Forex Market Update: Friday Saw The Largest One-Day USD Rally In Recent Memory - What Now? USD Volatility The Only Safe Bet

Daily Forex Fundamentals | Written by Saxo Bank | Aug 11 08 06:21 GMT |

Low yielding JPY and CHF still too weak considering market environment. Japan and EuroZone likely to show negative Q2 GDP reports this week MAJOR HEADLINES - PREVIOUS SESSION New Zealand Jul. QV House Prices out at % vs. -2.2% expected THEMES TO WATCH - UPCOMING SESSION Key event risks today (all times GMT): Germany Jul. Wholesale Price Index (0600) Japan Jul. Machine Tool Orders (0600) Norway Jul. CPI (0800) UK Jul. PPI Input/Output (0830) UK Jun. Visible Trade Balance (0830) Canada Jul. Housing Starts (1215) UK Jul. BRC Retail Sales Monitor (2301) UK Jul. RICS House Price Balance (2301) Japan Jul. Domestic CGPI (2350) Australia Jul. NAB Business Confidence (0130) Japan Jul. Consumer Confidence (0500) Market Comments It's tough to attach a label to a trading like we say on Friday, when the USD simply refused to quit and the dollar index saw its largest one-day rally - or move in either direction - in six years. The head-spinning momentum carried EURUSD all the way down through the huge 1.5000 level and saw significant new gains across the board outside of USDJPY, where action was more muted. Of course, the first question that comes to mind when we look at this move is - why? Why so much so fast? The only answer we can come up with is that the move may have been far more about the technical levels falling and market positioning rather than any compelling new developments. With 20-20 hindsight, it's perhaps easy to say that when ranges have persisted for a very long time as we saw from March to the beginning August, the breakout from the range becomes that much more significant as complacent range traders are forced out of their positions and formerly frustrated breakout traders all pile in at the same time. With the USD rally having quickly moved into parabolic mode, the sustainability of the move must be called into doubt in the shortest term and we could see sharp consolidation once the momentum fades. Still, this has been a decisive move and the USD bears have a lot of work to do if they expect the old weak USD trend to resume. A quick run-down of the ECB meeting from Thursday showed Trichet in a performance that was mostly in line with expectations, as he repeated strong warnings on inflation - especially the dangers of indexation of wage deals with inflation rates and his noting that the 'pipeline' of inflation didn't look promising for the immediate future. On the dovish side, he noted that Q2 and Q3 growth looked particularly weak and repeated the message that the ECB has no bias. The German and EuroZone GDP releases on Thursday of this week are likely to show negative growth readings for Q2, in fact. Friday saw a sharp drop in yields at the front-end of the EuroZone yield curve as the market begins to price in more easing from the ECB in the coming 12 months. 2-year yields swooned about 15 bps - a sharp move, but certainly not enough by itself to explain the scale of the EURUSD sell-off. We suspect that the USD strength has at least as much to do with the new Chinese anti-speculation rules and realization that China is now very interested in slowing the Yuan appreciation as its export markets are weakening drastically. Elsewhere, the high-yielding AUD remained on the weak side against the USD as the RBA statement overnight suggested that rate cuts will very soon be on the table due to a 'significant moderation' in domestic demand. USDCAD blasted higher on Friday in line with the other moves in USD pairs as the Canadian employment report showed a drastic drop in employment rolls (even if the actual unemployment rate confusingly dropped). Tomorrow we see both the US and Canadian Trade Balance numbers. The trend in terms of trade for Canada is rather unimpressive considering the rising price in oil and Canada's rising output from the oil sands. The strong loonie has damaged Canada's economy outside of resource extraction, as Canada has been increasingly at risk of becoming a petro-state. The latest drop in oil prices and CAD weakness will be welcomed by Canada and USDCAD may be on its way to 1.1000. One of the more confusing developments from a macro perspective is the resilience/rally in equity markets in this market environment as the world economy seems to be performing a more and more synchronized nosedive into growth oblivion. Perhaps the focus on the equity side has been more on energy prices and the salutary potential of easing cost pressures. From where we sit, any optimism at this bend in the road would seem poorly placed, and we would expect JPY and CHF to increasingly benefit if equities head south once again. Considering the geopolitical risks rumbling in the background (whether in the Middle East or in the suddenly hot Caucus conflict and its potential to disrupt oil shipments) on top of the generally woeful economic outlook, the risk aversion trade still has plenty of potential for further volatility. JPY calls are expensive, but EURCHF options are still rather cheap. Analysis Disclosure & Disclaimer SaxBank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information herein contained. The contents of this publication should not be construed as an express or implied promise, guarantee or implication by SaxBank that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. 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