Forex Report 27 October 2016

The dollar was subjected to further pressure in European trading on Wednesday with some follow-through selling from the losses seen on Tuesday. The Euro moved back above the 1.0900 level and pushed to highs near 1.0950.   The September US trade data was better than expected with the goods deficit declining to $56.1bn from $59.2bn previously which boosted confidence in GDP growth and suggested an improving exports trend which will underpin manufacturing. The Markit PMI services index also recorded an increase to 54.8 for October from 52.3 previously and the highest reading since November 2015. There was also a strong reading for orders and there was evidence of an increase in investment levels which will boost optimism within the Federal Reserve that capital spending levels have improved. New home sales data was generally firm which maintained confidence in the housing sector. The dollar gradually gained fresh support during the US session ahead of Thursday’s durable goods report which will be important for investment intentions. There were also some reports that the ECB was almost certain to extend asset purchases beyond March 2017, although this could still involve an important element of tapering. The Euro retreated back to the 1.0900 level later in the US session and held close to this level on Thursday with a firm dollar tone as US 10-year yields tested October highs.
The dollar remained under pressure early in the US session on Wednesday with a further test of support near 104.00 as European equities remained under pressure. There were some reports that the Bank of Japan could move away from explicit bond-purchase amounts and focus instead on managing the yield curve. There were also further reports that the bank is considering a further delay in meeting the 2% inflation target until fiscal 2018.  After finding support on approach to this level, the US currency gained net support from the US data releases. There was a reversal in bond markets with higher US yields helping to push the US currency stronger. A rally in oil prices following the inventories data was also important in curbing defensive yen support, especially as equities recovered some ground and the dollar advanced to the 104.50 area.  There were comments from Bank of Japan Governor Kuroda that any attempt to weaken the yen would be FX intervention which will lessen any potential for direct intervention. The dollar still maintained a firm tone, edging back above 104.50.
After the sharp losses and high volatility on Tuesday, Sterling secured a steadier tone on Wednesday with a small net advance as the Euro drifted towards 0.8920 while there was a recovery to above 1.2200 against the dollar. A slightly stronger than expected reading for mortgage approvals did not have a significant impact. There was evidence of robust consumer spending, but business lending was weak which will cause further concerns surrounding investment levels.  There was some residual Sterling support from Bank of England Governor Carney’s comments which suggested that the bank might decide against any further easing of interest rates. Hopes for a parliamentary vote on any Brexit deal also provided some net support, although there was further selling near 1.2250 against the dollar. The Q3 GDP data will be watched closely on Thursday and weaker than expected data could revive expectations of further monetary easing as well as undermining confidence in the outlook.
The Euro edged away from 12-week lows near 1.0800 against the franc, although there was further resistance towards 1.0850 while the dollar found support on approach to 0.9900. There was a slightly more resilient tone in risk appetite during the New York session which curbed potential franc support and there was still an important wariness surrounding National Bank intervention risks which had the desired effect in curbing franc buying.  Given the Swiss yield structure, rising global bond yields will tend to weaken the franc on potential capital outflows.
Regards All.

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