Euro resilience

The disappointing reading for US July durable goods orders released yesterday following on from the surprisingly large drop in new home sales at the end of last week has added further uncertainty about the timing of Fed tapering. Although the next meeting in September remains most likely as reflected in various Fed comments over the weekend it is by no means a done deal.

US Treasury yields slipped in the wake of the data but equities failed to sustain gains as Syria tensions escalated a factor that could cast a shadow over risk assets today, with rhetoric in the US strengthening and expectations of action growing. Further US data disappointment is likely today, with the August consumer confidence survey set to decline in contrast to a likely increase in the German IFO business confidence survey.

EUR resilience has been impressive over recent weeks. Despite all efforts at trying to sell the currency, investors have has their fingers burned. Today is also not a day to sell EUR. Although the growth trajectory looks firmer in the US, the propensity to surprise in a positive direction has come from Eurozone data releases.

Today expect a further positive surprise, with a likely further rise in the IFO German business survey which will contrast sharply with the drop in headline July US durable goods orders. It’s not all bullish for EUR, however. Technical indicators suggest that upside EUR/USD momentum is fading while Greek jitters could return as the Troika returns on September 16. Moreover, speculative market EUR positioning has risen to its highest since early February, leaving no more scope for short covering.

Although USD/JPY has crept higher over recent weeks it is still a long way off the 22 May high of 103.74. JPY bears have not yet given up hope, with JPY short positioning at around its 3-month average. Nonetheless, despite the rise in US Treasury versus Japanese JGB bond yield differential USD/JPY has failed to budge. Although this is likely to be a temporary phenomenon, yield differentials are clearly not impacting USD/JPY at present.

Eventually, the widening yield gap between the US and Japan will see increased capital outflows from Japan. Perhaps more details about Prime Minister Abe’s third arrow of reforms will prompt some downside for the JPY but unless risk appetite improves markedly it is unlikely that the JPY will fall far in the near term.

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