Originally published by AxiTrader
Welcome to the Forex Today column.
In it, I'll be trying to add a bit more colour and a lot more charts than I do in my broader overnight Market Wrap I do first thing every morning to set myself and my trading up for each day and each week.
RECAP
Risk went a little off last night with stocks dipping, gold and the yen finding a bid and bond rates falling.
A chunk of that move can likely be traced to the off the cuff comments by President Trump - at his stump rally yesterday - relating to the potential for a US government shutdown.
But my sense is it was the data, and Jens Weidmann's comments also played a big role in the moves overnight.
Trump's comments didn't really show up in the Mexico peso or Canadian dollar specifically. So there might be something else afoot in this risk averse move last night. I could be over egging it, but we'll see how things evolve.
HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS
So, as I noted above, my sense is that the Trump effect was less important than the ECB and data affect in forex markets overnight. Of course as the leader of the worlds biggest economy, with the US dollar the globes reserve currency, and US Treasuries (with bunds) the globes risk free assets, when Trump threatens a possible shutdown or default - even if he didn't know that's what he might be saying - then traders take notice.
Certainly, Fitch’s threat to the US AAA rating is proof of that. But traders are betting that cooler heads – even the President’s when he gets off the stump – will avoid a shutdown and will raise the debt ceiling.
Likewise, you can see the lack of Trump traction in the prices of the Mexican peso and the Canadian dollar. USD/MXN is up just 0.2% at 17.6850 while USD/CAD has lost 0.1% to 1.2546.
Of course that means both currencies have lagged the euro and yen in their overnight rally – the peso materially – but in the overnight moves you can see little worry about President Trump’s threat to NAFTA.
Elsewhere the euro is higher at 1.1811 after Bundesbank president Weidmann released his inner hawk. Weidmann said overnight that QE must end. “Based on our June forecast, there is no need in my view for taking further action for next year and in particular not for extending the buying programme” Weidmann said in an interview with the German press. It’s hard to disagree with him given the economic performance of the German and EU economies. Last nights composite PMI's for the EU and Germany are just another indication the need for emergency monetary measures has now passed.
Weidmann’s comment appears to be in contrast to Mario Draghi’s speech overnight where he talked about the uncertainty that the ECB, and central bankers more broadly, face. “We must be aware of the gaps that still remain in our knowledge” Draghi said in a speech. It wasn’t exactly a cry to leave QE intact. But it was a recognition of the reality of central banking. And its screams of caution. Just like Dallas Fed president Kaplan's comments that even as the balance sheet taper begins the Fed should wait for more indications about inflation.
So a hawkish Weidmann, a cautious Kaplan, solid EU PMI's, and weak US home sales (traders seemed to ignore positive US PMI) all contributed to the euro's half a percent gain. That sounds like a lot of words for what I'm about to write - EUR/USD is stuck in this range and unless 1.1910/20 or 1.1660/80 breaks it is going nowhere.
The yen found a bid last night and is back under 109 at 108.86 this morning. NZD/JPY got hammered overnight and that, along with the move in gold, bonds and stocks, suggests there is an element of risk aversion across global markets - or at least that it is rising.
The ability of USD/JPY to hold the bottom of this range is critical for the outlook for the yen and markets more broadly.
The pound is struggling having lost around 0.2% overnight to 1.2800. My outlook remains for a run toward 1.26. The corollary of this weakness of course is that EUR/GBP has lurched higher again gaining 0.61% to 0.9226. Only the pound’s flash crash has seen EUR/GBP higher since the GFC kicked off.
Elsewhere in the commodity bloc the Aussie has recovered 79 cents again after dipping back into the low 0.7880’s for a loss of 0.05% on the day. The battle continues for the Aussie.
The move in the New Zealand dollar, and NZD/JPY, might be a sign of risk aversion at least in forex. NZD/USD is down 0.70% at 0.7229 while NZD/JPY is at 78.73 down 1.27%!!!
Some will say that the NZ dollar loss is because of the election. That could be right. But gee whiz the failure from above 73 cents suggested a move back toward the 72 cent region (a bit like the reversal in USD/CAD suggested lower levels). So who knows.
But whatever the "real" reason for the kiwi's selloff it needs to hold 0.7190 on a close basis or the outlook darkens materially.
Have a great day's trading.