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  • Forex today was another roller coaster with a heavily risk-off holding pattern.
  • Wall Street stocks posting another sizeable loss (SPX: -1.9%, TSX: -1.2%) following the overnight rout.
  • Treasuries gained on a mix of sentiment and data after a miss on US CPI.

As analysts at TD Securities explained, “The risk-off tone did little to help the USD, which saw a broad-based decline against G10 FX. SEK (+1.8%) led the advance on stronger-than-expected CPI while the antipodes (NZD: +1.2%, AUD: +0.9%) also outperformed. CAD (+0.2%) underperformed on the crosses amid a sharp drop in crude oil prices (WTI: -3.3%).”

Currency action

EUR/USD was lapping the long dollar squeeze and added to Asian gains on the back of the CPI miss that came as a relief to investors, already troubled by the tighter interest rate conditions, albeit somewhat late to the party having been so complacent for maybe a bit too long. EUR/USD is sensitive to risk due to its close ties to the CHF – For two separate and distinct financial instruments, a 95% correlation is close to perfect as one can get. The euro is also highly responsive to the outlook for EMs given its close financial proximity with Turkey and there were some hopes of “the Pastor” being released which brings an element of relief to the market. However, the pair was mainly bid due to the market’s second thoughts with respect to the Fed’s interest rate hike path and the US Treasury yield slipped. There was a subsequent tightening in the DE-US spreads which outweighed the downside effect of a wider IT-DE spread. The key focus now will be on the US administration’s US dollar agenda and should the flows of media headlines start to stage China as a currency manipulator again after the US Treasury’s report on China next week, that could be the straw that breaks the dollar bull’s back. EUR/USD ended the NY session at 1.1593. Cable was coming out all shiny and new again, propped by continued positive headlines and rallied to 1.3249 – a strong level of resistance as it failed to break there on three sperate attempts.

GBP/USD ending North America at 1.3205 +0.1% from within the NY range of between 1.3250-1.3184. Eyes are on cable as investors wonder what currency could possibly replace the dollar’s safe-haven status in the near term and if a Brexit deal is done, appeasing the Brexiteers and the EU for a clean breakthrough of the deadlock negotiations, based on the inflationary environment and the pounds long staus as a solid coin, the sky is the limit. However, not to get too carried away with the Brexit headlines, and indeed, a Brexit deal remains in flux. the downside headlines today were associated with the DUP and PM May tensions. The concerns were that an EU withdrawal treaty that could threaten the survival of her government, with Democratic Unionist MPs  who prop up her minority government threatening to vote it down and that the European Commission said on Thursday there was “no breakthrough yet”. The cross, however, was holding its own on Thursday and was supported by the strength of the euro and weakness in the greenback.

EUR/GBP ended the day +0.45% at 0.8767 within Thursday’s range of between 0.8773-0.8737. However, the pound could find itself back in a bullish position depending on the outcome of next week’s EU summit next week where on 17 October EU27 leaders will meet in the European Council (Art.50) to discuss Brexit – The October European Council will focus on migration and internal security on the 18th that will be followed by the Euro Summit in an inclusive format. USD/JPY was a sight for sore eyes, but only if you are a bear.

The yen is picking up the safe haven bid again, presumably on repatriation flows into Japan as investors step back and see what developments come of the sudden rout in global equities. However, until now there has been good retracement support at today’s 111.96 low. the risk here for bears will be political and Finance Minister Aso has already tried to jawbone the yen lower. On a recovery in stock, the bulls could be back in the picture. As for the Aussie, eyes remain on the Yuan which made an impressive come back vs the greenback.

AUD/USD was carried all the way from 0.7060s to the 0.7130’s and US Treasury’s China report next week will be monitored from here.  Also, the White House hinted at possible Trump/Xi meeting at G20 next month, but was that just in an effort to prop up the markets with investors scrambling for something – anything at all?

Key notes form the US session: