Choppy Correction Unfolding in FX

The US dollar is mixed in choppy turnover. The dollar initially saw late yesterday’s Geithner’s anti-devaluation talk inspired gains reverse in early Asia and the euro briefly pushed through the $1.40 level and sterling approached $1.5950.

However, Asian accounts sold into the foreign currency bounce. The better-than-rumored German ZEW survey saw the euro and Swiss franc turn better bid for a little. Sterling is the notable laggard today, especially after the weaker than expected CBI Trends Survey and ahead of BOE King’s speech and tomorrow’s the government’s spending review and MPC minutes (where there has been some speculation of a three-way split). The dollar is largely sidelined against the yen and has continued to remains largely within last Thursday’s JPY80.90-JPY81.85 range. The Bank of Canada meets today but is nearly universally expected to stand pat.

Since the second half of last week, the strong trends in the foreign exchange market since early September seem to have broken down. Market sentiment is largely dollar negative. It is fueled by the prospects of QEII, which some pundits have called the “mother of all interventions”, and the perceptions that the euro zone is well ahead of the US in the business cycle and in being able to exit from the extraordinary policy.

Against this many participants are cognizant the extreme sentiment readings and the risk that the QEII has largely been discounted. The backing up in US bond yields (10-yuear note yield is up 8 bp over the past five sessions) while during this period, the dollar is up against all the G10 currencies, but the yen and Australian dollar.

Sterling, which frequently leads the euro, is breaking down. Recall that most recently the sterling bottomed on Sept 7. The euro bottomed a could days later. Sterling is moving below its 20-day moving average today (~$1.5840), for the first time since September 14. While there may be some support intermittent support, the downside risk extends toward $1.55 near-term. The euro’s 20-day moving average comes in near $1.3765 and this area represents a reasonable near-term target as well. The dollar put in a low against the Swiss franc on Oct 14. The CHF0.9650 offers immediate resistance and the 20-day moving average is just below CHF0.9700. It may take a move above CHF0.9750 to give boost confidence that a more sustainable low may be in place.