Focus On USD Rally
Swissquote Bank Ltd | Nov 21, 2016 07:16AM ET
Forex News and Events
Focus on USD rally
This week markets will further focus on President-elect Trump's picks for high ranking positions. Despite the glaring lack of platform details, investors have been quick to extrapolate Trump's every action into investable ideas. Our Themes Trading “President Donald Trump” theme continues to outperform, suggesting that our underlying assets are in-line with market thinking. A key pattern which this theme’s success highlights is that easier fiscal policy will support growth expectations (triggering long term inflation expectations). The results, have been a global sovereign rates yield curve, which is steepening sharply. With the move, USD has appreciated quickly while investors have sold EM bonds and shifted into DM equities. EUR/USD has reached 1.0579 - levels not see since December 2015, and a widening US-JP yields differential have blasted USD/JPY above the 110.80 level. We do not anticipate the USD to run much further (Fed fund futures are still pricing in a shallow tightening cycle) but have not seen any immediate signals of exhaustion.
This week, the macro backdrop suggests deeper EUR depreciation. European political risk has significantly increased with severe political risk events ahead next year. With candidates expected to exploit the growing anti-establishment populist movement, the risk of radical disruption is high (think Marine Le Pen inspired Fexit). In addition, the failure of polls in Brexit and US presidential elections injects a non-negligible amount of uncertainty into these events. In France's centre right, presidential primary Francois Fillon provided an upsetting victory to Alain Juppe and Nicolas Sarkozy. These results will likely lead to a Fillon / Le Pen showdown (after a Fillon / Juppe second vote on Nov 27th), where market risk increases significantly. Today, ECB President Mario Draghi will present the ECB’s annual report to the European parliament. We anticipate Draghi to remain dovish following this speech on Friday, emphasizing the need for further accommodative monetary policy. This will provide a clear signal that at the December 8th meeting the ECB will extend their asset purchase program by six-months while potentially reducing the rate to monthly purchases from €80bn to €60bn. We remain bearish on EUR/USD and anticipate a move to 104.00 in the near term.
Finally, with a light US calendar this week the Fed's November meeting minutes will likely take center stage. With a December 25bp hike nearly fully priced in, traders will be focused on the policy path from 2017 and 2018. Currently, the market is underpricing in the pace of tightening (correctly in our view) so an unexpected hawkishness will provide additional rationale of a sustained USD rally.
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Russia: Ruble appreciates ahead of the OPEC meeting
The ruble has started the week on a strong footing against the dollar, gaining almost 1% and heading towards 64.4 ruble. This rise is being spurred by hopes that a deal will be confirmed at this week’s OPEC meeting. Crude oil is pushing higher, but in our view, no deal will be struck and we maintain our bearish view on the commodity.
Also, Trump's election is already offloading some downside pressure on the ruble because of the possibility of lifted sanctions. We are adjusting our views as we believe that global relations, in particular those between US and Russia, would have deteriorated in the event of a Clinton victory.
However, the ruble remains fragile due to OPEC member divergence. The only hope of an agreement, in the short-term, is pushing the currency to appreciate, which is why we believe that it is slightly overvalued right now. For the time being, we are pricing in a deal at about 70% (in view of past OPEC meetings) and are ready for a sell-off. The OPEC meeting may be seen as a disappointing trade: We therefore advise traders to be prepared for a sell-off in crude oil and ruble. 66 ruble for a single dollar note represents our target for year-end.
The Risk Today
EUR/USD's buying pressures are back. Hourly resistance is given at 1.0521 (13/04/2016 low). The technical structure suggests that selling pressures are fading. A break of resistance at 1.0746 (17/11/2016 high) is needed to confirm a reversal. In the longer term, the death cross indicates a further bearish bias despite the pair has increased since last December. Key resistance holds at 1.1714 (24/08/2015 high). Strong support is given at 1.0458 (16/03/2015 low).
GBP/USD is way into a bearish channel. Resistance stands far away at 1.2674 (11/11/2016 high). Hourly support is given at 1.2302 (18/11/2016 low).Expected to see continue weakness. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.
USD/JPY 's buying pressures are important. The pair is making new highs day after day. Hourly support is given around 109.80 (16/11/2016 low). Stronger hourly support lies at 108.56 (17/11/2016 low). Expected to see further upside moves. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
USD/CHF's buying pressures are important. Yet, some profit taking are starting and we now expect further retracement. Hourly resistance is given at 1.0123 (18/11/2016 high). Expected to see further consolidation. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.
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