With a little help from central bank rhetoric, both volume and opportunity are making a significant comeback to the forex space. Up until now, the lower-for-longer monetary policy route basically handcuffed the Group of Seven currency pairs to a confined trading range over the past 18 months. Presently, with the possibility of a significant divergence in interest rate policy between the European Central Bank (ECB) and the Federal Reserve, investors have a plethora of trading opportunities. The mighty dollar is once again the dominant currency across the board, scoring big gains against the EUR, JPY, GBP, AUD and NZD over the past couple of sessions.
Both European and Asian bourses are currently tracking a strong rebound in the U.S. indices, where yesterday’s six-year high in U.S. new home sales reversed a global three-day slide in stocks. Even Germany’s DAX has opened higher for a second consecutive day amid optimism that the EUR’s weakness against the dollar will boost profits for the euro region’s companies, and the strength of the U.S. economy will drive global growth. The FTSE trades are pretty much unchanged after an early pop higher. The bullish investor will be encouraged that the U.K. index has managed two closes above 6,672, the 61.8% retrace of the August/September gains. And gold ($1,210.80, -0.7%) is picking up significant interest as it trades near last January’s lows, obviously being weighed down by a stronger USD, and other commodities such as oil are managing to trade broadly weaker as well.
Dollar Records Keep Falling
As volatility in forex trading continues to pick up, there has been no letup in the pressure on the 18-member single currency. So far this morning, the EUR has managed to plummet to its weakest level against the USD in 24 months (€1.2697). This time, the EUR has been bruised by yesterday’s anemic eurozone business activity, coupled with further dovish comments from ECB President Mario Draghi who repeated that he and other ECB policymakers are open to using further “unconventional” measures to head off the threat of deflation. Nevertheless, it’s not just a EUR move; this is a significant rally by the dominant USD.
The dollar has climbed against the yen (¥109.35); just shy of last week’s six-year high, while the NZD/USD has fallen below $0.80-cents to mark a fresh one-year low ($0.7953). The Kiwi selloff has been particularly pronounced, driven by a statement from Reserve Bank of New Zealand (RBNZ) Governor Graeme Wheeler who called his country’s exchange rate level “unjustified and unsustainable.” He added the RBNZ would welcome a move to a more “sustainable exchange rate,” and that the real rate has not adjusted materially to the recent downward movement in commodity prices given the -45% drop in dairy off its peak in February. Not to be outdone, the AUD/USD has also fallen to a new seven-month low, trading below $0.8820 following a comment from a Reserve Bank of Australia board member who forecast the Aussie downtrend will continue.
U.S. Housing Defines Economic Strength
To many, yesterday’s better-than-expected U.S. housing data underlines the relative strength of the American economy. It’s convincing investors that the Fed will soon be required to hike interest rates at a material pace, while the ECB comes up with ways to justify and ease its own monetary policy. U.S. new home sales rose to a six-year high in August (seasonally adjusted annual rate of +504k or +18%, month-over-month), contrasting with data out earlier in the week showing that existing U.S. home sales fell last month for the first time in four months. Investors should be wary as the report usually carries a large margin of error and is generally subjected to some extreme revisions. Months of supply dropped below five from a revised six-month supply previously. From a big picture perspective, and despite the huge monthly spike, through the first two-thirds of this year home sales are running “only” +2% ahead of last year’s pace.
Nevertheless, in comparing U.S. data to the eurozone and Japan, the American economy is showing signs of sustainable traction, while its counterparts continue to revise growth and inflation forecasts. Especially in Europe, with Germany being the region’s backbone, recent soft data suggests that the ECB needs to be more proactive, thereby justifying potential quantitative easing sooner rather than later.
EUR Has Room to Move
Due to the varying economic divergence, many expect the 18-member single unit’s slump to deepen. The currency has the look and feel of a €1.25 handle all over it in the short term. The market is already materially short EURs, and because of the urgency of the recent downtrend to new record lows, many speculators will not want to sell into a hole but would prefer to look for better levels to own USDs. The morning’s EUR move was supposedly instigated by one sizeable order being pushed through London from €1.2770. Investors should be expecting any return to this level to attract fresh EUR selling interest. Not to be discounted, but very much a part of the EUR landscape have been option interest. There continues to be talk of option barriers at every 50 pips to €1.2500, and a €1.2800 expiry for €1.1B today.
Bond Yields Listless
All the action remains in the currency space. Nevertheless, Bund yields have continued to trade near +1% while U.S. Treasury yields (+2.55%) are little changed ahead of American durable goods data this morning. Durable goods are expected to decline by -19% compared to a +22% increase seen in the prior month (the jump is due to Boeing’s record order volumes). Yesterday’s weak five-year auction has weighed on Treasury prices. In terms of eurozone peripheral bonds, yields are mostly lower (spreads tighter) amid Draghi’s comments (with Greek and Portuguese bonds outperforming). In the U.K., Gilt yields (+2.47%) are slightly higher amid equity gains.