EUR Soars As ‘Funding Trade' Reverses Sharply

Market Commentary

The absence of the anticipated RRR cut was not well received by Chinese investors. SHCOMP fell a whopping -8.5% on Monday. Asia ended in a sea of red. US trading saw DJI, S&P and NASDAQ fall another >3% by close. European bourses were hit harder with the DAX down -4.7% and the Euro Stoxx -5.4% by close. The FX space had a shake-up with the DXY index last seen around 93.50, dragged by the USDJPY which pulled back towards the 116 figure before rebounding to around 118.90. The major market theme of monetary policy divergence could be dialled back as markets pared Fed lift-off expectations. Market implied probability of a September rate hike has now fallen to 34%, from 48% before the minutes release last week.

EUR made another push higher; towards 1.1714 high (levels not seen since Jan 2015). Intensification of risk aversion and slowing divergence between Fed and ECB continue to be the key drivers. EUR remains a “funding currency” play – risk off sees EUR higher while risk on sees EUR lower. Worries of Fed possibly delaying rate hike (implies slowing monetary policy divergence between US and EU) could help support the EUR further in the short-term. This week sees a handful of ECB speaks; EUR strength may not be what the ECB officials are after. Caution is warranted with the potential ECB jawboning should there be excessive price action to the upside. EUR was last at 1.1570 levels this morning.

GBP was flat, though overall supported as the UK saw higher than expected inflation data, slightly below par retail sales, and better than expected public finance data last week. The focus this week is likely to be on the publication of the second estimate of Q2 GDP on Friday, market expects it will be left intact at its preliminary estimate of 0.7% q/q, 2.6% y/y. Nationwide’s measure of house prices and GfK’s consumer confidence will be released on Thursday and Friday respectively. Before that, the CBI will publish its August distributive trades survey on Wednesday. BoE Governor Carney speaks at the Kansas Fed symposium at Jackson Hole on the hot topic of Global Inflation Dynamics.

The USDJPY plunged briefly towards the 116-figure overnight to a level not seen since Jan this year on safe-haven plays on global risk-off. Since then, pair has rebounded, tracking dollar weakness. Further upticks are likely to be capped given that momentum indicators continue to be bearish bias, though oscillators are climbing out from oversold levels. Further rebounds should meet resistance around 119.88. The seventh-month high in the JPY is undesirable for the Japanese economy. It damages Japan’s already-weak exports and may prompt comments from Japanese officials with respect to further easing measures.

Technical Commentary

EURUSD Short Term (1-3 Days): Bullish – Medium Term (1-3 Weeks) Bearish

• While 1.15 supports expect test of weekly 1.18 corrective symmetry objective, only below 1.1350 concerns medium term bullish bias

• Daily Order Flow bullish; OBV sideways, Linear Regression and Psychology bullish but stalling

• Monitoring intraday price and Order Flow indicators on a test of 1.18 or 1.12

GBPUSD: Short Term (1-3 Days): Bullish – Medium Term (1-3 Weeks) Bearish

• A close above 1.57 targets 2015 highs next at 1.59. Intraday support is eyed at 1.56 Only a close below 1.5550 would concern the near term bullish advance

• Daily Order Flow bullish; OBV sideways to down, Linear Regression and Psychology bullish

• Monitoring intraday price action and Order Flow indicators on a test of 1.56 or 1.59

USDJPY: Short Term (1-3 Days): Bearish – Medium Term (1-3 Weeks) Bullish

• Intraday resistance now sighted towards 120.50, only a close back above 122.50 eases bearish pressure.

• Daily Order Flow bearish; OBV sideways to down, Linear Regression and Psychology bearish

• Monitoring intraday price action and Order Flow indicators on a test of 115 or 120.50

EURJPY: Short Term (1-3 Days): Bullish – Medium Term (1-3 Weeks) Bearish

• Ascending trendline support survives on closing basis bulls target symmetry objective at 141.70, a failure at 136 opens a retest of range support at 134/33.

• Daily Order Flow bullish; OBV sideways to up, Linear Regression and Psychology bullish but lack momentum

• Monitoring intraday price action and Order Flow indicators at 141 and 136