FX Steady Ahead of Key Central Bank Meets, GBP Pounded

Sterling Slides to 1985 Lows; Yen Outperforms, EMFX Dip

Summary:

The British Pound, also referred to as Sterling (derived from the silver coins issued in the Saxon kingdoms) slid to fresh 37-year lows at 1.1350 before settling to 1.1420 (1.1472 Friday).

The catalyst was a much weaker-than-expected Headline UK Retail Sales report, down to -1.6% in August from July’s 0.3%. The data confirmed some economist’s expectations that the UK economy is sliding into a recession.

Other currencies finished little changed ahead of this week’s key central bank meetings, with the US Federal Reserve at the centre. Most market participants expect the US central bank to lift its prime discount rate by 0.75 bp to 3.25%.

The Swiss National Bank, Bank of Japan and Bank of England also have their interest rate policy meetings this week.

The Dollar Index (DXY), which measures the value of the Greenback against a basket of 6 major currencies was little changed, at 109.72 (109.70 Friday). The Euro (EUR/USD) steadied to finish above Parity at 1.0013 from Friday’s 0.9985.

Overall risk appetite eased with the Dollar easing to 142.90 Japanese Yen, from Friday’s 143.50. The USD/CHF (Dollar-Swiss Franc) edged up to 0.9645 (0.9620).

Short covering after better-than expected trifecta of Chinese economic data lifted the Australian Dollar (AUD/USD) to 0.6720 from 0.6700. The Kiwi (NZD/USD) settled at 0.5985 (0.5970 Friday).

Against the Asian and Emerging Market currencies, the Greenback finished mixed. USD/CNH (Dollar-Offshore Chinese Yuan) dipped to 7.00 from 7.0150. USD/THB (Dollar-Thai Baht) slid to 36.80 (36.95).

Global bond yields were mixed. The benchmark US 10-year treasury yield was unchanged at 3.45%. The UK 10-year Gilt yield dipped to 1.75% from 1.76%. Japan’s 10-year JGB yield was unchanged at 0.24%. Australia’s 10-year bond yield climbed to 3.72% (3.68%).

Wall Street stocks finished modestly lower. The DOW was last at 30,845 (30,915) while the S&P 500 dipped to 3,875 from 3,892. Other global indices were mixed.

Data released on Friday saw China’s August Annual Retail Sales climb to 5.4% from July’s 2.7%, beating estimates at 3.5%. China’s August Industrial Production rose to 4.2% from 3.8% while Chinese Fixed Asset Investment climbed to 5.8% from a previous 5.7%.

The Eurozone Final Headline CPI (y/y) matched forecasts at 9.1%. Annual Core CPI rose to 4.3%, matching forecasts at 4.3%.

Canada’s August Annual Housing Starts climbed to 267,400 units, beating estimates at 265,000. Canadian Wholesale Sales dipped to -0.6%, matching expectations of -0.6%.

The US University of Michigan Preliminary Consumer Sentiment for September dipped to 59.5 against median economist’s expectations at 60.0.

• GBP/USD – Sterling was pounded to an overnight and 37-year low at 1.1350 before rebounding to its 1.1420 New York close. Lower than forecast UK August Retail Sales saw some analysts calling for a recession. In choppy trade the overnight high recorded was at 1.1480. The Bank of England meets on its interest rate policy this week.

(Source: Finlogix.com)

• EUR/USD – The Euro steadied to close just above Parity at 1.0013 from Friday’s 0.9985. Pre-weekend short covering lifted the shared currency to an overnight high at 1.0036. The overnight low traded was at 0.9945 in volatile conditions.
• USD/JPY – Against the haven sought Japanese Yen, the Greenback slid to 142.90 in late New York from its opening at 143.50. The overhanging rhetoric of BOJ intervention in case of further weakening of the Yen and modest risk-off supported the Japanese currency. In volatile trade, the overnight high was at 143.69. The overnight low recorded was at 142.80.
• AUD/USD – The Australian Dollar settled at 0.6720, up modestly from its opening at 0.6700 Friday. In choppy trade, the overnight low hit was at 0.6670 while the overnight high recorded was at 0.6724. Better-than-expected results in the Chinese trifecta of economic data (Retail Sales, Industrial Production and Fixed Asset Investment) supported the Battler.

On the Lookout:

The week kicks off with a light economic calendar which will pick up beginning tomorrow.

Highlights are interest rate policy meetings from several central banks (US Federal Reserve, Bank of Japan, Swiss National Bank, and the Bank of England (Thursday, 22 September).

All, except the Bank of Japan are widely expected to lift their prime interest rates by 0.75 basis points.

Earlier today New Zealand released its Business NZ Services Index which rose to 58.6 in August, up from July’s 54.4. The Kiwi (NZD/USD) edged up to 0.5993 from its New York close at 0.5985.

China follows next with the releases of August Foreign Direct Investment (y/y f/c 17.6% from 17.3% - FX Street). There are no other scheduled major economic reports out of Asia.

The UK start off European data with UK Rightmove House Price Index for September (m/m no f/c, previous was -1.3%; y/y no f/c, previous was 8.2% - FX Street).

The Eurozone releases its July Construction Output (y/y no f/c, previous was 0.1% - ACY Finlogix).

Canada kicks off North America with its August Industrial PPI report (m/m f/c 0.2% from -2.1%) and Canadian Raw Material Price Index (m/m f/c 3.2% from previous -7.4% - Forex Factory).

The US rounds up today’s economic data releases with its NAHB Housing Market Index for September (f/c 47 from a previous 49 – ACY Finlogix).

Trading Perspective:

The Dollar was steady against its Rivals ahead of key central bank policy meetings this week. While the US Dollar gained versus the British Pound, it eased against the Japanese Yen.

The Australian and New Zealand Dollars were modestly higher against the Greenback supported by a better-than-expected trifecta of Chinese economic reports (see above).

The one common denominator for FX was heightened volatility, which we should expect more of in the week ahead. Happy days!

The US Federal Reserve, Swiss National Bank and Bank of England are all widely expected to hike their prime interest rates by 0.75 bp.

The Bank of Japan (BOJ) is the only major central bank expected to keep its Policy Rate unchanged at -0.10%. Which should see the Yen weaken against the US Dollar and other major currencies. While this is FX 101, the caveat is risk aversion which will result in Yen strength.

• GBP/USD – The British currency was pounded lower to 1.1420 (1.1472) against the Greenback and other rivals following the poor UK Retail Sales report. Technical traders point to the Pound’s next significant supports between 1.05 and 1.08. Having traded this puppy in the past, this is entirely possible. Immediate support today lies at 1.1380, 1.1350 and 1.1320. Immediate resistance is found at 1.1450, 1.1480 (overnight high) and 1.1510. Expect consolidation ahead of the Fed and BOE decisions. Likely range today 1.1350-1.1450. Trade the range. While Sterling trades heavy, be wary of short covering spikes.
• EUR/USD – The Euro steadied to close at 1.0013, up modestly from its Friday close of 0.9985. The shared currency received some support from cross buying in EUR/GBP, which rose to 0.8767 from 0.8717. Immediate resistance today lies at 1.0035 followed by 1.0065 and 1.0095. Immediate support is found at 0.9985, 0.9955 and 0.9925. Look for consolidation in a likely range today of 0.9960-1.0040. Preference is to sell rallies.
• USD/JPY – The Greenback slid against the Japanese Yen to 142.90 from Friday’s open at 143.50. An easing in risk appetite saw demand for the Japanese currency increase. Only last week, Japan’s Ministry of Finance and Bank of Japan verbally intervened with the USD/JPY pair peaking just under the 145.00 level (144.97). Which suggests to this writer that the “line-in-the sand” for the BOJ is the 145.00 threshold. For today, immediate resistance lies at 143.30, 143.70 and 144.10. Immediate support is found at 142.50, 142.30 and 142.00. Expect more volatile trade, likely range today 142.70-143.70.
• AUD/USD – The Aussie Battler steadied against the Greenback to 0.6720 from Friday’s open at 0.6700. Better-than-expected Chinese trifecta of economic data supported the Battler. Tomorrow the RBA releases its monetary policy meeting minutes which will be scrutinised by Aussie traders. Immediate support today lies at 0.6690 followed by 0.6660 and 0.6630. Immediate resistance is found at 0.6750, 0.6780 and 0.6810. Look for a likely range today between 0.6670-0.6770. Prefer to sell rallies.

Another week, another Dollar. Have a good Monday and top week ahead all. Happy trading.