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The Switching Playbook
Focus overnight was all on the ECB. While the markets were preparing for the ECB to move in a more positive direction, the sultan of sophistry, Mario Draghi, was at his best, firing knuckleball during his prepared comments, but finishing with a wicked curve ball. Interest rates remain on hold and the prepared statement was arguably dovish. Draghi’s press conference forward guidance suggested that a shift in policy was on the horizon, which kicked the Euro bulls into overdrive, as there was little ambiguity between political uncertainty and data strength during his presser.
Given Draghi’s hawkish tilt, markets ferociously bought EUR across the board, with EURJPY leading the charge. Expect the EUR crosses to remain buoyant. Yet given the high demand for USD, which is projected to accelerate as we near next week’s FOMC, the EURUSD gains will likely be capped during the FOMC build up.
It is amazing what a subtle shift in the ECB playbook can do for EUR sentiment, leaving many wondering what ever happened to dovish Draghi.
Commodity prices kept dropping like a sack of potatoes, with oil leading the charge as bearish market forces, rather than anticompetitive price fixing politics, are now in the driver’s seat. The prices also fell as China’s expansion motor looks more lethargic.
Both copper and iron ore are also looking extremely vulnerable, but oil prices are providing the grease for this slippery commodity slope.
Against falling commodities prices, EURAUD has been in demand, which is pressuring the AUD as the markets have seized upon the current story line that the EUR will hold firm against everything but the dollar, even more as the commodity currencies struggle in the face plummeting oil prices. And while US yields look stationed to make higher highs, these issues collectively are blending into a toxic cocktail for the Australian Dollar.
Both EURJPY and USDJPY demand have weighed on Yen sentiment. The critical 115 level has held, but now it is at close range it is more a case of when rather than if, as we approach what is expected to be an attractive Non-Farm Payroll number.
US yields have certainly kicked into high gear since stellar ADP print. With tonight’s NFP expected to come in well, the market is gearing up for an anticipated rate hike next week.
None the less, there appears to be little panic in EM Asia. Dealers are not chasing the USD move higher as they have been prone to in the past, but pockets of USD selling interest are emerging. The broader market is still uncertain about the pace of US tightening. The USD continues to lag US bond yields, which may imply that after the FOMC is done the dollar may peak and reverse. However much of the speculation on APAC EM is the resumption of buoyant risk appetite and continued improvements in the global growth story line, all of which is open to much debate.