For those who thought last week would mark the end of the selling before the Santa rally, Monday’s session was rude awakening as literally everything that wasn’t nailed down was sold.
Nowhere was the selling more apparent than in emerging market FX and most notably the Russian ruble; USD/RUB gained over 9% in the day.
The moves in the ruble are those of a currency in crisis so it was not surprising to see the central bank issue a surprise rate-hike in the late hours on Monday. What was surprising was that the Bank of Russia hiked the main interest rate in Russia by 65 basis points from 10.5 to 17% in a major effort to stem the tide of FX outflows.
Calling a top in USD/RUB was tantamount to calling a bottom in Oil prices but after Russia’s central bank came out all guns blazing there is a chance of a bottom in the ruble without a bottom in oil prices. The ruble rallied by 7% in early morning trading on Tuesday, erasing a good chunk of Monday’s losses.
The oil price shock is spreading volatility. Although many of them are net oil-importers, emerging markets have been some of the hardest hit. Emerging FX rates including the Turkish lira and Indonesia’s rupah dived because of the corresponding strength in the US Dollar that has come alongside falling oil prices.
The British pound was not immune to the shock and saw steep selling towards recent lows. Whether sterling can avoid a resumption of its downtrend will largely be dependent on CPI data which is expected to show moderation to 1.2% and a speech from Bank of England governor Carney on Tuesday.
The euro came out relatively unscathed from yesterday’s bloodbath paving the way for a second month of improvements in the German ZEW demonstrating improved investor confidence. German investor confidence may not last too long though given the heavy selling seen in the Xetra DAX in the last week.
European markets look to open higher on Tuesday as selling pressure relinquished when China’s preliminary manufacturing PMI dipped into contraction signalling the need for more government stimulus ahead of Europe’s own PMI reports.
EURUSD – After breaking above declining trendline connecting the oct 15 and Oct 29 peaks, the euro traded in a smallish range below Thursday’s peak. Daily RSI needs to overcome the 50 level to suggest the up-move can continue.
GBPUSD – The pound failed at a declining trendline connecting the Sept 19 and Oct 28 peaks and fell back to the bottom of the prior range at 1.56. A break below 1.5590 could trigger further downside to 1.55.
EURGBP – The euro-sterling cross followed through on its open above its 21 day moving average and went on to challenge the Dec 1 peak at 0.7975. A break higher could trigger a move towards 0.8035.
USDJPY – The dollar-yen has failed to surpass 119 on several occasions intraday since Thursday. The pair now looks biased towards another move lower below 117.35 towards 115.50.
Equity market calls
FTSE100 is expected to open 15 points higher at 6,197
DAX is expected to open 27 points higher at 9,361
CAC 40 is expected to open 13 points higher at 4,018
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