FX Report 25 October 2016

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EUR / USD
The Euro was generally in a corrective phase on Monday with a very limited recovery from seven-month lows just above 1.0850 seen on Friday as the currency was unable to break back above the 1.0900 area. Regional PMI data was generally better than expected despite a miss for the French services-sector data. The Euro-zone manufacturing index strengthened to a 30-month high for October while the services-sector data recorded a 9-month high with a strong rebound for the German sector after notable recent weakness. The US PMI manufacturing index strengthened to a 12-month high of 53.2 from 51.5 previously with the orders and output components also at 12-month highs while inflation pressures increased. The data boosted confidence in the US outlook, especially given the firm components and underpinned wider US yield support as Treasuries declined. St Louis Fed President Bullard maintained his call for one interest rates hike over the next 2-3 years while Chicago head Evans called a very slow pace of rate increases dependent on inflation progress. Nevertheless, he remarked that three rate hikes were appropriate between now and the end of 2017 and the comments were slightly more hawkish than expected given that Evans is very much on the dovish end of the FOMC spectrum. The dollar drifted slightly higher as expectations of a December tightening continued with the trade-weighted index continuing to test 8-month highs. Markets are not expecting a Fed tightening next week, but the statement will be important for overall sentiment as the Euro failed to extend the correction.
JPY
After consolidating below the 104.00 level ahead of the Wall Street open, there was a move higher in bond yields following the US PMI data. The US currency pushed back above the 104.00 level with highs in the 104.30 area as US 10-year yields increased to around 1.77% from lows below 1.73% earlier in the day. There was also a slightly more positive tone surrounding the global economy following the latest round of Euro-zone and US PMI data which tended to undermine potential defensive yen support. The Chinese yuan remained a significant focus as it declined to fresh six-year lows. So far, there has not been a significant negative impact on risk appetite with the Nikkei index advancing to six-month highs on Tuesday. Supportive conditions were also important in curbing any potential yen support as the dollar strengthened to test resistance in the 104.50 area.
GBP
Sterling found support below 1.2200 against the dollar on Monday with some reluctance to chase the currency lower after, especially as there has been a more stable tone surrounding the bond market over the past few days.    The headline CBI industrial data was substantially weaker than expected with a headline orders figure of -17 from -5 previously. There were, however, mixed readings within the data with Sterling weakness helping to support the export sector and there were still expectations of rising output for the next quarter. There were comments from UK Prime Minister May that parliament would debate Brexit before and after Christmas which provided some degree of support to UK assets. Although there were still very important concerns surrounding Brexit risks, markets considered that much of the bad news had been priced in and there was caution ahead of next week’s Bank of England MPC meeting. The UK currency held above 1.2200 on Tuesday and consolidated near 0.9000 against the Euro.
CHF
The Euro was unable to make any impression on the franc on Monday and dipped to test support in the 1.0800 area. There were comments from National Bank Chairman Jordan that negative interest rates were appropriate given the global interest rates. He did warn over the longer-term stability risks surrounding very low rates which will trigger some doubts over policy sustainability.   The dollar was unable to make any impression on resistance levels, but did edge back towards 0.9950 late in the European session with global policy remaining under scrutiny.
Regards All.
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