Market Drivers - Currencies

Market Drivers - Currencies


Review: A few poor economic indicators from Spain as well as some problems caused by one of the coalition partners in the Greek government in respect of the current negotiations with the Troika (EU/IMF/ECB) sent negative waves through the financial markets. As expected the Bank of Canada did not change its interest rate and softened its rhetoric - CAD strengthened against USD. The overnight HSBC PMI data for manufacturing industry in China came out at 49.1 against 47.9 the last time. AUD strengthened following the announcement of the figures, while equities in China are 'flat' this morning.

Market sentiment: The economic indicators to be released today in Europe as well as the US will decide the overall sentiment. Generally, the next few days will offer a lot of events, but today's IFO data from Germany, PMI for industry in Europe as well as PMI industry in the US are very important economic indicators and will have a heavy impact on the overall situation. Jyske Bank's macro-economists generally expect the economic indicators to show stabilisation. Such a development will support an increasingly positive market sentiment and EUR will be preferred to most other 'majors' currencies.

Today's events: Initially, this morning (09:15) announcement of confidence indicators in Sweden in the form of consumer confidence and industrial confidence. It is expected that expectations will fall – if this holds true, SEK will be under pressure prior to tomorrow's interest-rate meeting of the Riksbank. At 09.58, PMI data for Europe will be announced and consensus points to better figures than the last time (46.5 for industry (46.1 the last time) and 46.4 for the service sector (46.1 the last time)). At 14:58 PMI data for the manufacturing industry in the US will be announced. Also here an increase is expected, namely to 51.5 from 51.1. At 20:15 the Fed will make its interest-rate announcement – which seems to be a non-event – and at 22:00 New Zealand will make an interest-rate announcement and it is expected that the rate will be kept unchanged at 2.5

EURUSD (NEUTRAL): We recommend a buy order at 131.85. S/L at 130.45. A breach above the top at 131.72 would be the final confirmation that EURUSD continues up towards our 3-month target at 138. The first important level to the topside has been breached. The next range of resistance will be 131.50-131.72. Support at 130.00 and then 200 MA (128.31).

USDJPY (SELL call option): We recommend investors to sell the call option and hence we close the recommendation (+1.05%).

EURSEK (NEUTRAL): Currently it is reckoned that there is about a 33% probability in the interest-rate market that the Riksbank will lower its interest rate tomorrow. Only four analysts have reported their expectations to the Riksbank in October – however, everybody expects an interest-rate cut in Q4. "The Shadow Board", an expert panel of Dagens Industri, also offers its view of the interest-rate policy – five out of six sees need for an interest-rate cut. The last person sees the need for a 50 bps. rate cut. In JyskeBank we expect a 25 bps. rate cut.

We do, however, assess that tomorrow's interest-rate meeting may be decisive and have a great impact on the future interest-rate policy (i.e. the probability of a lower interest rate). If the Riksbank is to conduct a normal monetary policy, it should lower its interest rate – the economic indicators have been poor. This may be illustrated by the super index for Sweden, which shows that on a consistent basis the analysts have been surprised negatively since the most recent interest-rate meeting.

However, last week's comments by central bank governor Stefan Ingves (keeping the interest rate low for too long may be detrimental) may throw grit into the machinery, and the question is whether he has sufficient backing among the rest of the board members to maintain an unchanged interest rate.

If the rate is kept unchanged, there are indications that Ingves has support in the interest-rate committee from at least two board members and hence the probability of further interest-rate cuts has been reduced dramatically unless the economic indicators really deteriorate. We expect that EURSEK will have to reach the range of 875-890 again before we see attractive opportunities in selling the cross rate