Sterling was among the biggest winners last week as the important risk was finally cleared. Scotland rejected independence in the highly anticipated referendum. Nonetheless, buying in the pound was exhausted after the referendum and it pared back much of the gains against dollar and yen towards the end of the week. Canadian was surprisingly the biggest winner last week, as lifted by strong core inflation. Dollar was the first biggest winner after the mildly more hawkish than expected FOMC statement. On the other hand, yen extended recent decline together with record high in US equities. Some acceleration was seen in the middle of of week with yen’s selloff. While yen pared back some losses before close, it’s still the weakest major currency last week. Yen was closely followed by Aussie and then Euro.
Here are some brief recaps of the key events last week. The dust is settled in the Scottish referendum with 55% voted “No” to independence while 45% voted “Yes”. Yet, the story does not end here. Westminster has made promises of further devolution for Scotland with new powers over tax, spending and welfare to be agreed by November, and draft legislation published by January. There would be considerable changes in constitutions and thus the “no” vote is not equivalent to “no change” in the UK. The focus now is returned to the economic and monetary outlook. More in The Aftermath of Scottish Referendum.
The BOE minutes for the September meeting showed a 7-2 vote to keep the Bank rate unchanged at 0.5% and the asset purchase program at 375B pound. Same as the August meeting, Martin Weale and Ian McCafferty dissented the policy decision and voted for a +25-bps hike to 0.75%. The staff revised higher their forecast for 3Q14 growth to +0.9%, whilst noting downside risks in 4Q14. More in BOE Minutes Show Another Month Of 7-2 Split Of Monetary Decision.
The SNB intensified the stance that it would use all possible means to combat deflation, as the central bank revised lower the growth and inflation outlook in the September meeting. Policymakers announced to defend the 1.2 floor of EURCHF, noting that ‘given a worsening of the environment, the key remains the minimum exchange rate’. In the meantime, the central bank also left the target range for the three-month Libor unchanged at 0.0–0.25%.However, EURCHF weakened after the statement as the market had anticipated that the central bank would accelerate easing measures and there had been rumors that the SNB would adopt negative rates. More in SNB Strengthened Stance To Interfere EURCHF If Inflation Deteriorates Further
Market reactions suggested that investors viewed the September FOMC meeting as a hawkish one although the Fed retained the language that ‘it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends’. Treasury yields and the US dollar climbed higher as fed funds ‘dot plot’ moved higher. Meanwhile, the Fed continued QE tapering and announced a further US$10B reduction in asset purchases. On the accompanying statement, it is stated clearly that the asset purchase program would end at its next meeting. More in FOMC Left ‘Considerable Time’ Language But Generally Viewed As More Hawkish.
Technically, while the Sterling was rather strong during the week, the overall picture is indeed mixed. EUR/GBP resumed recent down trend and took out 0.7873 key support level to as low as 0.7809. Further downside is anticipated in the cross but we’d be cautious on bottoming attempt at around 0.7755 key support level (2012 low). GBP/JPY resumed the long term up trend from 116.83 (2011 low) and hit as high as 180.70, highest level since 2008. Further rally is expected to next long term fibonacci resistance of 183.96. However, GBP/USD was limited below 1.6534/6643 resistance zone and could have topped at 1.6523. GBP/USD could be just stabilizing above 1.6051 low and is developing into a sideway pattern. Outlook in GBPUSD is still bearish for another low.
GBP/CAD’s rebound was also limited by 55 days EMA and could have topped at 1.8117. That’s also after a brief breach of the lower end of prior range at 1.8098. This week’s focus will be on 1.7815 minor support and break there could turn bias back to the downside for extending the correction from 1.8666 through 1.7535 to 38.2% retracement of 1.5242 to 1.8666 at 1.7358.
The development of Australian dollar is worth noting. Recent decline in AUD/USD showed acceleration and is likely heading back to 0.8659 support. GBP/AUD reached as high as 1.8475 last week and took out 1.8374 resistance. The development suggests that correction from 1.9185 has completed with three waves down to 1.7214, after hitting 38.2% retracement of 1.4380 to 1.9185 at 1.7349. Near term outlook will now stay bullish as long as 1.7858 support holds and we’d expect a test on 1.9815 high next.
AUD/CAD dived to as low as 0.9771 last week and the strong break of 0.9935 support confirmed resumption of decline form 1.0349. More importantly, the medium term channel support was taken out, suggesting that whole rise from 0.9169 has completed at 1.0349 already. We’d possibly seen further downside acceleration ahead to send the cross through 50% retracement of 0.9169 to 1.0349 to 61.8% retracement at 0.9620 and below.
Elsewhere, Euro stayed bearish against Dollar, Sterling and Canadian. Even against the weak Aussie, EUR/AUD didn’t have enough momentum to get through 1.4477 key near term resistance yet. Nonetheless, EUR/JPY did follow broad based weakness in the Japanese yen and confirmed near term reversal. But EUR/JPY was limited way below medium term resistance of 145.68, far lagging behind USD/JPY and GBP/JPY. Yen is clearly in broad based down trend with USD/JPY being the biggest winner this month. But as it’s close to an important projection level around 110 handle and is overbought, we’d be cautious on a pull back.
Regarding trading strategies, we’re holding on to EUR/USD and AUD/USD shorts for the moment. EUR/USD’s recovery was disappointing and we didn’t have a chance to add to our short positions. Now we’d anticipate the next bearish run to 1.2755 key support level within the next two weeks. And, we’ll keep an eye on any bottoming sign around there to close out our short positions. Meanwhile, AUD/USD would be targeting 0.8659 key support level in a latter stage. We’ll look for opportunities to sell Japanese yen ahead, but not now. USD/JPY could have a pull back from 110 handle or below and we’ll wait for an opportunity to enter after the anticipated pull back.
USD/JPY surged to as high as 109.45 last week as recent rally accelerated. Initial bias remains on the downside this week for 100% projection of 96.56 to 105.43 from 101.08 at 109.95 next. Break there will pave the way to long term fibonacci level at 111.62. On the downside, break of 107.39 support is needed to indicate short term topping. Otherwise, outlook will stay bullish in case of retreat.
In the bigger picture, whole medium term up trend from 75.56 is still in progress. Current upside accelerating indicates that the pair is building upside momentum again. Current rally would likely extend through 50% retracement of 147.68 to 75.56 at 111.62 to 61.8% retracement at 120.13 and above. On the downside, break of 101.08 is needed to signal medium term reversal, or outlook will stay bullish.
In the long term picture, the strong impulsive look of the rally from 75.56 suggests that USD/JPY is now in a long term up trend. Based on current momentum, such rally should at least take out 61.8% retracement of 147.68 to 75.56 at 120.13 and have a test on 124.13 resistance.