Once again, the USD rout takes the EUR rate to new highs, this time making a clean break above 1.1700 to suggest the breakout is underlined and that 1.2000 is now just a matter of time.
As has been quoted by many, the speed of the move does make current levels susceptible to a correction, but this can be applied to the USD rates across the board, and with real money looking to invest in Europe again - as evidenced by the sharp gains in EUR/CHF - then perhaps USD bears are better 'insulated' here.
There is no doubting that a recovery is under way, but the ECB will be wary of the extent of the EUR correction in the time frame achieved, and any comments on what will be monetary policy 'adjustments' ahead, seem to be falling on deaf ears as the market can only see one way.
The German IFO survey this week underlined the strength of the EU's leading member state, while in Italy, strong industrial orders reported at the start of the week show this is a broader based recovery. Everything points to QE tapering later this year, but inflation is still a concern. Higher exchange rate levels can have an impact on CPI in countries who import heavily, so this should only have a moderate impact on the EU wide numbers ahead.
Positive risk sentiment is helping to tame some of the pressure here, despite overwhelming sentiment on the USD. With BoJ policy firmly anchored in accommodating mode, US yields in the mid curve are standing their ground, and any fade in expectations of another hike in Fed funds this year, will be merely shifted out on the horizon - for now at least.
The Nikkei closed in the black overnight, but only to a modest degree. This along with yet more record levels on Wall Street all prove supportive, but largely as pressure on the funding currencies rather than the USD per say.
Support in the 110.30-50 area has again held up well, but remains in the balance as to whether we test this, as this will be the first 'port of call' for USD bears if equities turn. Earnings healthy this week however, so this does not look imminent.
Above 112.00, the spot rate looks to be running into strong offers, so this is where we will need to push through in order to put a rubber stamp on the lower half of the 110.00's.
GBPUSD and EUR/GBP
Cable is enjoying the ride as it were, and has made a fresh push above 1.3100 to print highs just above 1.3150 - a new post sub 1.2000 recovery peak. This is very much a function of USD weakness, alongside the resistance seen in EUR/GBP ahead of 0.9000, but the ominous way the cross is holding up suggests there is another test on the figure level at some point. This may be deterred should we break under 0.8900.
From the UK perspective, it has been a good week for investment - vis–à–vis BMW (DE:BMWG) - as well as some of the groundwork put in by Trade Sec Fox in the US earlier this week. There is still a long road ahead with the Brexit talks to negotiate, and lest we forget, we have hit a sticking point with not only the exit payment but with EU citizens rights.
The mid week release of the UK Q2 GDP number saw growth ease off to 1.7% vs 2.0% in Q1. That we matched expectations was enough to keep GBP in line with the rest of the spot rates, but there were some cautionary notes on some of the numbers, but we have to expect this with what lies ahead.
Next levels to watch for in Cable lie up at 1.3185-90, and we expect thin markets have aided some of the moves seen of late, but EUR/GBP is also on the heavy side as the tight correlation with EUR/USD sticks.
Nb: Julu CBI Distributive Trades Survey later this morning.
AUDUSD and AUDNZD
The AUD spot rate has now cleared 0.8000, but into the 0.8000-0.8200 target zone, we will be coming into some profit taking, as fears of verbal intervention from the RBA may pick up with the exchange rate up here.
Naturally, correlation traders will point to the pick up in metals prices which have been bolstered by fresh confidence in China, and Copper in particular continues to press on the recent highs where we hit $2.90.
No fresh news out of Australia on housing, which had dampened some of the RBA mood at some stage, though since the release of the minutes - of the same meeting - there has been a more positive tone to allay fears that central bank bias is erring towards the next rate move being down.
AUD/NZD is back in its near term comfort zone in the mid 1.0600's. Little to differentiate between AUD and NZD as the near term focus is on external matters, ie the USD, so for now we see range bound trade developing.
NZDUSD
Wednesday’s rally in NZD/USD gained extra legs in the Asian session. This move came on the back of strong Chinese industrial profits data and Fonterra’s announcement. Fonterra, New Zealand’s dairy giant stated that it made upward revision to its farmgate milk prices
We saw an extension of the move above the 0.75 handle with the next resistance closer to the 0.7620 level
We finally broke below the 1.2460 base from last May, and this opens up a move - eventually - for 1.2200-1.2000 lower down. Much has been made of the over extended levels here, as in the EUR, but as we noted a few weeks back, it was only 2 months ago when the CFTC reported CAD shorts at record highs, so this turnaround has naturally impacted.
Oil prices have also bolstered the linked currencies, and this has served as yet another 'platform' for relentless gains seen here. Nevertheless, the RSI's are deep in oversold territory, and WTI through $49.0 will face a battle for $50.0 and we are mindful of this. * 10yr Canadian yields have duly breached the 2.00% mark, but are tailing off a little, and this keeps the spread with Treasuries at 30bps, as it has broadly has been in the last few days.
May GDP figures out tomorrow, which point to a strong number based on the data received recently for the month, so we may not be over with the downside yet. 1.2560 needs to give way on the upside to generate a near term pause.
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