The EUR ended this year's second full trading week at $1.1567, after having briefly fallen below $1.15 on Friday.
The euro's depreciation had accelerated following the Swiss National Bank's surprise decision to abandon its cap on the value of the CHF relative to the EUR. Market participants have interpreted the SNB's move as further evidence that Mario Draghi will likely announce an ECB QE programme on Thursday. According to press reports, Draghi has already proposed a concrete QE plan to Angela Merkel and her finance minister Wolfgang Schäuble to ease German worries about a collectivisation of European countries' government debt.
But whether the ECB will start QE is not the only open question. The size of any such QE programme is another unknown variable that could ultimately take currency traders by surprise: The ECB said it was going to expand its balance sheet to €3 trillion. Its assets currently stand at roughly €2.17 trillion, which means that the ECB will have to purchase up to €830bn in government debt. Rumour has it, however, that the European national central banks might only flood the markets with €500bn as a first step and that the remainder or even another €500bn worth of assets will be purchased as part of a second QE programme if necessary. As said, those are only rumours at this point, but they are not far-fetched considering that the German Bundesbank remains very sceptical about asset purchases and may thus feel more comfortable with a smaller QE programme.
At least the above chart tells a clear story: The EURUSD exchange rate is pretty much stuck in one-way traffic at the moment. Unless the ECB disappoints next week, the next significant stop will be near $1.12. Despite extreme EUR short positioning in the market, the EUR is not all that much oversold versus the USD from a technical point of view, yet. Stay EUR short or wait for a turnaround signal, but keep up to date on any news about ECB easing measures as they will likely cause some volatility in the run-up to Mario Draghi's press conference on Thursday; a smaller-than-expected QE programme will squeeze EUR shorts.
Following today's announcement that Norway would start purchasing NOK 250 million per day in October using foreign currency from its oil revenue accounts, the krone appreciated roughly 1%. EURNOK is currently at 8.1164, USDNOK is at 6.4273.
This is not a game changer. NOK 250 million equals only USD 36 million, and Norges Bank Governor Oeystein Olsen noted that this was neither a policy shift nor an intervention aimed at influencing the exchange rate. The central bank was merely reacting to current kroner flows, he added.
Draghi has been busy giving interviews and speeches throughout the week, all the way preaching his sermon of monetary policy that "will stay accommodative for an extended period of time", dirty deeds that need to be done because "the risks of doing too little are bigger than the risks of doing too much" (a.k.a. "let's throw some stuff and see what sticks"), and "additional unconventional measures" that the ECB stands ready to employ if needed.
The market was quick to react: EURUSD dipped below $1.27 in early trading but later recovered a bit to trade just above the $1.2746 support level dating back to mid-2013.
In late London trading the US dollar retreated somewhat following worse-than-expected durable goods orders and rekindled worries about China's economy. In a risk-off environment that also saw the major equity indices lose 1-2% across the board, EM currencies were the biggest losers and the JPY had its comeback as a safe haven currency.
We still expect EURUSD to fall to $1.25 and USDJPY to climb towards Y110 in the medium term. However, for EURUSD we are closely watching support levels and fibs, because a short-term correction to $1.30 would be perfectly plausible after the sharp USD appreciation and given the many uncertainties currently in the market. If the $1.2746 support holds tomorrow, we will take profits. (Risk seekers might even fancy a quick long trade.) For USDJPY we would still like to see Y107.5 before going long again.
After Scotland expectedly voted to remain in the UK, the British pound quickly regained strength and more than made up for its losses from before the referendum. Although Friday's candle indicates that there was some profit taking going on, with the close being significantly above the intraday low, we expect EURGBP to continue its downtrend in the foreseeable future with a first target at the 2012 low at 0.7755. The next support would then be around 0.75, a level not seen since 2008. We reinstate our EURGBP short trade accordingly.
Yesterday's FOMC statement contained mixed signals with regard to the US dollar's future path. While the Fed "dots" were rearranged in a slightly more hawkish way, the wording in the statement itself did not change drastically and still contains many dovish references, including the oft-cited phrase that the federal funds rate will stay low for a "considerable time" after asset purchases end.
We retain our EURUSD short and USDJPY long views, targeting $1.25 and Y110 respectively. However, we choose to wait for a correction in USDJPY before entering into a new long trade after having taken profits yesterday.