Equity traders have a saying, â€śThere is no rally like a bear market rally.â€ť Fridayâ€™s sharp reversal in US stock indices which caused a 200+ point turnaround in DJIA average in the last hour of trade was just the latest example that the old dictum holds true.
â€˘ Japanese Yen: Equities Rebound pulling USDJPY above 107.70
â€˘ Euro: Capped at 1.4850 but aided by carry flows
â€˘ British Pound: Slowdown in housing weighs
â€˘ Canadian Dollar: no event risk today
â€˘ US Dollar: Existing Home Sales on tap
Equity traders have a saying, â€śThere is no rally like a bear market rally.â€ť Fridayâ€™s sharp reversal in US stock indices which caused a 200+ point turnaround in DJIA average in the last hour of trade was just the latest example that the old dictum holds true. Fridayâ€™s equity rally saw some follow through in Asia and Europe tonight as all the major bourses produced triple digit gains, fueling a rise in USDJPY back to 108.00 figure.
The news helped to rally USDJPY for more than 50 points as risk appetite returned on the back of speculation of an imminent rescue of Ambac, one of the troubled monoline insurers. If the Ambac rescue goes through and the company retains its AAA rating, it should alleviate worries that have weighed heavily on the trillion dollar municipal bond market over the past few weeks and perhaps steady stock further as credit concerns recede.
Despite better price action in USDJPY, the EURUSD struggled most of the night trading in a tight 1.4800-1.4825 range capped to the upside with offers at the 1.4850 level. Carry trade flows provided modest support for the pair but have been unable to push it higher. With nothing material on the calendar currency traders had little event risk to key off tonight leaving the pair in a tense standoff between the bulls and the bears as it continues to flirt with all time highs.
Clearly the EURUSD is finding strong resistance at these levels as the psychologically important 1.5000 level remains just out reach, but we believe that the price action is much more indicative of consolidation rather than exhaustion. Just as the NZDUSD spend several months warily circling the 8000 level before finally breaking through on Thursday, so too the EURUSD is likely to continue to churn before making a decisive move higher.
The one economic release that could either make or break the EURUSD rally is tomorrowâ€™s IFO report. As we wrote in our weekly, â€śThe IFO report is due on Tuesday with markets looking for print below the 103 level. If the IFO does indeed show significant weakness, all the hand wringing about ECB being too hawkish could drive the pair right down to the bottom of the recent range. However, should IFO remain at last months levels, the case for decoupling will only strengthen and the pair could make a run to new highs as the decupling thesis will be confirmed.â€ť
How will IFO print? Join us in the EURUSD forum