The source of an exuberant start to the week in Europe was the product of a miracle in Medinah rather than any progression in EZ debt crisis. As Europe gelled superbly to see off the U.S. in the Ryder cup, division and confusion regarding a Spanish bailout was clearly visible early on and any rallies were fraught with uncertainty.
Expectations remained high for an imminent bailout for the ailing sovereign as reports continued to reaffirm the growing market optimism. Spain’s new junk bond Moody’s rating only acted to fuel the speculation. The euro breezed through the 200 DMA shorts to push to US$1.2939.
The voice of reason Germany quelled talk about the urgency of a bailout, but the rally soon picked up again. It was left to Spanish PM Rajoy to douse hopes of a forthcoming bailout, firmly denying the country was close to a request. As expected the pair softened dipping back below US$1.2900.
Struggling insipidly through mid-week, the euro chopped in a tight range ahead of the ECB and Fed minutes on Thursday. There was minimal reaction on the release of both as the ECB held rates and Draghi’s conference acted to reiterate previous pledges. Investors were happy to persevere with their blind faith as the ECB reinforced their readiness to act and we saw the euro burst to US$1.3031. We learnt nothing new from the FOMC minutes as any dollar gains were ultimately nominal. From a technical standpoint the break of US$1.2975 confirmed a ‘head and shoulders’ move aiming at US$1.3090.
To cap a strong week for the single currency, NFP data squeezed the pair to reach 2-week highs of US$1.3072. While the headline figure came in line with expectations at 114,000, a big upward revision to the August number of 46,000 prompted the rally. The real surprise came from the unemployment data that saw the U.S. figure drop to 7.8% from 8.2% marking a near 4 year low. The euro did surrender gains late in the session to close back near US$1.3025.
It is likely the euro will fall against the dollar as we see risk-off, although focus will be on the 200DMA. If the level is held, we are likely to see the euro build on its recent momentum.
The Australian dollar endured another arduous week with the main catalyst for its underperformance being the RBA. In a quiet start, Chinese PMI data came in line with expectations and resulted in an uninspiring opening. After failing to capitalise on the broader risk-on environment, the pair suffered at the hands of another RBA rate cut. The central bank shed a further 25 basis points, seemingly wrong-footing many economists who had perceived the bank to be less impatient than the cut suggested.
On the news it immediately dumped over 60 pips to US$1.0292. In general they regurgitated previous comments with a dovish bias citing the labour market and global growth as causes for concern. During Tuesday, comments from Spain’s Rajoy saw the pair collapse another leg lower to US$1.0253. The pair bounced round in a lacklustre fashion through to Friday, although it did eke back some gains back to US$1.0270. NFP Friday proved the nail in the coffin as strong U.S. unemployment data sealed a harsh move lower to see the Aussie finish the week near US$1.0170.
It is likely the Australian dollar will fall against the U.S. dollar in the near-term as its downside bias remains intact. Chinese growth concerns and struggling domestic data remain key reasons for this.
A rollercoaster week for Cable ultimately left it on par as PMI data exacerbated moves in tandem with the euro. A string of disappointing data began with the less important Manufacturing PMI as it came in below expectations at 48.4. This triggered sterling underperformance, but to no great extent. This trend continued as Construction PMI contracted for the month, posting 49.5. The data was overshadowed later on Tuesday with an isolated rally to US$1.6187 which seemed to have been inspired by the real money community.
The dismal week continued with a weaker than expected Services PMI of 52.2 that extended the rot. This proved to be a pothole rather than a substantial obstacle on the way down to fresh 3-week lows of US$1.6067. Through to Thursday, Cable took full advantage of the ECBs confirmation of its readiness to buy bonds and raced to US$1.6202. It did manage to peak at US$1.6217 on the immediate reaction to NFP data, but eventually succumbed to the stronger dollar to close back at US$1.6130.
It is likely sterling will track the euro lower and weaken against the dollar as Spain continues to be top of the agenda for markets.
A wealth of volatility underpinned the beginning of the week for gold as fund-buying and central bank demand resulted in a spike to $1,791 an ounce, representing a near one-year high. The metal did quickly recede back to $1,775, before slipping into a tight trading range. It seemed investors were holding off ahead of NFP data later in the week. With little real impetus the metal held a $10 range through to Thursday, ignoring a sharp drop in crude oil along the way.
Although NFP remained the focus, gold set its sights on $1,800 after ECB comments regarding their pursuit of bond buying. A good attempt left it $5 shy at $1,795. Surprisingly strong U.S. unemployment data took the shine off the metals inflation hedge appeal and it stumbled aggressively back to $1,775 an ounce.
It is likely gold will consolidate in the near-term as investors reassess the condition of the U.S. economy.
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