Could September be a trend changer for the forex markets?
September is the month when institutional investors traditionally return to their desks following their summer breaks and it's also a month when trends can change as they make a fresh assessment of the markets.
On the face of it equities probably look the most vulnerable to a reassessment. They've had a fabulous multi-year bull market thanks to the world economy being saved and because of quantitative easing by the US Federal Reserve, which is due to end in October.
As for the forex markets, it is tempting to conclude that current trends will carry on, namely a continued strengthening of USD, especially when adding in the toxic geopolitical cocktail brewing in many parts of the world.
EUR looks gloomy, but could yet surprise
The EUR, especially looks vulnerable to more losses due to economic stagnation and the looming spectre of deflation in the Eurozone. It seems only a matter of time before the European Central Bank unleashes some form of quantitative easing. However, going by past form the ECB tends to be slow to act and unless it is an outright emergency, it tends to underwhelm.
Therefore once expectations become reality, the EUR may actually bounce back. Look for support around on EUR/USD at 1.3100 and 1.2980. If they fail then it could fall to around 1.2700-1.2800. On the upside considerable resistance is likely to be encountered around 1.3300-1.3400.
Investors could reassess GBP in September
If there's any major currency, which could see a turnaround it is GBP – it has had a very bad summer, though it seems to have stabilised very recently. Indeed, investors may reassess the sell-off as overdone. The UK economy is healthy (which attracts a lot of inward capital) and an interest rate rise is likely to happen sooner than in the US. This could be enough to support GBP, traditionally a risk currency, through a period of risk-off sentiment.
However, there is one potential wild card. Scotland votes to decide whether or not to remain in the UK on September 18. Whichever way the Scots do vote, it is likely to have some short-term impact on GBP, especially if they vote for independence.
For GBP/USD several layers of tough resistance are likely to occur around 1.6685-1.6800. Strong support levels can be found grouped around 1.6400-1.6500.
Geopolitics could reverse JPY decline....
There is some concern that the Japanese economy is sinking back into bad old ways of almost non-existent growth, which could later lead to stagnation and deflation again. During Q2 the economy shrank at an annualised 6.8% in response to a hike in the sales tax to 8% from 5%. It's too early to say if this is just a blip or part of a wider trend.
But if Japan is sliding back towards stagnation that will likely put pressure on the Bank of Japan to carry on longer with its quantitative easing programme, which will be a negative for JPY.
However, JPY is traditionally a safe haven currency and this is where it might come into its own again sometime in Q4.
After looking at the growing tensions in the Ukraine, Middle East and South-east Asia, investors might decide they want to be in safe havens (US Treasuries have already had a good run recently). Those fears, if indeed they become dominant, which may already be being telegraphed through the US Treasury market, are likely to show up very quickly in equities. A big stock market sell-off may well see the start of a turn-around on JPY.
For USD/JPY resistance is placed around 104.15 while 105.45 should prove fairly difficult to clear. Support comes in around 103.00 and it is likely to prove very stubborn around 100.00-101.00, particularly the closer it gets to 100.00, which is a psychologically important level.
...But geopolitics and the ECB could be real quandary for CHF
CHF is also a traditional safe haven currency – though the Swiss National Bank has done its best to make sure it doesn't soar to stratospheric levels every time a wave of fear convulses through global markets.
A flare up in geopolitical tensions – or simply a greater focus on them – could really put the SNB to the test if capital starts to flood into CHF. There's also the prospect of the ECB launching a quantitative easing programme, which could put unbearable upward pressure on CHF.
CHF has the potential to get caught in a vicious tug of war between capital inflows and the SNB's determination to cap any major currency appreciation
On USD/CHF resistance can be seen around 0.9250 with support around 0.9040-0.9100.
By Justin Pugsley, Markets Analyst MahiFX
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