2013-05-23 10:09 (UTC)
XE Market Analysis
Markets were frayed in Europe. Very heavy action followed yesterday's comments from Bernanke, the FOMC minutes, overnight data weakness in China and a stock market collapse in Japan. The dollar, which had started the Asian session on the front foot, weakened into the European open amid a sharp liquidation via yen-funded carry trades after the Nikkei 225 closed 7.32% lower. By the time liquidity rose after the London open USD-JPY had dropped from over 103.50 through 102.00. There was choppy action for a time, but more blase comments from Japan Economy Minister Amari tipped the pair under 101.00. The net impact was a higher EUR, GBP and AUD. The CHF also gained sharply as some of the excess in CHF-funded carry was also worked off, leaving EUR-CHF close to 1.2450 and USD-CHF under 0.9700. European data included more improvement in eurozone manufacturing, though it still remains in contractionary territory. The second estimate of U.K. GDP also came in as expected at 0.3% q/q.[EUR, USD]
EUR-USD firmed up on better than expected eurozone manufacturing PMI data. The composite reading improved in May amid better readings from France and Germany in the early releases. EUR found support ahead of 1.2820 after the London open and filled sell orders from 1.2860 to 1.2880. EUR-JPY's recovery from 130.20 over 131.00 also provided positive guidance, along with EUR-GBP's move back over 0.8550. EUR-AUD is still looking strong above 1.3350 amid the AUD meltdown in the last 24 hours, but EUR-CHF has now corrected nearly two big figures from yesterday's highs on carry trade unwinding, leaving it around 1.2460. EUR-USD may meet reasonable size selling pressure over the 1.2900 level as the underlying trend is still skewed to the downside. The dollar is also more likely to trade on the firmer side following yesterday's remarks from Bernanke, though it will remain sensitive to data.[USD, JPY]
USD-JPY steadied after the sharp drop, though it continued to experience good price chop throughout. USD-JPY fell from over 103.50 in Asia and accelerated to the downside into the European open on heavy unwinding of carry trade positions. Stop losses featured heavily in the downturn. 102.50 and 102.00 were big trigger levels and losses extended to the 101.40 area initially. Natural bids ahead of previous lows of 101.35 and 101.20 fueled bargain hunting and USD-JPY climbed back over 102.00 in about 30 minutes of trade after the London open. However, the downturn in the Nikkei (-7.32%) and losses in other global stocks limited yen losses, along with blase comments from Economy Minister Amari, who did not think the stock market fall was anything to be worried about. USD-JPY hit 100.80 lows on further position unwinding and then backed up. Dollar sellers are noted just over 102.00, while offers are tipped at 102.20 and 102.50. Trendline support is noted towards the 100.50-60 area and 100.00 is also going to be a major level.[GBP, USD]
Cable mirrored EUR gains and headed to 1.5075. The second U.K. GDP estimate came in at 0.3% q/q and 0.6% y/y, which fueled light demand from the 1.5050 region, though it had already benefited from strong bids ahead of 1.5020 in early Europe. USD-JPY's deep drop to the 101.00 area from over 102.50 at the European open also weighed on the dollar a touch. GBP suffered in recent sessions on weaker than expected U.K. data, while general USD strength also flushed out a number of long positions in Cable, including option barriers. However, the 1.5000 area should fuel decent demand from corporates, offshore investors and sovereign names. It has not traded under this level since the BoE highlighted the consequences of sterling weakness on inflation back in March.[USD, CHF]
CHF is sharply higher amid a meltdown in carry trades, which forced EUR-CHF to 1.2420 and USD-CHF to 0.9635. The CHF has tracked JPY movement of late, though there was also some serious excess in CHF-funded carry in the last 24 hours. Specs were very heavy swissy sellers on Tuesday and Wednesday, which lifted EUR-CHF from under 1.2500 to new trend highs around 1.2650. Topside movement got added momentum after SNB's Jordan joined the chorus of dovish central bank speakers. He sounded open to further easing and followed Tuesday's IMF endorsement for negative interest rates. We think EUR-CHF should still meet demand on dips after Jordan remarked on the lower limit in EUR-CHF and negative interest rates. However, as the CHF weakens it could reduce the SNB's need to shift the EUR-CHF peg, though it is still struggling overcome deflation.[USD, CAD]
USD-CAD corrected some of yesterday's sharp gains, leaving it close to the 1.0350 region. Option related offers put a top in place ahead of 1.0400 during the Asian session and just after the European open. Thereafter, a marked downturn in USD-JPY and USD-CHF fueled a moderate dollar correction, which helped CAD$ firm up. However, stock markets were still weaker on the session, while commodities were mostly lower after a poor China manufacturing PMI reading in Asia. Dollar buyers are tipped into 1.0340 and 1.0320.