Analys från DailyFX
FX Remains Complacent Towards US Fiscal Risks
Talking Points:
– Italian PM Letta’s final vote sees support grow in Senate by two seats; governance situation nevertheless extraordinarily difficul.
– High yield FX and US stocks remains elevated despite US fiscal issues.
– US Treasuries may be signaling that debt ceiling worries will come to light next week.
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INTRADAY PERFORMANCE UPDATE: 09:30 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.04% (-0.58%prior 5-days)
ASIA/EUROPE FOREX NEWS WRAP
Higher yielding currencies and risk-correlated markets stabilized yesterday morning after US Speaker of the House John Boehner (R-OH) promised not to let the US default on its debt, essentially ensuring that the debt limit would be raised by October 17. The mere rhetoric of seeking compromise dismantled a ticking time bomb of growing negativity that had griped global markets in Asia and Europe on Thursday.
While FX and stocks may have bought the positivity – most notably the Australian and New Zealand Dollars recovering modestly against the safe haven complex – US debt markets have not. As noted earlier this week, the CDS curve for US government debt has inverted (1Y CDS 5Y CDS) for the first time since July 2011 – a sign that this round of negotiations is more fierce than the fiscal cliff in December 2012.
With CDS spreads widening out suggesting greater fear, US Treasuries have also been signaling distress. The 1-month US T-Bill yield has spiked the past several days, from 0.0203% last Friday to as high as 0.1267% yesterday (at the time of writing, the yield was 0.1217%). This inversion of the yield curve on the short-end suggests funding stresses are rising as October 17 approaches, with thus far little evidence that markets are buying that a solution is around the corner.
If short-term US yields continue to push higher as they have over the past week, otherwise complacent markets – commodities, equities, and FX – will be forced to take notice and there could me a not-so-minor correction as reality sets in. With both Democrats and Republicans remaining very-much entrenched in their ideologies, financial markets have an eerie similarity to late-July 2011. Read Senior Currency Strategist Jamie Saettele’s notes on “panic trading” in the USDJPY here.
USDJPY 5-minute Chart: October 4, 2013 Intraday
Taking a look at European credit, the Italian 2-year note yield has decreased to 1.631% (-5.5-bps) while the Spanish 2-year note yield has decreased to 1.333% (-4.6-bps). Likewise, the Italian 10-year note yield has decreased to 4.298% (-6.7-bps) while the Spanish 10-year note yield has decreased to 4.201% (-2.8-bps); lower yields imply higher prices.
Read more: In the ECB’s Wake, Euro Looks Free of its Crisis-Mode Market Dynamic
ECONOMIC CALENDAR – UPCOMING NORTH AMERICAN SESSION
See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators. Want the forecasts to appear right on your charts? Download the DailyFX News App.
— Written by Christopher Vecchio, Currency Analyst
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
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What’s inside:
- EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
- Resistance in vicinity of 11825/80 likely to keep a lid on further strength
- Targeting the low to mid-11600s with more selling
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Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.
Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.
Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).
Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.
For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.
EURUSD: Daily
—Written by Paul Robinson, Market Analyst
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You can follow Paul on Twitter at@PaulRobinonFX.
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
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