GBP/JPY
No More Cuts: Surprising to the upside, British retail sales data rose for the month by 0.7 percent according to the Office for National Statistics. Compared to the consensus estimate for a 0.3 percent rise, the better than expected figure sparked speculation that the Bank of England may not have suggestive data in justifying a rate cut at this particular time. As a result, with the 4.50 percent benchmark rate seemingly stable, traders bid the underlying major higher leading to strength in certain crosses. Additionally, the upbeat figure may ultimately add to better expansion prospects as market players await tomorrow's gross domestic product figure.
Carry Trade Potential: A carry trade candidate, the GBPJPY cross was bid higher with participants taking further advantage of the wide interest rate spread. Garnering 450 basis points, earlier selling pressure was felt as speculation was leaning towards a rate cut bias in the United Kingdom. Given the shrinking possibility, traders mounted on already profitable positions. Additionally adding to selling pressure on the Japanese yen leg, convenience store sales dipped 0.3 percent for the month of September. Although the figure improved on the 1.3 percent decline seen in the previous month, the retail figure still resides in negative territory.
Technically Speaking: Already overextended on the current bull wave, a retracement similar to the one witnessed on the 19th looks imminent, if only to stall further moves higher on the cross. With that said, a test of the 38.2 percent fib at 203.13 looks probable with a less likely penetration of the 50 percent leaving to a reversal of the uptrend.
CHF/JPY
Monetary Conditions Too Loose: Sparking nascent interest rate hike speculation, Swiss National Bank President Jean-Pierre Roth stated that monetary conditions currently were too loose to contain inflationary pressures as the “economic situation is improving.” The SNB sees the annualized measure of GDP growth around 1 percent with higher estimates of 1.5-2 percent in 2006. Subsequently, inflation is looking to rise above the 2 percent level as well given growth forecasts are met. As a result, Swissie traders bid the underlying major slightly higher with gains additionally seen in the crosses.
A Carry Trade Is Still A Carry Trade: As the Swiss economy contemplates rising interest rates, traders are yet again taking advantage of the zero rate policy in the Japanese economy. With expectations rising on today's comments, the spread may now be expected to widen to a full percentage point or 100 basis points. Although most carry trades are boasting far more in gains on the differential, a weak carry trade is better than none at this point.
NZD/USD
Fundamental Push: With inflationary pressures continually rising in the New Zealand economy, traders are speculating on further near term rate hikes boosting the underlying major throughout the session. With continued strength in consumer demand and higher housing valuations, the country seems to be poised for further growth entering 2006. However, along with growth and expansion, not to mention still relatively lofty commodity prices, inflationary pressures are set to rise above 3 percent in the country. Already pricing in a 25 basis point rate hike, talk of a full 50 point jump raised overall interest in the underlying pushing the price action past the recent consolidation.
US Speaks Hawkish Bias: Traders for the most part, concentrating on the potential rise in rates for the Kiwi country, tossed aside recent dollar strength and further hawkish bias from several Fed officials speaking on the day in trading the major. Notably, Fed Governor Donald Kohn stated that although there are inherent risks of a slowdown in growth domestically, “after the rise in retail energy prices, the risks may be skewed a little toward the upside on inflation.” In addition, an affirmation by Dallas Fed President Richard Fisher stating “the object will always be to keep inflation at bay, so that the American business machine can keep on humming” confirmed the overall hawkish sentiment.
Technically Speaking: Breaking through recent consolidation further upside potential exists for the major currency in the near term. Bolstering the notion, the underlying spot price action ripped through formidable resistance at 0.6990 to trade at the intrasession high of 0.7025. With the move slightly overextended the first test on a potential retracement looks to be the earlier 0.6990 resistance which now serves as support. Any penetration would see an imminent test of the 38.2 percent fib at 0.6973.
Richard Lee is a Currency Strategist at FXCM.
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