EOD wrap from citi
Citi:
Don’t get left behind! The USD is….
• …potentially, on its way higher.
• Emotions ran very high on Tuesday. Valuation concerns voiced by RBA Governor Stevens continued to weigh on AUD, while ECB member Nowotny briefly talked up the EUR.
• In the end, the case for USD upside won over as some, including CitiFX Technicals, are of the belief that at current levels, the USD is due for a rebound. Naysayers say that gains are just pre-FOMC positioning but only time will tell.
• Our global flows over the medium-term support the USD bulls. We’ve seen persistent selling of USD vs EUR since September NFP (pre-Syria, Yellen and FOMC). However, since the beginning of October, the selling has come to a halt while EURUSD has rallied from 1.3500 to 1.3800.
• Techs has gone long the USD versus EUR, JPY and GBP. DXY has been holding good support at 78.60-79.00, where 2012 and 2013 lows converge. Momentum is also the most oversold since 2011, when the DXY Index began its multi-year rally. The chart below is taken from the full Techs support here.
•
• Before the USD found its wings in NY, AUD and then EUR were of focus.
• RBA Governor Stevens’s warning about being long AUD resulted in the pair slipping back below the 0.9500 figure for the first time since mid-October. It also tested short-term support, 0.9485.
• The next level on the downside is 0.9463, which is the 61.8% Fibonacci retracement level from the late September low to the mid October high on the dailies. It’s likely a sell on rallies.
• Our spot AUD trader in London thinks there are still a fair few stale long AUD positions around, including against the NZD. Higher AUDNZD had almost become regarded as a safe one-way bet, so this might be a cross to put on watch with the RBNZ decision due Wednesday in late NY.
• Conviction in EURUSD was very much lacking into the NY open, with the pair dipping from around 1.3790 to fill bids in the 1.3760/70 region. Essentially, it looked doomed for a day of sideways trading after US retail sales data and soft confidence figures failed to influence.
• However, the ECB’s Nowotny came to the rescue, talking it straight up through the 1.3800 figure.
• Nowotny downplayed the chances of a depo or refi rate cut. He argued that the ECB doesn’t have tools to use against a strong EUR and that it will just have to live with it.
• However, he did add that the bank has room to act on liquidity and that there is a strong consensus to avoid a liquidity cliff when the LTROs mature in early 2015.
• Comments sent EUR higher, although the impact on rates markets was fairly limited. We saw pronounced selling into spot’s spike above 1.3800 but buying re-emerged back towards 1.3770.
• Despite that latter demand, lows came in near 1.3740. Looking at our client segments, real money was a big net seller, with banks the main buyers.
• Some, less than impressed with Nowotny, pointed out that his recent track record is questionable.
• In April 2013, responding to a question about potential for an imminent rate cut, Nowotny said, “It’s still too early. In Europe, we have very expansionary monetary policy and it is too early to judge if further steps should be taken.” 10 days later, the ECB cut rates from 75bps to 50bps.
• CitiFX Strategist Valentin Marinov had other issues with Nowotny’s assessment. “Ahead of the ECB meeting, I still think that the risks for EUR maybe tilted to the downside especially if the upcoming Eurozone CPI surprises on the downside in part due to the resilient EUR exchange rate of late,” says Marinov.
• “In addition, the Nowotny comments do not concur with recent underperformance in Eurozone bank stocks underperformance as well as with ECB expectations of uneven recovery for the Eurozone with risks still on the downside. If President Draghi highlights these risks, this could erode some support for the currency.”
• There wasn’t much to say about USDJPY until it began to rally in NY from the 97.60/70 area. This was in line with the broad USD rally, first seen via profit-taking in EURUSD.
• We saw some very hefty demand in USDJPY out of the investor community. The first of this emerged on the break above the 98.00 figure, but the bulk of it was seen up to 98.20, with the high of the rally being near 98.30.
• Offers on EBS were quite in good size - every 5-10 pips or so from 98.00 to 98. 25. This was likely Japanese exporters’ offers for month-end left at local banks.
• Looking ahead, our NY JPY trader believes it will still trade solid. Topside targets would be 98.60, the 90d MA, and 99.01, the recent high.
• A strong recovery in Nikkei future was also a supportive factor for USDJPY, and we heard of good demand for bullish plays in the option world.
• CrossJPY was also active. AUDJPY, despite the retail demand in early Europe, fell as low as 92.70 before heading back towards 93.00. We also saw good retail demand to buy GBPJPY.
• Mirroring the ups, but mostly downs of EURUSD, cable settled on session lows near 1.6040. Our London GBP trader continues to believe it’s a sell on rallies.
• There’s not much to say about the Scandis but note that EURSEK has inched back up towards the 8.7800/8.8000 congestion zone
• USDCAD respected ranges, being compressed by interest on both sides of the market. Flow-wise, we saw light CAD selling from the NY open led by bank names. Most of this flow was concentrated in EURCAD and AUDCAD, though we reiterate that it was not heavy.
• Having no impact, Canadian industrial production fell from +0.3%MoM to -0.3% in September, while the prior month saw a positive revision of 0.1%. A speech from BoC Governor Poloz also proved underwhelming as he signalled no changes from the bank’s statement last week.
Other notable mentions for USD
• Market News International reported that the Senate Banking Panel’s hearing on Yellen’s nomination for Fed Chair will most likely take place on November 14.
• Unconfirmed reports suggest that Obama will consider allowing Jerome H. Powell to take a second term as Fed Governor. Powell took office on May 25, 2012, to fill an unexpired term ending January 31, 2014, so this is likely expected.
• However, CitiFX Strategy thinks that more interesting selections will be the replacements for Duke, Raskin and Yellen’s seats.
• US negotiations over the 2014 budget officially begin on Wednesday. In a not-so-optimistic preview of these debates, the Financial Times suggests that Republicans may be as, or even more hard-line with its demands this time around, sensing that Democrats are increasingly divided over the rollout of the Affordable Care Act (ie Obamacare).
• The House and the Senate budget agreement deadline is December 13.
• The latest Hilsenrath article highlighted research from several Fed economists, predicting its balance sheet won’t return to normal levels until sometime between mid-2019 and mid-2021. The study is an update from finding presented earlier this year. Click here for the full research paper and here for Hilsenrath’s quick synopsis.
EM in focus
• The Communist Party of China will hold a key meeting, known as the Third Plenum, in Beijing from Nov 9 - Nov. 12, according to the CPC Central Committee Political Bureau issued.
• The meeting is expected to set out the Chinese leadership’s priorities for the next decade. It is believed that observers will monitor the talks for potential announcements on measures to re-balance the economy, encourage urbanization and perhaps liberalize the financial system.
• The National Bank of Hungary lowered the 2-week benchmark policy rate by 20bps to 3.40% in line with expectations. This is the 15th consecutive month of rate reduction and the third consecutive 20bp cut following the MPC’s decision to slow the pace of rate cuts from 25bp earlier to 20bp in August. The tone of the MPC statement remained unsurprisingly dovish, confirming that further rate cuts may follow if risk factors remain supportive.
• Pension reform in Poland announced early September is now being question by officials from CB bank, regulators (polish FSA) and State Solicitors Office (subsidiary of Treasury department).
• Our trades see three potential implications: increased political risk including changes of government or even early election; a 4% deficit in 2014 instead of a surplus and permanent improvement by 1% a year; PLN40bn more of borrowing needs and breaching its debt ceiling.
Citi:
Don’t get left behind! The USD is….
• …potentially, on its way higher.
• Emotions ran very high on Tuesday. Valuation concerns voiced by RBA Governor Stevens continued to weigh on AUD, while ECB member Nowotny briefly talked up the EUR.
• In the end, the case for USD upside won over as some, including CitiFX Technicals, are of the belief that at current levels, the USD is due for a rebound. Naysayers say that gains are just pre-FOMC positioning but only time will tell.
• Our global flows over the medium-term support the USD bulls. We’ve seen persistent selling of USD vs EUR since September NFP (pre-Syria, Yellen and FOMC). However, since the beginning of October, the selling has come to a halt while EURUSD has rallied from 1.3500 to 1.3800.
• Techs has gone long the USD versus EUR, JPY and GBP. DXY has been holding good support at 78.60-79.00, where 2012 and 2013 lows converge. Momentum is also the most oversold since 2011, when the DXY Index began its multi-year rally. The chart below is taken from the full Techs support here.
•
• Before the USD found its wings in NY, AUD and then EUR were of focus.
• RBA Governor Stevens’s warning about being long AUD resulted in the pair slipping back below the 0.9500 figure for the first time since mid-October. It also tested short-term support, 0.9485.
• The next level on the downside is 0.9463, which is the 61.8% Fibonacci retracement level from the late September low to the mid October high on the dailies. It’s likely a sell on rallies.
• Our spot AUD trader in London thinks there are still a fair few stale long AUD positions around, including against the NZD. Higher AUDNZD had almost become regarded as a safe one-way bet, so this might be a cross to put on watch with the RBNZ decision due Wednesday in late NY.
• Conviction in EURUSD was very much lacking into the NY open, with the pair dipping from around 1.3790 to fill bids in the 1.3760/70 region. Essentially, it looked doomed for a day of sideways trading after US retail sales data and soft confidence figures failed to influence.
• However, the ECB’s Nowotny came to the rescue, talking it straight up through the 1.3800 figure.
• Nowotny downplayed the chances of a depo or refi rate cut. He argued that the ECB doesn’t have tools to use against a strong EUR and that it will just have to live with it.
• However, he did add that the bank has room to act on liquidity and that there is a strong consensus to avoid a liquidity cliff when the LTROs mature in early 2015.
• Comments sent EUR higher, although the impact on rates markets was fairly limited. We saw pronounced selling into spot’s spike above 1.3800 but buying re-emerged back towards 1.3770.
• Despite that latter demand, lows came in near 1.3740. Looking at our client segments, real money was a big net seller, with banks the main buyers.
• Some, less than impressed with Nowotny, pointed out that his recent track record is questionable.
• In April 2013, responding to a question about potential for an imminent rate cut, Nowotny said, “It’s still too early. In Europe, we have very expansionary monetary policy and it is too early to judge if further steps should be taken.” 10 days later, the ECB cut rates from 75bps to 50bps.
• CitiFX Strategist Valentin Marinov had other issues with Nowotny’s assessment. “Ahead of the ECB meeting, I still think that the risks for EUR maybe tilted to the downside especially if the upcoming Eurozone CPI surprises on the downside in part due to the resilient EUR exchange rate of late,” says Marinov.
• “In addition, the Nowotny comments do not concur with recent underperformance in Eurozone bank stocks underperformance as well as with ECB expectations of uneven recovery for the Eurozone with risks still on the downside. If President Draghi highlights these risks, this could erode some support for the currency.”
• There wasn’t much to say about USDJPY until it began to rally in NY from the 97.60/70 area. This was in line with the broad USD rally, first seen via profit-taking in EURUSD.
• We saw some very hefty demand in USDJPY out of the investor community. The first of this emerged on the break above the 98.00 figure, but the bulk of it was seen up to 98.20, with the high of the rally being near 98.30.
• Offers on EBS were quite in good size - every 5-10 pips or so from 98.00 to 98. 25. This was likely Japanese exporters’ offers for month-end left at local banks.
• Looking ahead, our NY JPY trader believes it will still trade solid. Topside targets would be 98.60, the 90d MA, and 99.01, the recent high.
• A strong recovery in Nikkei future was also a supportive factor for USDJPY, and we heard of good demand for bullish plays in the option world.
• CrossJPY was also active. AUDJPY, despite the retail demand in early Europe, fell as low as 92.70 before heading back towards 93.00. We also saw good retail demand to buy GBPJPY.
• Mirroring the ups, but mostly downs of EURUSD, cable settled on session lows near 1.6040. Our London GBP trader continues to believe it’s a sell on rallies.
• There’s not much to say about the Scandis but note that EURSEK has inched back up towards the 8.7800/8.8000 congestion zone
• USDCAD respected ranges, being compressed by interest on both sides of the market. Flow-wise, we saw light CAD selling from the NY open led by bank names. Most of this flow was concentrated in EURCAD and AUDCAD, though we reiterate that it was not heavy.
• Having no impact, Canadian industrial production fell from +0.3%MoM to -0.3% in September, while the prior month saw a positive revision of 0.1%. A speech from BoC Governor Poloz also proved underwhelming as he signalled no changes from the bank’s statement last week.
Other notable mentions for USD
• Market News International reported that the Senate Banking Panel’s hearing on Yellen’s nomination for Fed Chair will most likely take place on November 14.
• Unconfirmed reports suggest that Obama will consider allowing Jerome H. Powell to take a second term as Fed Governor. Powell took office on May 25, 2012, to fill an unexpired term ending January 31, 2014, so this is likely expected.
• However, CitiFX Strategy thinks that more interesting selections will be the replacements for Duke, Raskin and Yellen’s seats.
• US negotiations over the 2014 budget officially begin on Wednesday. In a not-so-optimistic preview of these debates, the Financial Times suggests that Republicans may be as, or even more hard-line with its demands this time around, sensing that Democrats are increasingly divided over the rollout of the Affordable Care Act (ie Obamacare).
• The House and the Senate budget agreement deadline is December 13.
• The latest Hilsenrath article highlighted research from several Fed economists, predicting its balance sheet won’t return to normal levels until sometime between mid-2019 and mid-2021. The study is an update from finding presented earlier this year. Click here for the full research paper and here for Hilsenrath’s quick synopsis.
EM in focus
• The Communist Party of China will hold a key meeting, known as the Third Plenum, in Beijing from Nov 9 - Nov. 12, according to the CPC Central Committee Political Bureau issued.
• The meeting is expected to set out the Chinese leadership’s priorities for the next decade. It is believed that observers will monitor the talks for potential announcements on measures to re-balance the economy, encourage urbanization and perhaps liberalize the financial system.
• The National Bank of Hungary lowered the 2-week benchmark policy rate by 20bps to 3.40% in line with expectations. This is the 15th consecutive month of rate reduction and the third consecutive 20bp cut following the MPC’s decision to slow the pace of rate cuts from 25bp earlier to 20bp in August. The tone of the MPC statement remained unsurprisingly dovish, confirming that further rate cuts may follow if risk factors remain supportive.
• Pension reform in Poland announced early September is now being question by officials from CB bank, regulators (polish FSA) and State Solicitors Office (subsidiary of Treasury department).
• Our trades see three potential implications: increased political risk including changes of government or even early election; a 4% deficit in 2014 instead of a surplus and permanent improvement by 1% a year; PLN40bn more of borrowing needs and breaching its debt ceiling.