Analysis | October 13, 2020

KTM FX Weekly: Three factors could cap the EUR

  • PBoC and the EZ service PMI weight on the EUR
  • Closer to home, the focal point this week will be the EC Summit

The euro remains neutral against the dollar on Monday after China’s new foreign exchange rules. Over the weekend, the People’s Bank of China (PBoC) removed the banks’ requirement to remove cash reserve of 20% when purchasing F.X. through CNY. In other words, the risk reserve ratio was down from 20% to 0%. The latest PBoC move hit the CNY and CNH on Monday; thus, USDCNH rallied 0.90%. It has been mostly reversed Friday losses.

The current driving factor in the currency market is that the PBoC makes it less expensive to short the Yuan (CNY) against the dollar and signals less concerned about Yuan weakening. In general, Yuan (CNY) is the currency used in China, and Yuan Renminbi (CNH) is the offshore currency. Weaker CNY and CNH drags the other major currencies like AUD, EUR, and NZD. Flipside, lower Yuan means higher Yen (JPY), SUDJPY down 0.5% on Monday.  

Coming back to our subject currency, EUR was a little higher 0.20% against the U.S. and Kiwi dollar last week. But, down a percent against the Canadian dollar and down 0.50% against the Swiss Franc. On Monday, the euro was little down to neutral against the dollar.

On Monday, Danske Bank published the latest IMM positioning report highlighting that leverage funds trim EURUSD longs. As shown in the below table, the open interest down by -1.90%.

Quiet Euro: Columbus Day in the U.S. painted a quiet session on Monday with Euro remains neutral at 1.1810, and overall, the dollar index was little changed. The U.S. bond market was closed; however, the European credit market was quiet overnight.  

Data review: Latest PMIs showed the service PMI signaled a fall back into contraction of the services economy during September.

  • After accounting for seasonal factors, the services index posted 48.0, down from 50.5 in the previous month and the lowest since May.

However, Germany was the only services economy to register growth (albeit marginal) as all four other nations monitored registered a contraction. Spain recorded by far the steepest monthly fall, followed by Ireland, according to IHS Markit.

Commenting on the service PMI data, Chris Williamson, Chief Business Economist at IHS Markit, said, “With the eurozone economy having almost stalled in September, the chances of a renewed downturn in the fourth quarter have risen.”

Looking ahead: Closer to home, the focal point this week will be the European Council Summit on 15-16 October. On top of this, U.S. election polling is another factor to remain focus on. Data wise August EZ Industrial production and September CPI releases are due.

  • Moody’s Analytics reported, “Eurozone aggregate industrial production data for August is also due. We see output falling 2.1% m/m after having risen 4.1% in July. We always expected the recovery in output to slow by the end of the third quarter.”

 TECHNICAL OVERVIEW

The EUR sustained its uptrend for the second consecutive week, closed above the 1.1800 handles. However, we have found out three factors that could cap the EUR in the near-term.

  1. The announcement made by the PBoC halted the Euro strength on Monday.
  2. The latest positioning also suggests Euro longs are trimmed according to Danske bank. And euro and Japanese yen faced a minor short squeeze, according to the ING.
  3. The monthly EUR scoreboard is not favorable to bulls. Among major EUR crosses, EUR is outperforming marginally only against USD and NZD. Both of these two major currencies are in the election race.

If the price is moving Northward, key resistances to watch out are 1.1870 and 1.1920. Flipside, support exists at 1.1700-1.1680.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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