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.
The USD has posted impressive gains against most currencies during the past four weeks and just bounced off some year-to-date highs in most cross rates. The USDJPY rate climbed more than 6% since mid-July and currently trades at 107.09. The YTD high is at 107.39 and was reached on 12 September.
We advise to take profits in USDJPY ahead of this week’s FOMC meeting, but note that we are inclined to open new USD long positions around 105.90 and again at 105.00 in case of USD dips. If the FOMC surprises on the hawkish side, we will go long USDJPY immediately.
This week’s event risk aside, our long-term expectation for the two currencies remains unchanged: USD long and JPY short.
The British pound came under pressure after the publication of the YouGov September poll results, which hinted at more people being in favour of Scottish independence than initially thought. In fact, the number of people saying “yes” to independence were in the majority for the first time with 51% of the votes. Although there clearly is an actual possibility of Scottish independence, the latest results should not be overstated. Polls have wrongly predicted voting outcomes in the past. People are naturally more inclined to vote against drastic regime changes, and saying “yes” in a non-committal poll is a different thing from doing so when it comes to actual voting altogether. We are convinced that the Scots will vote against independence in the referendum on 18 September.
Traders should still entertain the possibility of increasing volatility and GBP weakness as we get closer to the referendum. EURGBP is currently at 0.8014 and with GBP net positioning still long we see substantial downside risk for the British pound during the next two weeks. Those who would like to keep their GBP long trades open might want to hedge against this particular event risk, if their position is not outright speculative, or at least make sure to have a stop loss limit in place.
Our longer-term view remains EUR short and GBP long, so we will likely re-enter EURGBP shorts once uncertainty abates.