US Dollar Fails To Find Support From G7 And Poor US Data

The USD has continued to lose ground against G10 counterparts (DXY 76.76) after the G7 meeting in Istanbul failed to provide any comment on the USD’s decline, or indeed on the strength of the EUR. Japanese Finance Minister Hirohisa Fujii did however appear to clarify his stance on JPY, by stating that the government would intervene if the currency moved in a “biased direction”. JPY pared some of its gains to 89.90, however this comment was in contrast to the Japanese reaction when the JPY was last at these levels in 2008, where the government pressed the G7 to issue a statement specifically warning about JPY volatility.

Meanwhile the ECB’s Nowotny has been on the wires this morning saying that forex developments warrant “no immediate action”. We believe the lack of any urgency or strong concern from policy makers about current levels of FX will likely pave the way for further USD weakness to come, and in addition, that the inverse relationship between US data and USD strength may be breaking down.

After last week’s poor ISM and terrible Non-Farm Payrolls, the USD failed to gain support and weakened markedly; EURUSD tried to puncture support through 1.4500, touching a low of 1.4481 before squeezing sharply to a high of 1.4618. The devil was in the details of the ISM report as it highlighted a sharp narrowing in the gap between new orders and inventories - traditionally a good indicator of the state of the business cycle.

Poor US data has usually encouraged a flight to safety and USD strength, but going forward, it seems that poor US data will have a much lower impact on the USD rallying, whereas good US data is likely to continue to support EUR and other risky assets. The bias of risks therefore appears to support further EURUSD strength from here (currently 1.4645).

We also expect the drivers of FX markets in the coming weeks and months to evolve towards a more differentiated evaluation of central bank policy, and markets will likely pay much attention to the key data events this week. Today we can look forward to Eurozone Retail Sales, while Tuesday sees the RBA’s October rate meeting, along with Swiss CPI and UK Industrial Production. Wednesday will provide Swiss Unemployment figures, and Thursday’s highlights include Australian Unemployment, and rate decisions from the BoE and ECB.

The Risk Today:
EurUsd We have been looking at a very short term picture on the EUR USD lately looking for quick proftiable day trades, but Friday afternoon the pair eventually broke those intraday channels to the upside. However, there is good news for the shorts this morning as a more medium term trend starts to appear and one could argue that the rally from 1.4480 on Friday afternoon was more to do with short covering than any long term bulls stepping in. Either way, the pair has stopped its rally right on the new downtrend line around 1.4650 and the bears will being doing their utmost to keep it below 1.4684. The pair is looking pretty overcooked on the 2 hourly stochastics up at these levels too so with little news on the horizon I would expect shorting between 1.4620 and 1.4660, some mild short covering around 1.4550 and real long interest at 1.4480.

GbpUsd The pair continues in its march south, selling off this morning without ever having reached the upper downtrend channel which lies at 1.6050/60. I would expect some serious shorting around 1.0640 -60. Long interest and short covering are likely on the support and medium term uptrend channel around 1.5836

UsdJpy We said on Friday that the trend remains down on all time frames and that is still true however after the non farm payrolls the pair dropped nearly a whole figure and tested the major support at 88.59 which has held very well. Notice that on both occassions the pair has tested that level it does not hang around for very long and the buying interest is immense. Expect a continuation of this pattern with shorts at 90.20 and 90.60 and obviously long interest and short covering on that major support at 88.60 / 70. RSI and stochastics looking a little tired on the 1 hour chart.

UsdChf The inverse head and shoulders players are at the last chance saloon today having seen the pair retrace all the way back to the very last of the uptrend channels, trading back through the neckline in the process. Again there is a good risk reward profile for the dollar bulls with entry around 1.0330 and a stop below the second shoulder at 1.0275. A close lower than there will completely ruin this entire formation and leave the pair susceptible to further downside pressure.

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