NY Session: EUR higher ahead of EU Summit, JPY falls
Updated Oct 17, 2012 4:00:00 PM Written by Eric Viloria, CMT
The
dollar traded on the back foot today as sentiment was boosted following
positive US housing data and after Moody’s affirmed Spain’s Baa3
government bond rating late yesterday. Commodity currencies (AUD, NZD,
CAD) outperformed on improving risk appetite while JPY was the only G10
currency weaker than the greenback as is usually the case in a ‘risk-on’
environment. Also, increased pressure from government officials on the
Bank of Japan to ease more is weighing on the yen.
EUR gains after Moody’s, ahead of EU Summit
The announcement by Moody’s removed the imminent threat of assigning junk status to Spain, however with a negative outlook, the risk is still high. The ratings agency indicated that the “combination of euro area and ECB support and the Spanish government’s own efforts should allow the government to maintain capital market access at reasonable rates”. This will be tested tomorrow as Spain holds a government bond auction which includes 10-year bonds. It was also indicated that Spain will likely apply for a precautionary credit line as opposed to a full bailout from the ESM which carries less conditionality and will allow the country to continue to access financial markets while tapping the ESM as required.
EUR/USD rallied above the 1.31 figure and is approaching September highs which may act as resistance. The 2-day EU Summit begins tomorrow and in our view, there is scope for disappointment as we expect no major developments. Furthermore, a look at EUR/USD price action following prior EU Summits shows that the currency pair declined over the five sessions that followed in 9 out of the last 12 summits. As such, we anticipate that the rally in EUR/USD may stall and correct lower in the coming week.
US housing data shows improvement
In the US, housing market data continued to show improvement with both September housing starts and building permits rising by more than expected to the highest levels since July 2008. Housing starts jumped by 15.0% m/m to 872K (cons. 770K) and building permits rose by 11.6% m/m to 894K (cons. 810K). The 45.1% annual increase in building permits is the largest since 1983.
BOE debates additional QE
The GBP is stronger against USD and JPY, but weaker against the rest of its major counterparts after this morning’s release of the Bank of England’s MPC minutes which showed a discussion of additional asset purchases or QE. The MPC voted 9-0 to keep QE at £375B and interest rate at 0.5% at its most recent meeting. Some members saw “considerable scope” for more QE, however others questioned its impact. UK labor data showed notable improvement with the ILO unemployment rate unexpectedly falling to 7.9% over 3-months from 8.1% while September jobless claims fell by -4.0K (cons. 0.0). GBP/USD is currently higher after breaking above its 21-day SMA and trading around 1.6150.
Data Watch: China GDP
China’s data dump tonight includes 3Q GDP which is expected to slow to 7.4% from the prior 7.6%. September industrial production and retail sales are also key releases out of China tonight as they will provide insight into the extent of China’s slowing economy. Japan will see its weekly securities investment figures while 3Q NAB business confidence and September RBA foreign exchange transactions are due out of Australia.
EUR gains after Moody’s, ahead of EU Summit
The announcement by Moody’s removed the imminent threat of assigning junk status to Spain, however with a negative outlook, the risk is still high. The ratings agency indicated that the “combination of euro area and ECB support and the Spanish government’s own efforts should allow the government to maintain capital market access at reasonable rates”. This will be tested tomorrow as Spain holds a government bond auction which includes 10-year bonds. It was also indicated that Spain will likely apply for a precautionary credit line as opposed to a full bailout from the ESM which carries less conditionality and will allow the country to continue to access financial markets while tapping the ESM as required.
EUR/USD rallied above the 1.31 figure and is approaching September highs which may act as resistance. The 2-day EU Summit begins tomorrow and in our view, there is scope for disappointment as we expect no major developments. Furthermore, a look at EUR/USD price action following prior EU Summits shows that the currency pair declined over the five sessions that followed in 9 out of the last 12 summits. As such, we anticipate that the rally in EUR/USD may stall and correct lower in the coming week.
US housing data shows improvement
In the US, housing market data continued to show improvement with both September housing starts and building permits rising by more than expected to the highest levels since July 2008. Housing starts jumped by 15.0% m/m to 872K (cons. 770K) and building permits rose by 11.6% m/m to 894K (cons. 810K). The 45.1% annual increase in building permits is the largest since 1983.
BOE debates additional QE
The GBP is stronger against USD and JPY, but weaker against the rest of its major counterparts after this morning’s release of the Bank of England’s MPC minutes which showed a discussion of additional asset purchases or QE. The MPC voted 9-0 to keep QE at £375B and interest rate at 0.5% at its most recent meeting. Some members saw “considerable scope” for more QE, however others questioned its impact. UK labor data showed notable improvement with the ILO unemployment rate unexpectedly falling to 7.9% over 3-months from 8.1% while September jobless claims fell by -4.0K (cons. 0.0). GBP/USD is currently higher after breaking above its 21-day SMA and trading around 1.6150.
Data Watch: China GDP
China’s data dump tonight includes 3Q GDP which is expected to slow to 7.4% from the prior 7.6%. September industrial production and retail sales are also key releases out of China tonight as they will provide insight into the extent of China’s slowing economy. Japan will see its weekly securities investment figures while 3Q NAB business confidence and September RBA foreign exchange transactions are due out of Australia.
Source: Bloomberg, FOREX.com
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