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Euro gropes for support after German election

Most major currencies traded lower over the past week. The steepest decline against the US dollar was seen in the Japanese yen (-0.69%), while sterling slipped 0.46%, the New Zealand dollar dropped 0.38%, the Australian dollar dipped 0.09%, and the single currency edged down 0.04%. Conversely, the Canadian dollar ( 0.99%) and the Swiss franc ( 0.86%) strengthened.

The EURUSD pair fell 0.16% against the dollar to 1.1720 on Friday, September 24. Price action held above 1.1730 until the North American session. Then the greenback drew support from deteriorating market sentiment amid grim news about the threat of bankruptcy facing distressed Chinese developer Evergrande.

On Wednesday, September 22, Evergrande told Chinese investors that on September 23 it would make interest payment on its yuan-denominated bond maturing in 2025 (CNY RMB 232 mln or $35.9 mln). On Thursday, the developer was supposed to pay $83.5 mln in interest on its outstanding dollar-denominated bond, but the company did not confirm the payment.

Evergrande has a 30-day grace period to settle its obligations before being officially declared bankrupt. Given that the company has already stopped paying many of its contractors and some of its employees, it looks like investors are being lulled into a false sense of security.

The PBoC triggered a collapse in the cryptocurrency market, pressuring risk-sensitive assets ahead of the weekend. China’s central bank said on its website that all virtual currency-related business activities are illegal financial activities.

Later in the day, Cleveland Fed President Loretta Mester added fuel to the fire. In her speech, she stated that QE asset purchases have become less effective, so the scope of bond purchases could be reduced.

Today’s macro agenda (GMT 3)

  • 11:00 Eurozone: M3 money supply and loans to households (August)
  • 13:00 Germany: Bundesbank monthly report  
  • 14:45 Europe: ECB President Christine Lagarde speech
  • 15:00 US: Fed member Charles Evans speech
  • 15:30 US: durable goods orders (August)
  • 16:00 and 19:00 US: Fed member John Williams speech
  • 19:30 US: Fed member Lael Brainard speech
  • 21:00 UK: BoE Governor Andrew Bailey speech

Current outlook

In European trading, major currencies have been showing mixed performance today. The Australian, Canadian, and New Zealand dollars as well as the yen are trading in positive territory, while the single currency was trading at 1.1719 by the time of writing. The single currency looks shaky due to the results of the election in Germany. Merkel's conservative CDU/CSU bloc lost, garnering 24.1% of the votes. In first place is the Social Democratic Party of Germany, headed by Olaf Scholz, with 25.7%. The SPD and CDU/CSU must now persuade the other parties to form the next coalition government.

US index futures look more optimistic at the outset of trading: S&P 500 and Dow futures were up 0.45%, while Nasdaq futures were 0.34% higher ahead of European trading.

Investors will focus on a speech by ECB President Christine Lagarde and US durable goods orders to gain insight into which way markets will move. Also speaking today are three Fed members. It will be interesting to see what they have to say about the timing and scope of QE tapering.

Negativity from China might reduce risk appetite. There is still no news from Evergrande about interest payment.

Technical analysis

On Friday, September 24, the euro fell to 1.1706 and retraced to the 55-day SMA (balance line) at 1.1723. EURUSD is trading at 1.1704. Despite the UK energy crisis, sterling is faring better than the euro due to a decline in the EURGBP cross pair. Buyers apparently priced in risk for the single currency after Germany’s elections ended or are retreating before the speeches of Lagarde and other Fed officials.

The September 20 pricing model points to a reversal for the recovery of the single currency. Closing an hour below 1.1695 would increase pressure on buyers, while a retracement to the 1.1724 level would send a bullish signal for continued upside with targets in the range of 1.1750-1.1765.

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