FX Report  4 November 2016

The Euro retreated from its best levels on Thursday, although the dollar was still unable to gain any significant traction.  US jobless claims data was slightly weaker than expected with an increase to 265,000 in the latest week from 258,000 previously, although there was a sharp decline in layoffs according to the latest Challenger survey. A smaller than expected increase in third-quarter labour costs of 0.3% was offset by a substantial upward revision to the second quarter. The ISM non-manufacturing index was weaker than expected with a decline to 54.8 from 57.1, although this followed a very strong increase the previous month and it was a firm underlying release which suggests moderate growth. There were mixed Presidential opinion polls during the day and, although the latest ABC poll recorded a 2% lead for Clinton which had some impact in easing speculation over a Trump victory, there was still a very important element of caution, especially with turnout doubts. After finding support above 1.1050, the Euro rallied back above 1.1100 later in the US session with caution surrounding risk appetite and hawkish comments from Bundesbank head Weidmann limiting Euro selling. The latest US employment report will trigger short-term volatility with the key to any longer-term impact depending on whether there is a disruption to Fed tightening expectations. The data would have to be well below expectations to undermine the chances of a Fed rate increase while a very strong release could trigger upward pressure on US yields.
The dollar found support above 102.50 and rallied during the European session without being able to break above 103.50. US data failed to provide a clear lead and the US currency drifted weaker later in the US session. There was a slight improvement in risk appetite, although equity markets continued to decline which provided net yen support.   The October Japanese PMI services-sector index strengthened to 50.5 from 48.2 with the composite index at 51.3 from 48.9 which will provide some net support to the economic outlook, although Bank of Japan policy implications will be limited. Risk conditions remained fragile with equity markets remaining on the defensive which limited the potential for yen selling, although the dollar moved back above the 103.00 level ahead of the latest US employment data.
The UK PMI services index was stronger than expected at 54.5 from 52.6, boosting confidence in the short-term growth trend. Ahead of the Bank of England decision, the UK High Court ruled that the government would need parliamentary approval before triggering Article 50 to launch EU exit negotiations. This raised the potential for a delay in launching the process and also led to speculation that the government would have to make concessions and play down the potential for a ‘hard’ Brexit. In response, there was a sharp move higher in Sterling with a move above 1.2400 against the dollar. The Bank of England left interest rates on hold following the latest policy meeting with interest rates at 0.25% and the amount of bond purchases of £435bn. Both decisions were by taken by a unanimous vote. There were upward revisions to inflation forecasts and the bank reiterated that there would be only limited tolerance to an inflation over-shoot. The bank also removed its forward guidance that a further rate cut was likely and switched to a balanced stance. Sterling advanced further on the switch in stance with EUR/GBP dropping below 0.8900 before a correction while there was a four-week high against the dollar although it stalled ahead of the 1.2500 area.
The Euro gradually regained support against the franc on Thursday, eventually breaking above the 1.0800 level with further speculation that the National Bank was providing assistance. The dollar found support below 0.9700 and edged to the 0.9740 area.  There was a slight easing of risk aversion which curbed potential demand for the Swiss currency while a net increase in global bond yields also curbed demand for the franc, although uncertainty remained high. The franc would be undermined by a strong US employment report and any speculation of ECB tapering.
Regards All.

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