Forex - Risk Aversion Leads Equities Lower, USD Higher

Forex News and Events:

A new week begins and risk aversion is the dominant driver of FX markets. The broad USD move lower began showing signs of fatigue last week, and after some disappointing US data (durable goods orders, existing/new home sales figures); the markets have reined back their longs in commodities and risky assets. Gold is having to re-familiarize itself with three-digit prices (trading at $988 vs. highs last week around $1020), and crude oil is down over 8% from this time last week after US inventory numbers last week revealed a glut of crude and gasoline supplies. The euphoria of global recovery always felt slightly overdone and now it seems markets have snapped back to reality somewhat. P/E ratios for the S&P show equities are still expensive; trading around 19 times profit, much higher than historical averages (16.3 over the last hundred years); despite our belief the longer term trend is for appetite to return and the USD to continue lower, for now we respect this correction in the market and will look to the broader indicators of market risk sentiment (Shanghai Composite, Baltic Dry Index) to direct our FX trades. The G20 did not precipitate any firm policy initiatives; discussion of banker pay featured on the agenda, but this topic always feels like a populist distraction from the more important issues. The communiqué reiterated commitment to continue stimulus measures which should appease any fears of premature exit strategies; it also seems the G20 are leaving themselves flexible to allow for differential withdrawal of stimulus across countries in the coming months. There’s very little on the data calendar today, but if the previous week has taught us anything it’s to watch out for policy-maker rhetoric. After Mervyn King’s devastating effect on GBP last week and ensuing criticism from traders, the Bank of England responded over the weekend that they were not trying to deliberately talk down the currency, though this provided little boost to GBP after the fact. Japan’s new Finance Minister Fujii is also learning the pitfalls of easily-misconstrued comments after being quoted overnight that “it would be a mistake to use FX policy to defend industry” and “recent USD/JPY moves not abnormal”. USDJPY dropped on the news, taking out stops through 89.00 before Fujii returned to say that his comments were misinterpreted and were not intended to reflect government support for a strong JPY. USDJPY pared back gains to 89.60 levels, and one can’t help but think the new Fin. Min’s credibility may also have lost some ground in the process.

Today's Key Issues (time in GMT):

00:00 EUR Germany: Preliminary CPI, % m/m (y/y) Sep: -0.2 (-0.1) exp. 0.2 (0.0) prior

The Risk Today:

EurUsd EURUSD is likely to continue trading in a choppy fashion as we remain between 1.4515 and 1.4730. 14-day RSI currently stands at a benign 57 which does not suggest the pair is oversold after last week's correction lower; nevertheless, despite a resurgence of risk aversion that should focus attention on the downside, expect considerable support at the 1.4515 level.

GbpUsd GBPUSD remains on a downtrend after last week's head and shoulders top, but as 14-day RSI hovers around 30 and most GBP crosses are decidedly signalling oversold territory, we believe a test of the neckline around 1.5950 could well materialize ahead of GDP data tomorrow. While GBPUSD remains below 1.6150 resistance, the near-term support remains just below 1.5800 and further at 1.5690.

UsdJpy USDJPY emphatically pierced through the psychologically important 90.00 handle, pointing to a resumption of a longer term downtrend in the pair. 90.50 should contain any rallies as focus turns to the 87.10 lows.

UsdChf The USDCHF correction has made a push towards intraday resistance at 1.0390, however the bigger picture remains bearish and we expect to see a resumption of selling pressure towards first support at 1.0250 and then 1.0190.

Resistance and Support: