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The Daily Fix - 1/3/2016

Posted on: 01 March 2016, by: Pepperstone Support, category: Market Review

The big news of the day was the PBoC’s cut of the RRR by 50bps around 10:00 GMT/5:00 EST.

The bigger themes were continued bias for USDJPY downside, though progress has been slow and 111.92 support remains respected; second, pressure on EUR into the ECB.

As for the PBoC, there was a somewhat underwhelming reaction in FX: USDCNH up from 6.5490 towards 6.5600 and AUDUSD gaining ~35pips to a high of 0.7168. The pairs have since settled near 6.5520 and 0.7140.  

Citi Economics thinks the move by the PBoC was not a surprise, although the timing was earlier than expected. It has been calling for five RRR cuts and two policy rate cuts this year.

Month-end left its footprint primarily in USDCHF selling and modest USDCAD demand around 11:00 EST/16:00 GMT. Otherwise, the main flow was seen in early London: EUR selling.

USDCHF market volumes around 20% higher than normal by the London close, while overall market volumes were down roughly ~15%.

In contrast, USDJPY market volumes were around -30% below normal and AUDUSD market volumes were around -40% below normal.. Directionally, themes were light dip demand in EURUSD and USDCAD selling.

Remember, AUD sees the RBA meeting today but no policy shifts are expected

In NY, FX market reaction to G20 and soft US economic data remained somewhat subdued. For the record:

US pending homes fell by -2.5%MoM in January. Weakness was concentrated in the Midwest (-5.2%) and West (-4.5%) followed by the Northeast (-3.1%). The oil-dragged South was actually up by 0.4%.

Pending sales are often seen as a leading indicator for housing, since they measure purchases at the time a contract is signed, rather than at closing. Comments accompanying the report signal that the market is still seeing an imbalance between homes for sales and buyers. "The recent acceleration in home prices and minimal inventory throughout the country appears to be the primary obstacle holding back would-be buyers," Lawrence Yun, the NAR's chief economist, said in a statement.

US Chicago PMI came in at 47.6 versus 52.5 expected in February. Details showed the lowest prices paid index since July 2009 and contraction in employment for the fifth month in a row. New orders also fell; in fact, only two components improved.

In the end, investors are stuck with the view that the Fed is almost certainly not hiking in March but the overall, US data picture is constructive. The question from here: Is just 17bps of tightening priced in for all of 2016 fair?

Data in the Eurozone started a downtrend in EURUSD. Our traders felt the selling also reflected overflow from Friday’s strong US data round.

Eurozone headline HICP dipped back to negative territory at -0.2% YoY versus 0.0% consensus, a 1y low. Core inflation eased to 0.7% YoY versus 0.9%, lowest since April 2015.

Base effects in the energy component and further weakening in food price inflation contributed to depress the headline rate, while part of the decline in core inflation seems to have been related to holiday prices and could see some payback in the next two months. Still, the data confirm the modest uptrend in core inflation observed in H1 2015 has faded and put the ECB to test at next Thursday’s meeting.

UK mortgage approvals, consumer credit and money supply data was not impactful for GBP. Brexit concerns linger, though GBPUSD saw modest short-covering towards 1.3945.



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