Forex - FX Markets Drift Due to Lack of Drivers

Forex News and Events: The lack of true drivers in markets means that wave-like pattern instinctively takes hold. So it's Tuesday, which means that risk appetite must be lower. USD was on a firmer footing due to the slightly pullback in investor sentiment. EURUSD was able to momentarily peak past the 1.5000 barrier before buyers disappeared and the pair steadily fell to 1.4900. However, as with the broader FX trend, the EURUSD is still well within its 1.4875 – 1.5000 range. We are seeing much the same range trading in USDCHF and GBPUSD, 1.0000 to 1.0220 and 1.6450 to 1.6700. JPY crosses remain under heavy pressure, as risk correlated trade felt the brunt of shift in sentiment. Support levels particpants are watching are for NZDJPY 63.15 (weekly cloud) & GBPJPY 143.60 (trend line support). Perhaps the most interesting movement, or lack thereof, has been within the commodity currencies, which have not kept pace with the surge in commodity prices, highlighted by spot Gold’s rapid rise to $1174.00oz. Part of the problem has been the commodity currencies central banks talking down monetary policy tighten and therefore shifting rate expectations. But in our view, it has more to do with nervousness of FX players to follow trades into what seems to be in overbought territories. But from a longer term macro perspective we see most commodity currencies as undervalued and expect investors to reenter long risk trades as commodity prices remain elevated and rate expectations adjust to the realities of faster domestic growth & inflation. Regional Asian equities were broadly lower, as risk appetite naturally declined (despite the encouraging US Existing home sales surging by 10.1% yesterday), news that West LB needs more capital and Standard & Poor’s bleak assessment of Japanese banks; citing Sumitmo Mitsui and Mitsubishi UFJ as among the banks with the weakest capital base. Interestingly, for a short while Shanghai B shares, traded in USD, dropped 6%, while A shares denominated in CNY remained steady. Clearly, traders are now contemplating some level of revaluation. At some point, even the most resolute cynic (me) must consider a world with a more fairly valued CNY….but not yet. Short USDCNY forward trades on the hope of shift on in exchange rate mechanism, is still rightly called “China Death”. The highlight of the day will undoubtedly be the release of November's FOMC minutes and details into the change of wording. The minutes should supply some clarity in the Committee's new conditionality language, which stating that members would keep rates low for an "extended period" and the objective to cut the size of its agency debt purchase program from $200bn to $175bn. In regards to forecast, we suspect that the latest updated economic projections will show a bit stronger figures on growth and slightly lower ones oncore inflation. Also in the US, 3Q GDP should be adjusted slightly lower, softer consumer spending growth and a larger contraction in inventories, but unless we see a significant deviation we doubt the release will be a market mover. Overall, the short holiday’s filled week will undoubtedly provide some distortions in FX prices, but we don’t see an structural change within the US or markets, which would halt the greenback's eventual break above 1.5060.