Mid-Day Report: Dollar Firm, Extending Rally Against Commodity Currencies

The financial markets are relatively steady today. FTSE is fluctuating between gain and loss for the moment while DAX and CAD are mildly lower. US futures also point to a flat open. Dollar continues to be the biggest winner this week as Euro and Sterling remain generally pressured. Nonetheless, there seems to be new wave of selling in commodity currencies in early US session. Both the Australian dollar and Canadian dollar weaken considerably against the greenback. Meanwhile, the Japanese yen is rather directionless at the time of writing.

A number of economic data were released today but markets paid little attention to them. Canadian housing starts dropped to 192k in August. UK industrial production rose 0.5% mom, 1.7% yoy in July while manufacturing production rose 0.3% mom, 2.2% yoy. Both were slightly better than expectation. UK trade deficit widened to GBP -10.2b in July, BRC sales monitor rose 1.3% yoy in August. Japan machine tool orders rose 35.6% yoy in August, consumer confidence dropped to 41.2 in August, tertiary industry index rose 0.0% mom in July. Australia home loans rose 0.3% in July, NAB business confidence dropped to 8 in August.

In Eurozone, former ECB chief economist Juergen Stark criticized that ECB is turning itself into a European “bad bank” by “taking enormous risks onto its balance sheet with the purchases of ABS”. He noted that last week’s surprised rate cut by ECB could be seen as a “symbolic” move and zero interest rates will “not produce a single euro in additional lending”. And, “this inefficiency will in the long term among other things further undermine the ECB reputation”.

Dollar was boosted this week by a San Francisco Fed study. The report noted that “surveys, market expectations, and model estimates show that the public seems to expect a more accommodative policy than Federal Open Market Committee participants.” Meanwhile, “the public might not give enough weight to how dependent the central bank’s guidance is on both current and incoming data.” Hence, the public could underestimate the conditionality and uncertainty of interest rate projections.” Some analysts noted that the markets could have been awakened by the report and had started re-pricing those rate expectations.

Sterling continues to be the weakest currency this month. The major event in the UK this month is undoubtedly Scotland’s independence referendum on September 18. The latest polling result from YouGov shows that, excluding undecided voters, ‘Yes’ vote (51%) surpassed ‘No’ vote (49%) for the first time on September 6 on the question ‘Should Scotland be an independent country?’. GBPUSD slumped more than -1.5% to 1.607 (as of September 9), the lowest level since November 2013, following the -1.6% selloff last week. The uncertain outlook, economic, fiscal, monetary, political, etc, in the continuing UK (rest of UK, rUK) after Scotland goes independent has been unnerving investors. Worse still, it appears that the British government has not prepared any contingency plan for the case of a breakup, although the BOE indicated that it has plans to provide emergency lending to Scottish banks in the case of deposit flight. The Scottish Government proposes that the Independence Day will be on March 24, 2016. That will ensure that the Scottish parliament elections would take place on May 5 2016 and there would be sufficient time for negotiation of various issues after the September 18 referendum. We believe the issues concerning investors the most are the currency and debt allocation/fiscal issues in rUK. More in Pound Got Pounded – Scottish Independence Referendum Creates Huge Uncertainty In UK’s Prospect.

Daily Pivots: (S1) 1.6056; (P) 1.6144; (R1) 1.6191; More

Intraday bias in GBP/USD remains on the downside as recent decline from 1.7190 continues. Current fall should target 50% retracement of 1.4813 to 1.7190 at 1.6002. Break will target 61.8% retracement at 1.5721. On the upside, above 1.6233 minor resistance will turn bias neutral and bring consolidations. But recovery should be limited by 1.6534/6643 resistance zone and bring fall resumption.

In the bigger picture, price actions from 1.3503 (2009 low) are treated as consolidations to long term down trend from 2.1161. The current development, with medium term top formed at 1.7190, argues that such consolidation is possibly completed, just below 50% retracement from 2.1161 to 1.3503 at 1.7332. The firm break of 55 weeks EMA affirmed this bearish case and GBP/USD is now heading back to 1.4813 key support level.

GBP/USD 4 Hours Chart

GBP/USD Daily Chart

GMT
Ccy
Events
Actual
Consensus
Previous
Revised
23:01
GBP
BRC Sales Monitor Y/Y Aug
1.30%
0.30%
-0.30%

23:50
JPY
Tertiary Industry Index M/M Jul
0.00%
0.30%
-0.10%
0.00%
23:50
JPY
Japan Money Stock M2+CD Y/Y Aug
3.00%
2.90%
3.00%

23:50
JPY
BoJ Minutes

01:30
AUD
NAB Business Confidence Aug
8

11
10
01:30
AUD
Home Loans Jul
0.30%
1.00%
0.20%
0.10%
05:00
JPY
Consumer Confidence Aug
41.2
42
41.5

06:00
JPY
Machine Tool Orders Y/Y Aug P
35.60%

37.70%

08:30
GBP
Visible Trade Balance (GBP) Jul

-9.1B
-9.4B

08:30
GBP
Industrial Production M/M Jul
0.50%
0.20%
0.30%

08:30
GBP
Industrial Production Y/Y Jul
1.70%
1.30%
1.20%

08:30
GBP
Manufacturing Production M/M Jul
0.30%
0.30%
0.30%

08:30
GBP
Manufacturing Production Y/Y Jul
2.20%
2.20%
1.90%

12:15
CAD
Housing Starts Aug
192K
195.0K
200.1K

14:00
GBP
NIESR GDP Estimate Aug

0.60%

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