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Faros Morning Update - Grand Bargain?

|Includes: BRL, CNY, ProShares Ultra Semiconductors ETF (USD)

 Grand Bargain?

The G20 confirmed what we had expected from the G20 which is that the course that currencies had been on directionally, will continue.  The Geithner ‘targets’ that had been discussed in his letter to G20 members was not agreed to, but the principals surrounding that idea were.  Nations with surpluses need to use the tools available to reduced them while refraining from competitive devaluation of FX rates.  Nations with deficits must work to reduce volatility in their exchange rates.  Emerging Market countries will gain more sway at the IMF through adjustments in the structure.  It very much feels like this is all part of a ‘grand bargain’ that is a multi month or even multi year plan that is meant to help correct deep entrenched imbalances. 


EUR/USD rallied post G20 as the USD/CNY fix came in 30 pips lower at 6.6729.  USD/NJA fell across the board and we heard of NJA central banks in the market intervening but not nearly to the extent we had been hearing them recently.  So the price action in NJA currencies was muted and less strong than we would have expected.  But you can point to the USD/CNY fix and the lack of a meaningful move as the reason why there was not much wind in the sails.  USD/KRW traded down to 1116 while USD/MYR traded down to 3.0940.  USD/INR traded down to 44.30 area after rising up to 44.60 into the NY close.


AUD/USD a significant mover overnight on the higher than expected PPI print and the RBA’s Stevens was on the tapes talking about how ‘tolerating higher inflation does not help the economy’ and the local bond market continues to price in a high chance of a rate hike in November.  AUD/USD traded up through 0.9950 after initially drifting down to 0.9830. 


USD/JPY broke through the 80.85 level hitting a fresh 15 year low at 80.40.  Talk of large stops below and 79.70 is the big level to watch below.  CNY/JPY dropped through the 12.15 support and we think this cross is more important to the BoJ as this   


cross seemed to be the trigger for intervention several weeks ago.  Interesting that it cracks so shortly after G20 and also interesting that Toyota mentioned it is growing comfortable with 80.00 USD/JPY while Toshiba came out and said it was planning for 70.00 USD/JPY.  Feels like USD/JPY has much further to drop.


EUR/USD traded up to 1.4080 before retracing back to 1.4030/40.  DXY resistance at 77.00 feels likely to hold for now.


CHF failed to turn back to its strengthening trend despite the underlying weakness in financial stocks in the US and the uncertainty associated with the financial system in general in the face of elections and FOMC in the coming week.  The short term up-trend line in USD/CHF remains in tact with 0.9660/70 key and in EUR/CHF the 1.3600 level is the level to watch. 


HUF a big mover overnight as USD/HUF traded down to through 194.00 after opening above 197.00 and EUR/HUF traded down to 272.60 area after 275.00 the open.  Hungary left rates unchanged at 5.25% as expected.  PLN also rallied a fair amount with EUR/PLN dropping down through 3.9330 and offered on, vs. 3.9700 where we started Asia. 


GBP rallied overnight as the BoE indicated that corporate funding conditions had ‘started to stabilize’ but it was really the move in the USD that GBP was tracking and we traded above 1.5770 briefly.  The 50 day at 1.5652 remains key below for now on the technicals.


USD/BRL opened lower, in line with the rest of the EM complex but it was rumors and discussion in the local press that Brazil may consider removing the withholding tax on local debt for foreigners if the recent round of capital controls does not work.  These discussions sent USD/BRL back up to Friday’s closing level at 1.7050. 


Good Luck

Disclosure: I do not hold positions in currencies