (R1), 1.5500 (R2), 1.5560 (R3)

USD/JPY in a consolidative mode

USDJPY

  • USD/JPY remained locked in a consolidation mode, within a range between the 121.35 (R1) resistance zone and the 119.90 (S1) support territory. I believe that a break in either direction is likely to determine the forthcoming near-term bias. Our momentum studies detect positive upside momentum and support the case for another attempt to move higher and test the 121.35 (R1) hurdle. The RSI found support at its uptrend line and points up, while the MACD appears to have bottomed above its zero line and is willing to cross above its trigger line.

  • As for the broader trend, the plunge on the 24th of August signaled the completion of a possible double-top formation. Even though this keeps the overall picture somewhat to the downside, a break above the 121.80 (R2) resistance is the level that could shift the bias to neutral.

  • Support: 119.80 (S1), 118.75 (S2), 118.25 (S3)

  • Resistance: 121.35 (R1), 121.80 (R2), 123.00 (R3)

GBP/JPY

  • GBP/JPY surged following the Bank of England rate decision on Thursday but the move was halted slightly below our 187.60 (R1) resistance zone. The pair subsequently retreated, to test the 186.00 (S1) obstacle as a support this time. Given that the MPC members showed little concern over the recent international events and kept their upbeat view of the UK’s economy, I would expected GBP/JPY to advance again, at least for another test of the 187.60 (R1) area. A break above that level could trigger further upside extensions, perhaps towards our next resistance of 188.50 (R2). This would print a higher high on the 4-hour chart, and shift the short-term picture slightly to the upside, in my view. Our short-term momentum studies support the notion for further advances. The RSI found support at its 50 level and bounced up, while the MACD, already in its positive territory, seems willing to cross above its trigger line. As for the broader trend, as long as the pair is trading above the black uptrend line taken from the low of 10th of October 2013, I would keep my view to the upside. Given the negative divergence between our daily momentum studies and the price action however, another leg down for a test of that uptrend line cannot be ruled out.

  • Support: 186.00 (S1), 184.60 (S2), 183.90 (S3)

  • Resistance: 187.60 (R1), 188.50 (R2), 189.80 (R3)

DAX futures hit support at 10135

Dax

  • DAX futures plunged after failing to break above the 10525 (R2) resistance area, to find support around the 10135 (S1) zone. The index currently look ready to challenge the 10135 (S1) barrier again but given the positive sentiment overnight with the US and Asian shares modestly higher, a rebound to test the 10400 (R1) resistance zone again cannot be ruled out. I would expect a break above 10400 (R1) to open the way for the next resistance at 10525 (R2). The RSI has found support near its uptrend line and now appears ready to move above its 50 line, while the MACD, is positive and could cross above its trigger line anytime soon. On the daily chart, the break below 10670 (R3) on the 20th of August has shifted the medium-term outlook to the downside, in my view. Therefore I would treat any future near-term advances that stay limited below that zone as a corrective phase.

  • Support: 10135 (S1), 9965 (S2), 9780 (S3)

  • Resistance: 10400 (R1) 10525 (R2), 10670 (R3)


BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS

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