FX Becalmed As Euro Recoups Yesterday's Losses

 |  Includes: FXB, FXE, FXY, UDN, UUP
by: Marc Chandler

The US dollar has mostly been confined to yesterday's ranges. This means there has not been follow through buying after yesterday's rather unexpected gain. The news stream has been light. Global equity markets are mostly lower and bond markets firmer.

The euro rose to a four-session high just above $1.3570, helped by supportive comments from Chinese officials. The PBOC's Zhou acknowledged that the euro is an important reserve PRC reserve currency, and mentioned French bonds, in particular. This is consistent with the general market understanding. Zhou's comments followed remarks by Premier Li Leqiang, affirming that it would like a strong euro. This too is not really news. With the euro area a major export destination for China, a stronger euro could reflect more economic activity.

The euro could not sustain its Asian session gains and came off during the European morning. The ECB's Coeure again pressed with the possibility of a negative deposit rate. However, such forward guidance, as such, is simultaneously undermined by the acknowledgement that deflation is a remote possibility. An unprecedented move to a negative deposit rate would require a dramatic deterioration of conditions, which Coeure, but also Praet, who have played up the negative deposit rate, deny.

Meanwhile, we note that EONIA continues to rise. Although the ECB indicated last week it will suspend repayment of the LTRO over the turn of the year and there is a large settlement of such payments this week, the rise in EONIA began before these developments. It appears to be largely seasonal pressures related to month-end. Looking at the pattern of the last several months, EONIA begins rising near mid-month and then rapidly falls off at the start of the new month. EONIA has been quoted about the effective Fed funds rate since the middle of last week.

Sterling traded yesterday on both sides of last Friday's range and finished the North American session below Friday's low. However, there was no follow through selling in the face of this bearish technical development, which suggests the bulls have not given up on a test of the $1.6260 top that held on two separate tests last month. Meanwhile, Carney is playing up the slack in the economy. He is also pushing that the 7% unemployment level is a threshold not a trigger (the mantra of forward guidance) and subject to uncertainty.

For the first time in four sessions, the dollar has not recorded a higher high against the Japanese yen. The BOJ minutes showed a minority voice that was more concerned than the majority by downside risks to the economy and inflation. Meanwhile, the Corporate Service Price Index rose 0.8% year-over-year in October from 0.7% in September.

After testing the NOK8.20 support in recent days, the euro has bounced higher. Despite news that Germany's Bayer is "early stage" talks to acquire Norway's Algeta, in a deal that could be worth around $2.4 bln, the krone is trading heavily. Immediate resistance is seen in the NOK8.29-NOK8.30 area.

The US will report October building permits (but not housing starts), CaseShiller Home Price Index, consumer confidence and the Richmond Fed survey. The data typically are not market movers, but we note that the house prices are expected to have ticked up to 13%. Consumer confidence is also expected to have improved slightly in November from October. On the other hand, most of the regional Fed surveys have been disappointing, suggesting some moderation in economic activity after what is now likely to be 3%+ Q3 GDP (revisions due next week).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.