A distinct lack of conviction in markets set the tone for a disappointing start to the week for the euro. In the U.S., Columbus day meant flows were light, but the pair crept lower early on after EZ Finance Ministers formed a united front against the exigency surrounding a possible Spanish bailout.
Greece also managed to intrude on headlines following Merkel’s high profile visit to Athens. Marred by protests in the capital, Merkel said the reform road remained long for the country, but was confident they would remain in the EZ. Safe-haven demand drove flows and the euro dipped to US$1.2907. It did manage a slight reprieve after Draghi reiterated that the OMT was unlimited, but a bounce back to US$1.2961 was short-lived as the pair nosedived to US$1.2859.
Scarcity of any fresh developments mid-week left the euro snared in a sedate range as it hovered tenuously above the highly touted 200 DMA at US$1.2823. Late on Wednesday an S&P downgrade of Spain by two notches to BBB- aggravated EZ concerns catalysing another attempt to overhaul the key moving average.
After successfully holding the US$1.2823 level, it was onwards and upwards for the pair following comments from the IMF’s Lagarde that the ailing EZ economies should be given more time to reduce their budget deficits. The euro rallied strongly back to US$1.2952 as investors perceived the comments to herald greater stability in the currency bloc. The recovery continued into Friday before petering out at US$1.2992. Supporting the rally was reported talk that EU officials were considering delaying Basel III capital rules, although this was rubbished later in the day. Week end position squaring left the euro within a few pips of its week opening at US$1.2957.
It is likely the euro will remain in its indicative range against the dollar in the near-term as uncertainty over Spain and the resurgence of Romney in the race to the Presidency remove any clear direction.
The Australian dollar spent the majority of the week recovering from its recent post-RBA rate cut hammering. Early doors the pair found good support from the paring back of substantial EUR/AUD longs that had been built up in the aftermath of the RBA’s recent decision. It managed to claw its way higher eventually meeting resistance at US$1.0220.
In choppy fashion the pair managed to absorb much of the downward pressure which filtered through from the plunging euro. Taking a medium term view, the sharp rise in iron ore of late is likely to have supported the pair during the week as investors reconsider short positions. Ahead of important employment data, the Aussie dollar continued to bounce around but with a general upside bias and pushed to US$1.0263 mid-week.
It was a mixed outcome on the data front as the notoriously volatile employment change number came in above expectations with a 14,500 rise. A slight tick up in the unemployment rate to 5.4% however dampened optimism. Nevertheless, the pair raced away from US$1.0220 to reach US$1.0292 highs. The rally didn’t last and the pair closed back near US$1.0230.
It is likely the Australian dollar will continue to encounter downside pressure as prospects of a China hard landing weigh on sentiment, however with much of the recent negativity priced in, we may see choppy consolidation in the short-term.
The recent recovery by the dollar against the yen was spasmodically snapped at the start of the week as a round of heavy EUR/JPY selling by U.S. names beat the pair as low as ¥78.08. Thereafter flows were tentative with the prospect of Japanese action enough to discourage any severe yen buying. The dollar did remain under pressure, but avoided any confrontation with the ¥78.00 level.
The release of BoJ minutes during Thursdays Asia session failed to provide any support, although did seem to point towards further BoJ easing at the policy meeting at the end of October. The pair eventually breached ¥78.00 to plum a ¥77.95 low. Progression of the interventionist rhetoric was almost immediate as Noda was hot on the wires stating Japan ‘will take decisive action’. Selling off quickly, the yen was also dented by a drop in U.S. unemployment claims which came in at 339,000. Peaking at ¥78.59 the pair slipped into range to close the week near ¥78.40.
It is likely the yen will lose ground in the near-term as U.S. data and intervention fears underpin the dollar, however its safe haven appeal will continue to support it.
For the most part, gold remained steady during the week as a number of opposing factors pinned the metal in a modest range. Initially extending its decline from the previous week as a result of U.S. jobs data, it slipped further as global growth came under scrutiny from the IMF, settling near $1,760 an ounce. A sharp rise in the price of crude oil limited the downside.
Through Wednesday the metal became choppy as renewed EZ fears kept it away from previous week highs. It eventually managed to track the euro back higher to $1,774 after the U.S. saw a better than expected jobless claims number. The precious metal failed to sustain its buoyancy as the better outlook in the U.S. resulted in a collapse to $1,752 on Friday. Investors focused on the improvement as giving a sign the Fed may ease up on its recent stimulus.
It is likely gold prices will recover in the near-term, but a continuing stream of strong U.S. data will see the metal shed its recent QE gains.
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