Sentiment Improves But Yen Still Well Bid Against the Buck

FUNDYS

September is finally upon us and it will certainly be interesting to see if there are any changes in the overall construct of the markets, with many traders now filtering back to their desks following their summer holidays. Price action over the summer months was anything but dull, so we would be surprised to see any significant pickup in volatility. For now, the general theme as we enter the Fall months has been one of risk aversion and demand for lower yielding alternatives to the USD, with the Yen and Swiss Franc finding the majority of the bids. However, the rapid and unrelenting appreciation in both the Yen and Swissie looks like it could start to take its toll, and we would not expect to see these currencies extend much further before a major capitulation. Both currencies are trading at or near multi-year highs, and the risk from here are for some corrective easing which might ultimately be catalyzed by official action on behalf of the respective central banks.

Relative Performance Versus USD Wednesday (As of 11:00GMT)

1. AUSSIE+1.59%
2. EURO+0.93%
3. KIWI +0.93%
4. CAD+0.56%
5. STERLING+0.23%
6. YEN+0.18%
7. SWISSIE+0.11%

There has however been a notable divergence in the Swissie and Yen today, with the Franc selling off sharply against the Euro, and the Yen continuing to remain well bid against the buck. Lately, the two rates have been more closely tied together and it seems as though some weaker Swiss PMI data, improved risk appetite, and rumors that a major Swiss bank has been askingtraders to book profits on Eur/Chf shorts, have all been attributed to the Swissie divergence. We must admit that it is somewhat ironic to see things play out this way after many analysts had called for relative outperformance in the Franc over the Yen due to its more legitimate safe haven status and the likelihood that the Bank of Japan would soon intervene. Price action in the Yen is even more compelling given the impressive rebound in global equities on Wednesday, with the single currency still very much bid against the buck despite the improved sentiment.

Although we have seen some weakness in data releases on Wednesday, including; UK and Swiss PMIs and a softer German retail sales print, investors seem to be holding onto the positives from a very solid Australian GDP result, impressive China data and in line Eurozone PMI.Global equity prices have been rising throughout the day and US equity futures are pointing to an open some 1% higher. Elsewhere, German FinMin Schaeuble has been on the wires saying that he sees no interest rate rise in the Eurozone over the near future.

Looking ahead, US mortgage applications are due at 11:00GMT, followed by Challenger job cuts at 11:30GMT and ADP employment (15k expected) at 12:15GMT. Construction spending (-0.5% expected) and ISM manufacturing (52.7 expected) are then out at 14:00GMT. Later in the day, domestic vehicle sales (8.85M expected) are released at 21:00GMT. On the official circuit, Fed Duke speaks at the Washington Summit at 14:45GMT, while Fed Fisher speaks on the topic of the US economy at 17:40GMT. Attention then shifts back to the Washington Summit where Fed Evans speaks at 21:15GMT. Commodity markets are well bid, with both oil and gold tracking higher ahead of the North American open. Gold has rallied to a 2-month high back above $1252 thus far.

GRAPHIC REWIND

TECHS

EUR/USD: The latest bounce out from 1.2585 is classed as corrective and the market looks to be in the process of seeking out the next lower top below 1.2925 ahead of a fresh drop towards 1.2500 further down. Monday’s bearish price action helps to reaffirm outlook, and a fresh lower top below 1.2925 could now be in place by 1.2780. Look for confirmation on a break below 1.2585 over the coming sessions, while ultimately, only back above 1.2925 would negate and give reason for pause.

USD/JPY: While the market trades below the 20-Day SMAs on a close basis, the downtrend remains intact and deeper setbacks below 83.60 can not be ruled out. A close above the 20-Day SMA will be required at a minimum to offer some form of relief to downside pressures. The market has not closed above the 20-Day SMA since mid-June when the pair was trading over 90.00. A break below 83.60 will open a test of next key psychological barriers by 83.00.

GBP/USD: The market looks poised for a fresh drop following the latest bout of consolidation, with a lower top now confirmed by 1.5600, following the break back below 1.5370. Below 1.5370 now exposes a more meaningful drop to test next key medium-term support by the 100-Day SMA in the 1.5100 area. Ultimately, only back above 1.5700 would negate bearish bias and give reason for pause.

USD/CHF: Has managed to break to yet another multi-week low below 1.0300 to open a fresh downside extension just shy of the yearly lows from January by 1.0130 thus far. However, any additional declines below 1.0130 are seen limited, with medium-term studies looking stretched. As such, we would be more inclined to be looking for opportunities to buy at current levels. For now, a break and close back above 1.0320 will be required to relieve immediate downside pressures.

FLOWS

Talk that major Swiss bank encouraging Eur/Chf shorts to book profits. Middle Eastern names on the offer in Eur/Usd above 1.2800. US bank and corporate bids in Eur/Gbp. Asian central bank offers in Usd/Cad.

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Written by Joel Kruger, Technical Currency Strategist for DailyFX.com

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