Like a beach ball pushed under water, the euro has bounced back across the board as Juncker's ill-thought comments were isolated and overwhelmed by reports of new buyers - from the Middle East to hedge funds and real money - taking advantage of the dip to get what is understood to be the underlying trend. Short-term momentum and trend followers were caught leaning the wrong way, aggravating the move. Over the past two weeks, 3-month implied euro volatility has risen from below 7% to 8.3%, the upper end of its 3-month range. The firmer volatility also appears to bring in more interest.
No other currency can keep up with the flows going into the euro. This is driving the single currency to new 9-month highs against sterling and new 13-month highs against the Swiss franc. It is firm against the Scandi-bloc (officials there have also issued conflicting comments about their currency assessment).
The yen has returned quickly toward its recent lows as Japanese officials make it clearer the correction from what they call "excessive weakness" is not over. With a G20 meeting coming up and the fear of criticism, or worse (retaliation, as suggested earlier this week by South Korea's central bank), Japanese officials are walking a fine line. We suspect they are trying to signal that while they desire a weaker yen, it is not an open-ended devaluation strategy. Since mid-November, when the Japanese election was called, the dollar has risen 9% against the yen. Trying to read between the lines, it appears at this juncture, officials would be content to see the dollar stabilize in the low JPY90s.
Overall, we are cautious for the North American session. The relatively large euro and yen moves in Europe have pushed both toward important chart points and left short-term technical indicators over-extended. A pullback in the euro (and sterling) and a firmer tone for the yen would be consistent with our reading of the technical indicators and with the choppy price action seen this week.
These are the two main forces today, the rebounding euro and depressing yen. To these we note a third force: the under-performance of the dollar bloc. It cannot be simply dismissed to disappointing Australian employment data, though it was weak. Australia lost 5.5k jobs while the consensus expected a 4.0k increase. Moreover, Australia lost 13.8K full-time jobs after a revised 6.3k loss in November (originally 4.2k loss). On the other hand, Australia reported an 8% decline in imports in December, setting the stage for a better trade report, after the blowout to 5-year highs in November.
Perhaps the issue is that the dollar-bloc does not seem to be trending while many participants are looking for trends that they can participate in. The Australian dollar was testing the upper end of its multi-month range near $1.06 last week and has returned to the $1.05 area. The market appears to be pricing in about a 40% chance of a rate cut next month. With a couple of minor exceptions, the US dollar has been trading between CAD0.9830 and CAD0.9900. The lower end of the range held earlier in the week and it is now testing the upper end of the range and even if it is frayed, the additional resistance is seen near CAD0.9920.
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