16 August 2016 at 11:37 GMT
Midday in Europe finds the regions bourses trading modestly higher on the back of a firm Asian session. But the action in FX far from relaxed: USD has melted below the psychologically important 100 level and is broadly weaker against a plethora of currencies, including the commodity ones, in the wake of fresh dovish mutterings by Fed officials.
In data releases, UK year-on-year consumer price growth picked up 0.6% against expectations of 0.5%. With growth expected to suffer in the UK post Brexit result, the Bank of England is expected to ignore these inflation numbers.
German ZEW posted a better reading than expected and focus of the German economy seems to be shifting from the effects of the Brexit result
- Canada Jun. Manufacturing Sales (1230)
- US July Housing Starts and Building Permits (1230)
- US July CPI (1230) Month-on-Month expected at 0.0%, Prior 0.2%
- US July Real Average Weekly Earnings (1230)
- US July Industrial Production and Capacity Utilization (1315) Expected at 0.3%, Prior 0.6%
- US Fed’s Lockhart to Speak (1630)
- New Zealand Q2 Unemployment Rate/Employment Change (2245)
A dovish Fed official statement is putting pressure on USD and EURUSD
broke the 100-day moving average that we have been looking at this morning at around 1.1230. This was important tech resistance, and as suspected opened the way higher, where the next tech resistance is a concentration of levels around 1.1310 area (1.1300 psychological level). EURUSD failed continuously since June 10 to close above this level until the Brexit referendum, where it was briefly higher before crashing on the result.
1.1230 is first tech support. GBPUSD higher CPI for year-on-year should be something to note in terms of a weaker GBP in the long run. But today it is all about USD weaker and a possible overextended short in GBP where we saw a sharp move higher following the first hour on the European exchanges.
A weaker US CPI today risks regaining the 1.30, and we watch closely 1.3100, where selling rallies has been working so far with this tech resistance. If this is taken out then more sharp moves are possible. USDJPY looked weak yesterday and we looked more on the 100 level as the target. Risk sentiment needs to hold or else we risk more move lower.
Using gold as a reference a break of 1355 in XAUUSD could be trigger for a weaker USDJPY, upside in USDJPY remains looking weak. Commodity currencies are stronger against the USD, and our AUDUSD view still looks handsome and watching any break of 0.7750 for new trigger higher. But watch out if risk-off walks in on the markets.
FX Options volatilities
Vols have traded higher across the board this morning with a bigger USD selloff in spot market driving this. Especially USDJPY is very nervous and 1m ATM is up 1.25 vol from this morning, with spot here at 100.00. 1-month EURUSD up 0.4 vol. EMG vols are on the opposite hand falling in today’s market, which is also the normal picture when EMG spot is moving higher vs the USD.
ZEW failed to move the market significantly, despite a more positive reading than was expected. Rates market looking more in the direction of the reverse gilt auction from the UK, where the Bank of England will be looking to recover from last weeks disappointment and buy back government bonds from the market.
As it stands, bunds are marginally higher for the session but yields remain relatively stronger than last week. Corporate bonds continue to find good support and XOVER credit spread is unmoved so far today by the negative risk sentiment in other asset classes.
A weaker close to APAC equities has set the tone for this morning’s pan-European session.
European indices trade lower led by industrial and financial stocks.
Schindler Holding fell 4% after the Swiss lift manufacturer lowered its full year growth estimate as trading conditions prove difficult in the Chinese construction market and the continuing recession in Brazil.
German fertilizer company K & S fell to 3-yr lows before recovering after UBS cut its price target and reiterated its “sell” rating on the stock citing continued pressure in the potash market.
Commodity and mining stocks have benefitted from a 4-day rally in crude oil prices and an uplift in precious metals.
Antofagasta rose 8% after announcing a rise in 1H profits with BHP Billiton up 3% on FY16 results and growth potential for 2017.
US equity index futures are slightly softer this morning after all 3 major US indices closed at record highs last night. Notable US earnings are released today by Advance Auto Parts, Dicks Sporting Goods and Home Depot.
Mid-session Europe is part of TradingFloor's stable of commentary running through from the US close, through Asia to the European session. Click below to keep abreast of all the developments as they happen.
A busy day in Tokyo and an even busier day in FX markets as USDJPY melts below 100.
— Edited by Clare MacCarthy