GBP Volatility Leads The Day, USD Struggling At Top: SW Report

2017-10-12 20:00:00

Tyler Yell, CMT, Currency Strategist

Key Highlights:

GBP volatility whips around from EU Brexit negotiator comments
JPY finds strength despite Abe showing a commanding lead for Oct. 22 election in Japan
AUD rebounds alongside NZD as metals benefit from falling USD after FOMC minutes
IGCS Highlight: USD/CAD 62% increase in short positions w/w warns of upside continuation

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Strong/ Weak Index October 12, 2017

Highlights:

-The British Pound avoided a bearish outside day in impressive fashion. Ahead of the US session, news that the EU’s chief Brexit negotiator Michel Barnier went from saying talks were at a “deadlock,” to potentially offering the UK a 2-year ‘grace period’ where the EU may offer Britain a two-year transitional Brexit deal. The market saw a 100-pip+ swing and the price is now pushing in on the opening range highs in the 1.33/34 region. Markets are as politically driven as ever, and this swing helps to show that to be the case.

-A head-scratcher of a move in FX markets has been the strengthening of the Japanese Yen against the US Dollar. USD/JPY looks set to test the lowest levels of the month as USD weakness begins to emerge after rebounding sharply from September 8 to October 6. The environment for a weakening appears ripe as the snap election for October 22 in Japan where PM Abe is working to increase his party’s majority in the lower-house is looking increasingly assured. Such a move would likely bring out JPY sellers, and the market tends to price-in and act early on potential political developments like the almost-assured victory of Abe. Either way, JPY strength vs. the US Dollar will face a further test near the 200-MA on a 4hr chart near 111.20, which also aligns with prior price action support. One highly correlated market that has helped explain the lack of upside in USD/JPY is UST 10Yr note yields, which have failed to rise as markets doubt how much further the Fed will go in tightening the reference rate beyond the December hike.

-The Australian Dollar is seeing a bit of a relief rally on the weakening USD and is bringing NZD higher with it. The was strong AU credit data overnight, but the clearer driver seems to be the positive correlation of some base metals that continue to rise and precious metal strength as seen in the price of bullion for immediate delivery, which is closing in on $1,300.

-In the aftermath of the FOMC minutes where Fed officials admitted concern about persisting low inflation readings and ahead of the monthly CPI print, markets are on watch. What they appear to be watching is potentially stretched bullish positioning on the USD. Recent Fed speakers have spoken to the data dependency that may put a lid on the probability of a December hike reaching its high-water market near 80%. A pulling back of that probability, which will be driven by the three CPI prints before the December meeting would be expected to pull the USD back as well.

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IGCS Highlight: USD/CAD 62% increase in short positions w/w warns of upside continuation