Is the Rally in Equities Helping Currencies?
Behind the Rebound in the EUR
AUD: RBA Open to Additional Stimulus
CAD: IVEY PMI on Tap
NZD: Looking for Stronger Employment Numbers
USD/JPY Hits Fresh Highs After Shirakawa Announces Early Departure
In the last hour of trading yesterday, the S&P 500 climbed to fresh 5-year highs and the last time we saw the index at these levels was in December 2007. Traditionally a rally in equities is accompanied by a rise in currencies because when investors are optimistic, all risky assets benefit. While that was not exactly what we saw today, on an intraday basis, all major currencies did benefit from the rise in equities – some more than others. The biggest beneficiary was USD/JPY, which rose to a new 2.5 year high at the end of the U.S. session. The EUR/USD held onto its gains after rallying into the European close and while the GBP/USD and AUD/USD ended the day with losses, they also rebounded off earlier lows. Country specific factors such as dovish comments from the RBA and reversal of safe haven funds parked in the U.K. continue to overshadow risk appetite but losses in these pairs would have probably been steeper if not for the rise in equities. In many ways, it can be said that demand for AUD/JPY and GBP/JPY, which also rose to multi-year highs today is helping the AUD and GBP avoid additional losses. Therefore the rally in equities is helping currencies, but some more than others. With volatility declining according to the VIX, investors are slowly dipping their toes back into the financial markets thanks to stronger economic data in the U.S., Eurozone and China.
GBP has been under pressure of late; the better than expected Services PMI yesterday gave GBP/USD some brief respite, however that soon faded and GBP/USD continued to edge lower making new lows. GBP/USD continues to struggle in a more ‘risk positive’ environment and today the current downside momentum in GBP looks set to continue ahead of Carney’s appearance before the Treasury select committee tomorrow, where he is expected to reveal a relatively dovish tone. EUR/GBP should see initial resistance around the recent high of 0.8717; for GBP/USD the 1.5600/30 area could provide some initial support, beyond that the next major support is around 1.5530 (Fibonacci).
The EUR/USD downtrend from Monday continued into yesterday morning, trading to a low of 1.3459, but it soon rebounded helped by better Spanish PMIs and upward revisions to the German and Eurozone aggregate print. German factory orders today could provide some support to EUR however Lloyds TSB think EUR/USD will likely remain range bound ahead of key events from Europe tomorrow. With possible risks from Draghi’s post-meeting press conference and the first Spanish bond auction following the 3y LTRO repayments tomorrow this should limit EUR/USD upside today.
US non-manufacturing ISM was slightly better than expected, falling modestly to 55.2. However, risk sentiment remained relatively well supported; while the USD index was little moved yesterday; USD made gains against most G10 currencies but continued to struggle against EUR. There is little on the calendar today and we expect the USD index will remain little changed holding within a 79-80 range.
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