Markets bounce back after tragic terror attacks in Paris

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Financial markets appeared to have begun the healing process in the wake of last Friday’s tragic terror attacks in Paris which influenced investors moving into safety and away from high-yield asset classes.  Yesterday’s strong close on Wall Street and the associated optimism from market participants filtered through into the overnight session, with the Nikkei positing a gain of 1.2%.  The Japanese yen was caught in the crosswinds as investors rotated away from perceived safe-havens as risk appetite perked up, causing USDJPY to ebb higher during the overnight session.

The big dollar is pushing higher on an index basis early this morning, yet the heavy weighting of the euro in the DXY basket appears to be one of the main catalysts for DXY’s upward momentum this morning.  The pound is holding up relatively well against the greenback as inflation for the month of October hit the wires at the pace expected, falling at a rate of 0.1% when compared to a year ago.  This is the same rate of deflation that was seen as the reading in September, suggesting the tightening labour market has yet to have any impact on headline inflation, and reinforces the Bank of England’s cautious outlook towards its medium-term inflation outlook and associated monetary policy.  GBPUSD is essentially flat this morning after initially dipping lower on the news, but the pair has made decent strides since the sharp drop in early November.

The downdraft which pressured EURUSD lower yesterday afternoon has intensified, with the pair continuing to produce a relatively strong offer tone before the opening bell in North America.  Positioning for traders and yesterday’s soft close seems to be driving price action this morning, as the German ZEW survey for November came in better than anticipated with a reading of 10.4, besting the median analyst estimate of 6.0.  Current conditions did improve from October, though missed expectations with a print of 54.4; however, the overall sentiment of the survey improved from the disappointing reading in October, which could point to Germany’s soft patch of industrial production figures as an anomaly as opposed to the beginning of a longer trend.  Each piece of incoming data will be heavily scrutinized before the next ECB meeting to determine whether the associated economic indicators have deteriorated enough to prompt the ECB to take a more accommodative stance towards monetary policy, and it’s likely the euro will have a hard time sustaining any upward momentum with the large event risk waiting in the wings.

As we head into the beginning of the North American session equity futures are looking to build off yesterday’s gains, while oil is seeing some profit taking after its push higher yesterday.  While oil is experiencing some softness today, the inability of black gold to slide beneath the $40 mark may warn the near-term drop may be overextended in the short-term, and short-term opportunities for fast-money trades may elicit a short-covering rally that leads to a push higher in Texas Tea.  The technical positioning in oil is a risk to loonie bears, which if oil does seem some relief to levitate itself back into the mid-$40s, USDCAD would also be vulnerable to some froth being culled from the pair.  US CPI data is the main piece of economic data on the docket for the North American session, with analysts expecting the annualized core reading remains firm at 1.9%, while the month-over-month headline reading increases by a pace of 0.2%.  A material deviation from expectations would most likely lead to a knee-jerk reaction for markets, yet, it is unlikely that even a miss to the downside will alter the Fed’s medium term inflation outlook, and ultimately sway their decision making ahead of December’s FOMC meeting; therefore, a miss to the downside in today’s numbers will likely give market participants an opportunity to accumulate greenbacks at relatively decent levels.

Further reading:

Elliott Wave Analysis: EURUSD and the German DAX

Where is the bottom for EUR/USD? Watch US inflation numbers

Get the 5 most predictable currency pairs

About Author

Scott Smith is a Senior Corporate Foreign Exchange Trader with Cambridge Mercantile Group and has a diverse background in the foreign exchange industry, with previous experience in both credit and trading related functions. Scott holds a Bachelor of Commerce degree from the University of Victoria, has completed all three levels of the Chartered Financial Analyst designation, and is currently working towards the Derivative Market Specialist certification offered through the Canadian Securities Institute. Cambridge Mercantile Group.

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