By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
- Daily FX Market Roundup 07.27.15
- Here’s 5 Reasons for the 1% Jump in EURO
- USD: Will China Prevent the Fed from Raising Rates?
- AUD and NZD Vulnerable to Further Losses
- NZD: Shrugs Off Sharp 8.5% Slide in Chinese Stocks
- CAD: Oil Prices Drop to Fresh Lows
- Lackluster Rebound for Pound
Here’s 5 Reasons for the 1% Jump in EURO
The euro is on a roll today, rising more than 1% against the U.S. dollar. Monday was the strongest one-day move for the currency pair in nearly a month and extends a 6-day recovery with pauses but no retracement. EUR/USD is still in a long-term downtrend but sentiment is shifting as investors find new reasons to buy euros. Whether the rally lasts remains to be seen but knowing how challenging the Greek debt negotiations will be going forward, we view the rally with caution and believe that it should lose momentum on the 1.12 handle. Monday’s rally was strong because not one but five distinct catalysts drove it:
- Data Divergence – Stronger Eurozone, Weaker US Data
- Reversal of Funding Currency Flows on Risk Aversion/Equity Market Weakness
- Greek Progress? Talks Begin, Tsipras Says Debt Relief Openly Discussed
- Chinese Stock Meltdown Causes Shift in Expectations for Fed Tightening
- EUR/USD Yield Spread Moves in Favor of Gains
The rally in EUR/USD began in the Asian trading session and picked up steam around 2 am ET/6 GMT when Chinese stocks started to fall quickly and aggressively. It extended its gains after the German IFO report but retraced into the North American open and did not head toward new highs until after the U.S. durable goods report was released. The euro became an extremely attractive funding currency after the ECB introduced Quantitative Easing. Investors took advantage of the currency’s cheap borrowing costs to fund their purchases of higher-yielding assets ranging from currencies to equities. Investors are now reversing some of these trades on the back of the sell-off in global equities. The sharp slide in Chinese stocks also raised concerns about the Federal Reserve’s urgency to raise rates, hurting the dollar. While Greece is an ongoing problem, our colleague Boris Schlossberg pointed out, “the Greek situation clearly no longer poses an existential threat to the Eurozone.” According to ECB President Draghi, policymakers will do everything in their power to keep Greece in the Eurozone including debt relief, which Greek PM Tsipras says is being openly discussed at the latest talks. Finally, Monday’s dynamics have narrowed the yield spread in the direction of the euro, providing additional support to the currency pair. This is the first time in almost a month that EUR/USD closed above the 20-day SMA. However Monday’s rally stopped right at the convergence of the 50-day SMA, first standard deviation Bollinger Band® and trend-line resistance. Which means that EUR/USD will either reverse from current levels or break through this key resistance and march above 1.12.
USD: Will China Prevent the Fed from Raising Rates?
The U.S. dollar traded lower against all of the major currencies Monday after the meltdown in Chinese stocks raised concerns about whether the weakness in China will prevent the Federal Reserve from raising interest rates in September. The Shanghai Composite Index dropped 8.5%, the single largest one-day slide in 8 years. This move was triggered by last week’s decline in the Caixin (formerly HSBC) PMI manufacturing index. We know that Janet Yellen and most of her counterparts at the Fed prefer to raise rates earlier to have the flexibility of slowing down later. Even when Chinese stocks were falling in June they did not seem fazed according to the latest FOMC minutes. Whether or not the sell-off in China will prevent the Fed from raising rates hinges on whether you believe that China will stand by idly and let stocks fall. During the first leg of the decline, the Chinese government responded with quick and aggressive measures and overnight regulators vowed to continue buying shares to stabilize the equity market. If they are successful in doing so before the September FOMC meeting (which is almost 2 months away), then the Fed could move forward and raise rates. Of course the most immediate focus is this week’s gathering of Fed officials. While no change in monetary policy is expected, everyone is watching for the central bank’s guidance. We are still looking for an upbeat outlook from the Fed and a tone that suggests September tightening is still on the table. Consumer confidence is scheduled for release Tuesday along with the S&P CaseShiller house price index. Durable goods orders rose more than expected but the details of the report contained a bit of underlying weakness.
AUD and NZD Vulnerable to Further Losses
All three of the commodity currencies traded higher on Monday with the New Zealand dollar leading the gains. These moves are unusual and counterintuitive because Chinese stocks fell aggressively and commodity prices moved lower. No major economic reports were released from Canada, Australia or New Zealand, indicating that Monday’s move was driven by U.S. dollar weakness. NZD weakened the most over the past 3 months and having become extremely oversold, it benefitted the most from the sell-off in the greenback. However with this in mind, the rebound in all 3 currencies Monday is modest – even for NZD. The downtrend remains intact and further losses are likely given the move in commodities and the vulnerability of China’s economy. The rebound in AUD/USD should amount to nothing more than a dead-cat bounce for the pair with an eventual target of 70 cents.
Lackluster Rebound for Pound
Like all of the major currencies, the British pound was driven higher by U.S. dollar weakness. However compared to the euro or even the Japanese yen, the rally in the sterling was lackluster. The Confederation of British Industry released its total trends survey and according to the report, orders fell sharply in July. However even with this decline, prices increased and business optimism improved significantly. Factory orders hit a 2-year low and expectations for export orders in the next 3 months fell to its lowest level since October 2011. At first glance, this report is negative for sterling and reflects the strain that a strong currency (versus the euro) has had on the economy but both businesses and consumers are optimistic and this bodes well for future activity. According to a separate survey released from Nielsen, consumer sentiment exceeded the global average for the first time in 9 years. Second quarter GDP numbers are scheduled for release on Tuesday and growth is expected to have accelerated at a faster pace.