01 December 2017 at 15:19 GMT
Looks can deceive: Month-end factors may have contributed to yesterday's euro rally.
TF montage: Shutterstock
By John J Hardy
Key developments in FX today:
- Thursday's strong euro rally may have been built on sand, as much of the action is coming unwound today and bizarre jumps in European rates markets and end-of-month factors may have driven a misleading move yesterday. Watch end-of-day levels today in EURUSD, EURGBP and EURCHF, for example, for an indication, as well as follow-up moves next week.
- Elsewhere, GBP consolidated versus the US dollar but remains relatively bid versus the euro and CAD pulled sharply higher on strong employment data.
- NOK took back much of the lost territory against the euro as well, and the bar is much lower now for the bears to find encouragement early next week if the euro more broadly is struggling and the price action pushes back below 9.80.
The sharp rally in EURUSD came off key levels yesterday and we took it at face value and the bullish outlook is intact on a reasonably strong close today and maintenance of the price above 1.1850 early next week, but if the 1.1800 area gives way, it could set into motion a new capitulation, perhaps driven by rather heavy positioning, back toward 1.1500 or lower, so the next couple of sessions are key to verify or deny the quality of this most recent attempt higher above 1.1900.
EURGBP – weekly
Possibly the most interesting GBP pair next week could be EURGBP, which has broken its local consolidation line and toyed with the 200-day moving average, though hasn't yet taken back the 0.8750 range low. On a weekly candlestick chart, we can see how critical that level looks heading into next weeks action for potential toward 0.8500 and lower (provided nothing Brexit related stands in the way).
A chunky move in CAD to the upside today on a blowout payrolls release and the unemployment rate dropping all the way to 5.9% from 6.3% in one fell swoop. This jolted Canadian short rates higher and saw USDCAD well back down into the range. Despite the shock, the pair will need to work all the way down through that 1.2665-1.2600 area to suggest the focus is switching back lower.
AUDCAD - weekly
Possibly more interesting for CAD bulls here is AUDCAD, which ripped back lower on the strong Canadian data release. This encourages the longer-term view toward mean reversion lower (mean reversion of last 15-20 years of price history – midline below 0.9000) into 0.9200 or even lower.
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank