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  • Forex today was another mixed day for the greenback that tested the 96  handle  but was soon enough sent packing back to the key 95.70 support zone and ascending trend line support.
  • The mood was soured in markets on China’s return and a slump in equity prices and when China catches a cold, so do European markets and to some extent, the US as well.

In Europe, both equities and Brent oil was down 1%, and US equities followed. The focus was soon turned to Italian spreads that increased sharply due to  Deputy PM Salvini’s anti-EU comments. they went onto to trade at their highest levels for 2018 so far and bumped through 3.60%. The US bond market was closed for the observance of  Columbus Day, although  futures traded, implying a pullback in yields from 3.25% to 3.21%. The Fed fund futures yields point to an 80% chance of a December hike. However, US equities were open and the Dow managed to eke out a positive close, up by about 40 points – The S&P and NASDAQ were down 0.1% and 0.7%.  

Currency action

As for some of the majors, the euro was holding firm despite the break down in the yen crosses lead by a sell-off in risk and USD/JPY. EUR/JPY nose dived but EUR/USD kept form in late London, rising from 1.1460,  (50% Fib of 2016-18 rally ),  to 1.1499 and closing around there. However, all ears are pinned to the ground for the Italian/EU clash where sentiment is growing that EU will play hardball with the Rome over their spending plans and    IT-DE & DE-US spreads are expected to hold near recent wides, a weight on the euro – as is a weaker Yuan with respect to EM-FX. Sterling was stubbornly strong at S1 and rose from there, 1.3039 to a high into the 1.3090s where the pair rested for the majority of the NY session. Brexit fears simmer away in the background as always.  We have the  support coming  in lower down at the daily cloud top 1.3013, while initial resistance beyond 1.3200 comes by the Oct 3/4 highs at 1.3130. As for the cross, EUR/GBP was  down -0.14% and ended the NY session around 0.8770 within Monday’s range of between 0.8808-0.8773. USD/JPY was the show of the day, dropping below 113 the figure. The yen has picked up its safe haven bid again and there is growing angst surrounding the Chinese / US standoff while US yields are seen as a risk rather than something to immediately support USD/JPY with respect to the yields spread. EM-FX is back in vogue in terms of Fed rate hikes which maybe encouraging repatriations flows back to Japan yet again, while seasonally, the dollar usually performs well in October and November, so the downside may be somewhat limited.  US CPI this week could well be the nail in the coffin for USD/JPY  speculative  long bulls if this turn of favouritism for risk-off yen continues.    Next supports are the September 27 low and daily Kijun at 112.56/47, but the 100-DMA, last at 111.18, is key. AUD/USD was even making tracks to the upside, despite heightened risk-off sentiment in markets. The pair managed to climb from 0.7041 and reached a high of 0.7081 even as AUD/JPY fell off a cliff and USD/CNH rallies with a backdrop of sliding Chinese equities -something is out of  align  here. The  PBOC cut the RRR which sent USD/CNH towards the 2018’s high which brings the 7.00 back into scope, and that is a negative for EM-FX and the Aussie bulls should be warned.  

Key notes from US:

Wall Street closes holiday-thinned day mixed

Key events ahead:

“Business confidence and conditions were rather resilient in August despite the surprise sacking of a sitting PM (prior +4 and 15 respectively). We expect confidence to recover a little as PM Morrison is business as usual and presiding over strong national finances, and conditions likely to remain double-digit,” analyts at TD Securities explained.