Although Syria tensions continue to linger in the background risk assets performed well overnight helped in part by Chinese trade and inflation data released over the weekend. Meanwhile the weaker than forecast US jobs report has eased some of the markets fears about tapering, with the Fed looking less likely to pare back asset purchases too aggressively. Even the situation in Syria looks a little less tense as US President Obama opened the door to holding off any air strikes on Syria if the country handed over its stock of chemical weapons as proposed by Russia. A limited data slated today, with only second tier releases on tap suggests there will be some positive follow through to markets today.
The USD has lost momentum in the wake of last Friday’s US employment report and subsequent drop in US yields. The USD may be helped by a relatively firm US retail sales reading expected at the end of the week but tapering uncertainty will likely act to restrain any topside. Additionally, underperformance of US bonds and equities alongside foreign selling of US portfolio assets (especially by reserve managers) highlights the uphill struggle faced by the USD in the short term. Notably aggregate net USD positioning increased again last week, with net long USD positioning around its three month average, highlighting the lack of USD momentum at present. Further USD gains may need to wait for when the Fed finally begins to taper next week.
EUR has been the most resilient major currency against the USD this year. It has easily quashed expectations that it would face a difficult time in the wake of a weaker growth trajectory and ongoing peripheral worries. Admittedly the Eurozone economy remains weak and will contract this year, but there are already signs of improvement, with positive data surprises being revealed. Moreover, the Eurozone external position has strengthened due to strong portfolio inflows and a healthy current account surplus. Although there a number of risks ahead including Italian political tensions and German elections the near term outlook for the EUR looks constructive, with strong technical support seen around 1.3220.
Gold has moved into consolidation mode, with a range of 1360-1400 being observed over recent days. Lower US bond yields, and a weaker USD in the wake of the softer US August jobs report suggests will offer some support to gold prices while speculative positioning has shown a significant improvement over recent weeks, with positioning well above the three month average. Some resolution towards ending South African strikes and improving risk appetite may dampen the upside but we expect gold prices to be relatively resilient over the coming weeks as seasonal demand kicks in (our analysis shows that historically gold has a positive month in September) with a retest of the recent high around USD 1434 set be breached over the coming week.