All Eyes On UK, Selling Pressure Mounts On MXN
London Capital Group | Aug 06, 2015 06:47AM ET
Forex News and Events
UK "Super" Thursday
Traders will have to manage the BoEs MPC rate decision, meeting minutes and inflation report all on Thursday (11:00gmt). The BoE will also conduct a press conference at 11:45gmt. This will clearly generate volatility as participants scramble to decipher the incoming data. In regards to the inflation report, we anticipate that the outlook should be shifted slightly lower due to stronger GBP and lower oil prices, yet still hit 2% by end of forecast horizon. Its universally expected that the BoE MPC will keep rates unchanged today. For the voting pattern of the rate decision we expect that two members vote for a rate hike (Weale and McCafferty) but there is significant risk that another member (Miles) joins the dissenters. This would be a bullish development for the GBP and accelerate our stronger GBP view. Finally, participants will be interested in how much the committee emphasize tightening in overall comments. We are constructive on the GBP on policy divergence especially against CHF, JPY and EUR. We expected that BoE to tread cautiously over sounding too hawkish especially in light of the failure of the Fed to upgrade its language. Yet, all other indications suggest that a rate hike could come as early as February. GBP/USD move above 1.5690 would trigger a bullish extension of strength to 1.5930 2015 highs. We remain buyers on corrections to 1.5460 support.
Mexico's Central Bank Intervenes
Selling pressure on MXN continued to mount forcing the authorities to defend the peso. The MXN has declined over 9% in 2015, and provides an indication on what could be awaiting other EM currencies. The deadly combination of weak growth & inflation outlook, soft crude prices, and higher US interest rates has investors fleeing MXN. According to sources, Mexico central banks sold $200mn - $400mn in yesterday trading. Despite the sizable auctions USD/MXN rallied to 16.39 before easing slightly. In late July the CB opted to keep rates unchanged at 3.00%, possibly saving their firepower for when the Fed raises rates. Yet the delay also suggests political pressure to keep government financing cost low. However, should MXN decline become unstable we anticipate the CB will enact a proactive rate hike. While presently Mexico has adequate foreign reserves at $191bn, the current size of intervention will be unable to stop the selling pressure. Currently weak oil prices will weigh on MXN, and force the central banks to further sell USD to smooth the peso decline. Crude oil is near a multi month lower oil continued to be sold as investors worry about rising US inventories as the summer driving season near the end.
Unemployment rises in Australia:
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“Australian labour market data has been released this night. Unemployment rate has increased from 6.0% to 6.3% for July, beating expectations at 6.1%. June Figure has been revised down to 6.1% m/m. In addition, the change of part-time contracts has increased sharply to 26.1k. However, this data remains very volatile and we prefer focusing on unemployment rate as seasonality is important on part-time jobs which may not fully reflect the true state of the labour market.
Yet, we are still concerned about Australia as its economy is slowing. In addition there are huge concerns about the real estate market that is bubbling. Indeed prices have risen 18.4% y/y in Sydney while Melbourne had an even stronger increase with a rise of 6.1% for the last three months. Hence, the Reserve Bank of Australia is struggling to adjust its monetary policy as lowering rate will fuel the real estate bubble.
For the time being, the inflation has risen 0.7% for Q2 and printed at 1.5% year-on-year. Data were finally very supportive for maintaining the cash rate target at 2% early this month even if inflation is still holding below the target band range of 2%-3%.
Therefore we remain bearish on the Australian Dollar which is at its lowest level against the greenback since 6 years. Low commodity prices should also hit more largely Australia and add downside inflation pressure. Also, China’s economic downturn starts to have an impact on the Aussie’s economy. Consequently, we think that AUD/USD will challenge the 0.7000 level within the next few months.”
EUR/USD is decreasing and is now holding around 1.0900. Hourly resistance lies at 1.1278 (29/06/2015 high). Stronger resistance lies at 1.1436 (18/06/2015 high). Support can be found at 1.0660 (21/04/2015 low). Over the last month, the pair is setting lower highs therefore we remain bearish over the medium-term. In the longer term, the symmetrical triangle from 2010-2014 favors further weakness towards parity. As a result, we view the recent sideways moves as a pause in an underlying declining trend. Key supports can be found at 1.0504 (21/03/2003 low) and 1.0000 (psychological support). Break to the upside would suggest a test of resistance at 1.1534 (03/02/2015 reaction high).
GBP/USD is still moving in either direction. Hourly resistance is given at 1.5803 (24/06/2015 high). Support is given at the 38.2% Fibonacci retracement at 1.5409. Stronger support is given at 1.5330 (08/07/2015 low). We expect the pair to decrease again within the next few days. In the longer term, the technical structure looks like a recovery bottom whose maximum upside potential is given by the strong resistance at 1.6189 (Fibo 61% entrancement).
USD/JPY has broken hourly resistance at 124.62 (10/06/2015 high). The road is now wide open towards the stronger resistance at 125.86 (05/06/2015 high). Hourly support is given by the 38.2% Fibonacci retracement at 122.04. A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 118.18 (16/02/2015 low).
USD/CHF has finally broken resistance at 0.9719 (23/04/2015) and still remains in a short-term upside momentum. We target resistance at 0.9863 (13/04/2015 high). Hourly support can be found at 0.9151 (18/06/2015 low). In the long-term, there is no sign to suggest the end of the current downtrend. After failure to break above 0.9448 and reinstate bullish trend. As a result, the current weakness is seen as a counter-trend move. Key support can be found 0.8986 (30/01/2015 low).
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