Risk Appetite Takes Multiple Hits & US Dollar Gains

Markets are still digesting yesterday’s rapid fire moves and their implications for longer term direction. It was the sterling sell-off that really sparked the FX markets, caused by BoE’s King stating that “weaker sterling helping necessary rebalancing of UK economy towards exports.” The Cable dropped nearly three big figures after that comment. In addition, BoE MPC member Dale reinforced King’s view by also commenting that U.K.’s economic recovery may be sluggish and lingering, while unemployment is likely to continue to increase. But most importantly, he acknowledged King’s statement that the sterling’s fall is helping the domestic economy.

We expect the sterling to remain weak, as there is still a high probability that BoE expands its asset purchase program by £25bn due to weak housing market and monetary indicators. The rout was quickly joined by commodities and equity markets, which were already feeling heavy.

In the US session, two events in softer housing data and the Feds announcing a shift in lending and auctions facilities caused a strong second jolt to risk appetite. The drop in US existing homes sales from 5.24m to 5.10m in August disappointed the recovery bulls. However, we see it more as a temporary one off and the stabilizing of a positive trend rather than a sign of renewed weakness. In addition, it doesn’t negate the Fed’s FOMC comments that “activity in the housing market has increased”. Perhaps the more important event was the Fed’s announcement that it would reduce in size the Term Auction Facility by $25bn and the Term Securities Lending Facility will shrink to $50bn, and then $25bn. While this move doesn’t offset the fed commitment to further Balance sheet expansion or eliminates markets pressures that could force the central bank to expand liquidity operations, it highlights improving conditions in the short term funding markets and a movement towards thinking about “exit strategy.”

Risk appetite clearly dented today, with the USD on a much stronger foot than it was on Wednesday. Asian and European equity indexes have struggled and we expect US stock to follow suit. Today’s data calendar sees Eurozone M3 and UK Total Business Investment Data from Europe, while the US session will provide Durable Goods Orders, U.Mich, and New Home Sales. Durable goods Orders are expected to post a 0.4% increase in August, while New Home Sales are forecast to rise 1.6% - considering yesterday’s big miss on Existing Home Sales, it will be worth watching this one. Outside the economic data, markets will be increasingly interested in the G20 meeting, which concludes today. There is a lot on the docket, so a meaningful agreement (outside the frivolous bonus debate) is very possible.

Today’s WSJ cites several senior sources saying that the G20 is close to an agreement that would require its members to subject their economic policies to peer review. In addition, renewed conversations on re-balancing could have strong implications in the FX markets. We will wait for the communique…….

The Risk Today:

EurUsd Yesterdays massive sell off quickly took the bullish tone away fro this pair. Near term focus on 1.4611 & 1.4515 support. Above the 1.4515 the pair remains constructive.

GbpUsd three big figures is a lot for any currency. Critical horizontal support at 1.5985 was pierced putting the focus on 1.5801 pivotal support. key resistance stands at 1.6468

UsdJpy Given the action in the Fx markets this week the USDJPY was relatively side lined. Pressure still building on critical 90.00 handle. Near term resistance is at 91.60.

UsdChf Despite the short term pullback off of 1.0200 downside focus remains entrenched. Support stand at 1.0190 then key 1.0012 lvl. Intraday resistance is located 1.0390.

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