FX Daily, October 26: Euro and Yen Extend Recovery

Swiss Franc

After touching 1.08, which apparently the “new floor”, the SNB moved the EUR/CHF upwards yesterday and Monday. Today’s EUR recovery against USD, let also the EUR/CHF rise.

EUR/CHF - Euro Swiss Franc, October 26

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FX Rates

The US dollar’s upside momentum reversed in North America yesterday and has been sold in Asia and Europe. This seems like mostly position adjustments ahead of next week’s FOMC, BOE and RBA meetings, in an otherwise subdued news period.

The euro has at three-day highs. It has scope toward $1.0950-$10.970 in this corrective phase. Support may be found around $1.09.

FX Performance, October 26

Source: Dukascopy.com - Click to enlarge

Sterling is firmer but has thus far been unable to build on yesterday’s recovery. Sterling had fallen to almost $1.2080 following Chancellor of the Exchequer Hammond indicating no encroachment on BOE’s independence, and that a request for more QE would not be rejected. Carney did not add much new in his testimony before the House of Lords yesterday. Acknowledging that the central bank does not have a target for sterling, but it is not indifferent to it, is boilerplate central bank mantra. His aversion to negative interest rates is also well appreciated.

FX Daily Rates, October 26 (GMT 15:00)

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The Australian dollar leads the majors higher, helped by a slightly firmer than expected Q3 CPI, which dashes any lingering ideas that the central bank could cut rates again. The Australian dollar is bumping up against its nemesis around $0.7700 that has been an effective for several months even though it has been frayed on occasion. We expect it to largely remain intact.

FX Performance, October 26

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Australia

The headline CPI rose 0.7% on the quarter up from 0.4% and more than 0.5% expected. The year-over-year rates are 1.3%, up from 1.0%. There was not the same improved in the trimmed mean and weighted median measures.  And for a good reason. There were a couple significant outliers. Fruits prices were up 19.5%. Electricity was up 5.4%. The central bank has indicated that inflation is not the key presently. Provided that growth remains firm and labor market holds up, there is no reason to mechanically cut interest rates.

Australia’s CPI is suggestive of something else as well. Tradable goods prices were up 0.7%, while non-tradable goods prices were up 1.7%. If we can generalize from this, countries in which exports plus imports are a smaller percentage of GDP, they may experience more inflation pressures.

Australia Consumer Price Index (CPI) YoY, October 2016

. Source: Investing.com - Click to enlarge

Crude Oil

That is a good segue to the other talking point. Oil prices are extending this week’s losses. Brent and WTI are off about 1.4% to their lowest level in three weeks. There are two drivers. API showed a 4.8 mln barrel build in US crude inventories. Today’s DoD estimate is looked upon for confirmation. In addition, Russia seems to be balking at participating with OPEC’s effort to cut output.

The decline in oil may also have more impact in the foreign exchange market, outside of being an additional weight on the Canadian dollar, Norwegian krone, Mexican peso, Malaysian ringgit, and Russian rouble. If the decline in oil prices drag yields lower, especially in US Treasuries, it could extend the US dollar’s correction. Although the FOMC meets next week, few if any expect the Fed to move. Those who do expect a hike see it in December. That is a long time in the foreign exchange market.

Crude Oil, October 2016

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United States

Today’s US data will do two things. First, it will allow last minute tweaks to Q3 GDP, where the government provides its first estimate before the weekend.

The September trade balance and (wholesale and retail) inventories will be useful for this. Second, the data will also provide some insight into the start of Q4. Markit’s preliminary services and composite readings for Oct will be published.

U.S. Services PMI, October (First Estimate)

. Source: Investing.com - Click to enlarge

U.S. Yields

We advise paying close attention to US yields, which remain firm in European turnover. Indeed, the two-year yield is at its best level since the five-month high was made a couple of weeks ago. The 10-year yield is steady near 1.76%. It has not been below 1.72% since October 11.

Yield US Treasuries 10 years, October 26 2016

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