It’s been an awkward and monotonous week, interrupted by a few major event risks in the making. With so many investors taking a beating from the equity moves of late, forex participation has been discouraged. The cash investor sitting on the sidelines continues be the dominant force. FX volume and volatility are both low, allowing the weaker long and shorts to be squeezed on either side. The market seems to find it difficult to apply a trade with conviction, believing some current price levels off-putting.
In a trip around the globe we see the conflict between Israel and Hamas has again erupted this week and promises to escalate. Regional leaders are doing the usual denouncing; however, oil prices trade firmer, naturally because of fears of supply disruption. The world investor is always wary of the Middle-East situation, and to date it seems they have yet to move their funds from the region. The natural inclination is to price in a risk premium before the weekend. Soon the market could be seeing a better bid scenario of the historical reserve currencies by hedge funds (USD, JPY and CHF).
Talking about tension, let's not forget China and Japan and the East China sea Island dispute. This has been one of the policy stalemates that historically have plagued Japan along with its aging population. The country is set to dissolve the lower house today and hold elections on December 16. The current opposition is favored to win under Shinzo Abe. He is expected to do no better in improving security ties with the world’s second largest economy. The current Japanese government has downgraded its view of the economy for a fourth month, as it cut its assessment of consumption, investment, corporate profits and the job market. Making Japan an interesting play is seeing how the BoJ tackles a strong yen. In the risk-off environment, the yen remains in constant demand and the CBanks' unlimited funding has yet to have a material weakening impact.
In Europe, it’s about how to make Greece’s debt mountain manageable before policymakers release a further +EUR31b in emergency aid. The IMF’s Lagarde publicly battles with other eurocrats on the idea that Greece should be given until 2022 to lower its debt to +120% of GDP. She wants a 2020 target. Next year's total debt is expected to top +190%! The IMF chief is currently en route to the euro-group meeting in Brussels on November 20, cutting short her Asian stay and another date of note to diarize for next week.
The euro trade balance data this morning was a bit of a surprise and has had minimal direct impact on the single unit. That has been left to other factors. The eurozone's current account surplus grew modestly in September (+EUR0.8b vs. +EUR10.9b, m/m), reflecting a slowdown in exports. Data published yesterday showed the eurozone contracted in Q3, its second consecutive decline, resulting in a technical recession. It’s worth noting that this headline release has been volatile of late, driven mostly by current account goods. That said, the optimist has us believing that a surplus is a positive for the region because exports are dominating.
The data stateside this morning is not expected to have a huge impact on direction. U.S. IP is forecasted to expand by +0.1%, m/m, in October, and certainly well below the previous months reading of +0.4%. The excuse will be the same as for the weekly claims, Hurricane Sandy. This anomaly should be overlooked by the market, at least until priced out over a matter of readings.
The EUR again failed to clear its 200-DMA (1.2810) and prices have eased lower once again during the European shift. U.K. real money sellers have been filling in the bids ever since 1.2755 has broken, and thereafter, closely followed by U.S. prime names. The 10-DMA is under threat intraday and deeper pullbacks remain on the cards as analyst’s hourly tick south. Sizable stops are expected below 1.2720. Previously, fast money had a long bias, however, price action now has them favoring further losses as a larger percentage of the market sticks to sell strength strategy under the 200-DMA.