SereneLoi.com

European Session: Risk Aversion Puts EURUSD And Gold On The Ropes

Equities traded heavily throughout the day yesterday, but it took a large miss in forecasts for US New Home Sales (-3.6% MoM vs. +2.6% expected) to add the catalyst for a USD rally late in the session. The numbers are particularly worrying considering that these figures reflect the performance of the housing market under stimulus, and considering the recent speculation that first-time homebuyer tax credits may be allowed to expire imminently, the prospect is not encouraging. EURUSD had spent the day stubbornly underpinned by support at 1.4750-60, but gradually as the wave of risk aversion took hold it collapsed to touch a low of 1.4683 overnight. Commodity currencies (the recent outperformers) were hit particularly hard; AUDUSD was down over 2% on the day to 0.8980, whilst USDNOK was down around 1.7% at 5.7400 despite the earlier rate hike and hawkish statement. NZDUSD suffered the most brutal sell-off, down over 3% on the day (0.7200 last) as there were few supportive factors to emerge from the RBNZ meeting. As expected, the central bank kept rates on hold at 2.5%, but they conceded very little in shifting from a dovish bias to a neutral stance. Wary of the effect of a strong NZD on the export-led economy, they were extremely careful to anchor expectations for no rate hikes “until the second half of 2010”. Given the much improved data over the last month and uptick in inflation in the 3rd quarter, it is likely this subdued assessment disappointed many speculators.

This morning the Asian equity markets are universally in negative territory, and futures are pointing to a lower open across Europe. The USD’s recent strength has left gold looking extremely vulnerable around its pivotal $1030 level; so far it has dipped to a low of $1026 in the past 24 hours ($1032 last), and silver has also suffered an aggressively sell-off to $16.12 lows ($16.25 last)

Looking ahead to today’s session there are a number of further key releases. First up will be Norwegian Retail Sales (Sep), where the market is looking for a 0.4% increase MoM after the 0.3% gain last month. The spate of impressive figures from Norway in the last few months has pushed ambitions high, and this number is likely follow suit. However, if there is a downside miss in the numbers, NOK could suffer acutely as positioning and market sentiment is primed for an unwind in commodity currencies today.

The other major release of the European session will be Eurozone Consumer Confidence (-18 expected, -19 prior); given sentiment we believe the bias strongly favours EURUSD weakness as better-than-expected figure will be unlikely to present a compelling case for buying EUR, but a weak number will almost certainly add fuel to the risk aversion fire.

Of course the centre-piece of the day’s releases will come in the US session as the US Q3 GDP first reading is revealed. Markets are still optimistic that the end of recession is nigh, but given the shock miss in UK GDP last week, there is certain to be some caution attached to forecasts. Obviously the prospect of a disappointing number will have a devastating effect on risk correlated trades and prompt strong USD buying, but markets should also consider the prospect that improvements in the US outlook may well beget the end of stimulus measures and indeed change the Fed’s attitude to low-for-long interest rate policy. A situation which would eventually also favour an unwind of USD carry trades.

#