Morning Forex Review – 31 January
The cautious tone on markets ebbed moderately through the NA session. However, stocks and risk-sensitive asset prices are still lower and USD remains an outperformer. EUR and AUD remain FX underperformers. JPY outperformed, leaving USD (and everything else) behind. After nearing the 200-dma on January 25th, USD/JPY has staged a hasty retreat.
CAD and SEK, lagged USD and JPY, but outperformed the rest of the G-10. In other markets, copper has dropped back below its 200-dma, as the risk rally has lost some momentum as we come to the end of January.
EUR: We had been watching $1.3146 ever since EUR/USD moved above $1.3000. The move above that threshold proved short-lived. As EU leaders while away precious time without a grand plan (or ANY plan for that matter!) to contain the crisis, and leaders elsewhere fret, there is again intense focus on the numerous downside risks to global growth and market sentiment. The hoped for breakthrough on the Greek PSI talks has yet to materialize.
Meanwhile, markets continue to await word from the EU Summit on how to merge vigorous austerity with vigorous growth. British PM Cameron noted that “this is the European Council where we need to get really serious about the growth agenda in Europe.” Ditto the UK, where short of a stunning growth surge, the current recovery will surpass that of 1979-1983 as the most sluggish in terms of returning to the pre-recession GDP threshold.
CHF: As EUR underperformed, EUR/CHF declined below support at 1.2067. It has tested 1.2058, the September 20th low. The low since the SNB imposed 1.20 floor was on September 19th at 1.2012. Should that threshold come into focus, the market will keep a wary eye on the SNB. Meantime, EUR/CHF vols remain moribund and the 1-month risk reversal has hit -0.86 the largest premia for puts over calls since mid-September. Between late September and mid-January EUR/CHF 1m calls had carried a premium to puts.
USD: Data was a mixed bag. December incomes rose 0.5% (cons: 0.4%), but spending was flat (cons: 0.1%). The savings rate rose to 4.0% from 3.5%. The not widely-tracked Dallas Fed MFG index rose to 15.3 in Jan (cons: 1.5) from -0.3 (was -3.0). Even so, Friday’s GDP report on the weak upswing in domestic purchases dominates. And yet, the US economic backdrop looks better than many. Of note, the World Bank recently showed that “nearly 45% of the world’s $10 trillion in merchandise trade begins or ends up in Europe.” The lack of progress on a European growth agenda matters. The DXY index rallied above 79, but the move was rather muted with EU developments and Friday’s NFP report looming.
AUD: Though an underperformer, AUD/USD remains well above the 200-dma at 1.0408, though back below 1.06. AUD remains vulnerable to the general direction of equity markets and overall sentiment, and thus vulnerable to spill over from developments on the EU crisis. We would like to highlight a bearish divergence from overbought levels that might prompt a pullback to descending trend line support at 1.0436. Meantime, AUD/JPY has dipped back below 81.49, the 200-dma.