Australia Inches Closer To A Rate Hike

It seems global optimism is the theme for the day; one of our key barometers of risk sentiment, the Shanghai Composite, is up around 1% today, and correspondingly the DXY depressed as investors once again resumed the hunt for yield. In addition, there have been suggestions of encouraging improvements in US employment data due this Friday which would further stoke sentiment and risk appetite.

The economic calendar returns to the fore after a meagre few days of releases, and kick-starting proceedings overnight were Australian Retail Sales that posted a whopping 0.9% increase in Aug (compared with forecasts for 0.5%). Building Approvals were less rosy (-0.1% M/M vs. +2.5% exp.), but that did little to dampen AUD bulls’ spirits, and the currency has powered to new 2009 highs around 0.8795. The numbers bring us tantalizingly closer to a rate hike from the RBA, with fixed income markets pricing in a 100% chance of a 25bps rise by December, but also the prospect of an RBA meeting next week that might surprise the market. We really like the AUD from here, and would group it with NOK as front-runner currencies with central banks on the cusp of raising rates.

In Europe, some of the highlights today will be German unemployment, Norway Retail Sales, Eurozone CPI and Swiss KOF, but a key focal point for FX markets is likely to be the upcoming ECB 12-month tender. EURCHF has spent the last week in a tight range around the 1.51 handle as investors speculate on the likelihood of SNB intervention around these levels, and it is widely recognized that previous instances of SNB intervention in the FX markets have coincided with the ECB auctions.

We remain long EURCHF, but bear in mind that speculative positioning for this event has been building for a while and that if intervention does not materialize by the end of the week, we would look to exit the position completely.

The Risk Today:

EurUsd The recent EURUSD correction lower found support around 1.4525 yesterday and has broken above the short-term downtrend on the 15-minute chart. We expect it to consolidate in this sticky 1.4515-1.4730 range as risk sentiment lilts back and forth.

GbpUsd GBPUSD is benefitting from USD weakness and has regained a foothold above 1.6000. A handful of GBP crosses still lie in oversold territory with 14-day RSI readings between 20-30, but USD-weakness related rallies should face considerable resistance around 1.6130. Near-term support intact just below 1.5800.

UsdJpy USDJPY continues to gravitate towards the lower bound of its downtrend, near term support lies at 89.15 and 88.25, whilst rallies should remain capped below 90.50.

UsdChf Focus will be firmly on CHF today in anticipation of SNB intervention. The USDCHF correction nudged briefly through intraday resistance yesterday at 1.0390 before paring back to current levels. A lot of price action between 1.0270 and 1.0330 will be sticky to negotiate, however the bigger picture remains bearish and we expect to see a resumption of selling pressure towards first support at 1.0250 and then 1.0190.

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