European Open Preview – Dollar flexes its muscles to reach an 11-month peak versus the yen

Marios Hadjikyriacos, XM Investment Research Desk

Here are the latest developments in global markets:

  • FOREX: The dollar index is higher on Thursday (+0.29%), extending the impressive gains it recorded in the previous session as US yields raced higher. The US currency touched a fresh 11-month high against the yen, buoyed by strong US data and confident remarks by Fed chief Powell. Meanwhile, the antipodean currencies underperformed, with both aussie/dollar and kiwi/dollar tumbling to fresh 2½-year lows.
  • STOCKS: The Dow Jones (+0.20%) closed at a fresh record high for a second session in a row on Wednesday, as risk appetite firmed amid easing concerns around Italy’s budget situation. The S&P 500 (+0.07%) came within a hair’s breadth of its own all-time highs, while the tech-heavy Nasdaq Composite gained 0.32%. That said, futures tracking the Dow, S&P, and Nasdaq 100 are pointing to a much lower open today, which is likely owed to the surge in US bond yields. Higher yields, theoretically, render bonds more attractive to hold, curbing demand for stocks. Accordingly, Asia was mostly in the red on Thursday. Japan’s Nikkei 225 and Topix edged lower by 0.56% and 0.09% respectively, while the Hang Seng in Hong Kong plunged by 1.68%. Likewise, in Europe all the major indices are set to open lower today, futures suggest.
  • COMMODITIES: Oil rallied to fresh four-year highs on Wednesday, even despite the weekly EIA crude inventory data showing the largest build in stockpiles this year. Oil prices also defied media reports suggesting Saudi Arabia and Russia struck a deal to raise their output in order to cool prices. Some suggest that given the already-low spare capacity in both nations, such an increase in production would imply output can’t rise much further moving forward. The risk-on appetite in markets likely aided the surge in oil as well. In precious metals, dollar-denominated gold is up by 0.13% today near $1,200 per ounce. Interestingly, the yellow metal tumbled by much less than one would have expected yesterday given the remarkable gains in the dollar, which suggests that demand may be slowly picking up.  

Major movers: “King dollar” reigns supreme as US yields surge

The dollar outperformed all major currencies on Wednesday, buoyed by US bond yields rising to multi-year highs. Yields on 10-year US treasuries soared to 3.23%, a high last seen in 2011, amplifying the greenback’s allure. The moves were powered initially by a set of robust data releases, which confirmed the US economy continues to fire on all cylinders.  The ADP employment report for September beat expectations, while the ISM non-manufacturing PMI for the same month surged by much more than anticipated, reaching its highest since the index was created in 2008.

Some relatively hawkish comments from Fed chair Powell a few hours later added fuel to the surge in the dollar. He said the Fed may have to raise rates past levels considered “neutral” to restrain inflation, and that we are still a long way from even reaching “neutral”. While neither comment was particularly new, investors still took the opportunity to price in a greater degree of tightening in 2019. Against this backdrop, dollar/yen skyrocketed to a fresh 11-month high of 114.50, as improved risk appetite in markets also weighed on the yen.

Euro/dollar pared earlier gains to close the session much lower as the dollar advanced, breaking below the key 1.1500 juncture, to stabilize around 1.1480. The euro’s losses came even despite encouraging news from Italy, where the government confirmed it will lower its budget deficits in the comings years, helping to calm concerns of an imminent clash with the EU. With Italian concerns fading for now, at least until the government releases the details of its budget, risk sentiment was boosted – triggering a rotation out of bonds (hence higher yields) and into equities.

In the UK, there was little of note in PM May’s remarks at the Conservative party conference. Now, the focus turns back to the talks, which are expected to resume this week. Media reports have floated potential “compromises” by both sides recently, and it will be crucial to see which of those turn into formal proposals.

Elsewhere, the antipodean currencies got slammed amid the dollar’s resurgence, with the aussie and kiwi being the worst performing G10 currencies, each losing around 1.2% against the greenback on Wednesday. Aussie/dollar and kiwi/dollar softened on Thursday too, both touching fresh 2½-year lows.

Day ahead: US factory orders & weekly jobless claims due; Italian politics and Brexit monitored

Thursday’s a quiet data day, with US factory orders attracting some interest; even those do not typically act as a major market mover. In the absence of anything major on the economic calendar, updates relating to Italian politics and Brexit will be monitored.

According to a government spokeswoman, details relating to economic growth projections that would support Italy’s budget plans will be published today. After much controversy and rising odds for an Italy-EU clash, the country’s budget deficit target for 2019 is at 2.4%, while it pledged to reduce it to 2.1% in 2020 and 1.8% in 2021.

In the UK, any Brexit updates following the Tory Party Conference will be closely watched; should hopes for a breakthrough from the current deadlock in negotiations rise, then sterling is likely to post a relief rally.

On the data front, US factory orders are scheduled for release at 1400 GMT. A rebound is forecast in August, with orders expected to grow by 2.1% m/m, after contracting by 0.8% in July on the back of subdued aircraft demand. Weekly jobless claims data out of the nation are due earlier in the day (1230 GMT).

Canada’s September Ivey PMI is also due at 1400 GMT.

ECB policymaker and Bank of Finland Governor Olli Rehn will be talking about monetary policy and the global economic situation at 0800 GMT. Other policymakers on the agenda are the ECB’s Nouy (0930 GMT) and Coeure (1400 GMT), as well as the Fed’s Quarles (permanent FOMC voting member – 1315 GMT).

Technical Analysis: EURGBP short-term bearish, trades near 2½-month low levels

EURGBP only managed to finish higher in two of the eight preceding trading days. At the moment, the pair is trading not far above 0.8847, this being September 20’s two-and-a-half-month low. The Tenkan- and Kijun-sen lines are negatively aligned in support of a bearish short-term picture. The RSI, which has been declining overall since late September, also lends credence to the view for a negative bias, though notice that it does not maintain a steep negative slope; negative momentum may be weakening.

Positive Brexit momentum is likely to push the pair lower. Immediate support to losses may take place around the 50% Fibonacci retracement level of the upleg from 0.8620 to 0.9098 at 0.8858; the two-and-a-half-month low of 0.8847 is also part of the area around this point. Further below, the 61.8% Fibonacci mark of 0.8802 would be eyed.

Rising odds for a no-deal Brexit on the other hand, are expected to elevate EURGBP. A first line of resistance could occur around the current level of 100-day moving average line at 0.8873. Stronger gains would turn the attention to the 38.2% Fibonacci point at 0.8915; the Ichimoku cloud bottom (0.8911), Tenkan-sen (0.8922), 50-day MA (0.8938) and the Kijun-sen (0.8949) all lie in proximity to this level.