Markets are trading in a lethargic manner as participants continue to nervously take on risk-correlated trades. The move toward risk is logical because without the massive sovereign crisis fear hovering over the market like the Sword of Damocles, one needs to consider the fundamentals - particularly monetary policy, as the core driver. Overall, the rate at which central banks are mopping up excess liquidity has been slower-than-expected with the BoE and Fed still discussing the potential for further QE.
In this era of ultra-low policy rates, risk taking will be encouraged. In the past few days, we’ve seen Eurozone sovereign spreads narrow considerably, the VIX index is trending lower along with decreased FX volatilities and global equity markets have demonstrated a resilience to bearish news. If corporate earnings come out strong, this could be the start of a summer rally, however we’re not so sure. Our view is that the fears surrounding sovereign risk may have subsided for the time being, but will most likely return this fall.
Even with the recent stint of positive news, foreboding signs are on the horizon. The Fed’s Beige book released yesterday reported that the US recovery remained on track but has begun to actively slow. The notion of a US slowdown was reinforced by recent US data, including yesterday’s durable goods figures.
In New Zealand, the RBNZ raised its policy rate 25 bps to 3.00% as we had predicted and the accompanying statement asserted that future growth prospects had deteriorated considerably. Traders rapidly paired down their interest rate expectations which in turn weighed on the NZD.
Governor King’s comment seemed to slam into the sterling market, which was curious because his remarks were really nothing new or original. He recommended caution over reading too much into the strong Q2 GDP figures and reaffirmed that inflation remained finely in check. Paul Fisher stated that the global outlook had weakened and David Miles resonated with the most dovish view of all – that inflation would taper off and the current ultra-loose policy was correct.
The combination of all these comments hit the GBP value like a sledge hammer. It wasn’t until Sentance’s hawkish comments that the “current policy setting was extreme” that some sanity was regained in the FX market.
We are convinced that the market is now underestimating the strength of the UK recovery and that the current downtrend in inflation will flat line and then begin to move higher. The BoE interest rate path should give GBP a boost in the mid-term.
Otherwise, there’s a frenzy of data to be released during the European session today and after that it’s onto corporate earnings. We will continue to use equity market activity as a compass for FX directions. Correlation remains particularly high between the EURUSD and S&P and should thus be traded accordingly.
Today's Key Issues (time in GMT): 07:30 SEK Jun retail sales, +0.6% m/m EXP; prior +1.6% m/m, +2.7% y/y. 08:00 EUR GER Jul unemployment rate, 7.6% sa EXP; prior 7.7%. 08:00 EUR GER Jul unemployment, nsa and sa; prior 3.153 mln, 3.23 mln. 08:00 EUR GER Jul unemployment - change, -10k sa EXP; prior -21.0k. 08:00 EUR ITA Jun wages, +2.6% y/y EXP; prior +0.1% m/m, +2.5% y/y. 08:30 GBP Jun consumer credit, GBP300 mln EXP; prior GBP331 mln. 08:30 GBP Jun mortgage appl/loans, 49k/GBP1 bln EXP; prior 49.81k/GBP1.184 bln. 08:30 GBP Jun money supply; prior unch. 09:00 EUR Jul business climate index, 0.39 EXP; prior 0.37. 09:00 EUR Jul consumer sentiment index, -14.0 EXP; prior -17.0. 09:00 EUR Jul economic sentiment index, 99.1 EXP; prior 98.7. 09:00 EUR Jul industrial sentiment index, -5.0 EXP; prior -6.0. 09:00 EUR Jul services sentiment index; prior 4.0. 12:30 USD Initial jobless claims, thous (4wma) 24-Jul 23:01 GBP GfK consumer confidence survey, bal Jul
EurUsd We’ve had another day of tight range trading in EURUSD, and for the time being there is a ceiling of resistance at 1.3046 that is blocking the path higher. We are still playing the bullish break out of a symmetrical triangle pattern on the hourly chart, and based on the projected path of that triangle we are expecting a move to 1.3290 in the coming days. Once we clear 1.3046, the next resistance level is expected at 1.3093 (10 May high) with weak resistance also anticipated at 1.3213 and 1.3254 (14 and 13 May highs respectively). Support at 1.2950 is still valid, with trendline support just below at 1.2940 –should the pair drop below there we would have to concede the failure of the bullish triangle breakout, and would then eye technical levels below at 1.2793 (23 Jul low), 1.2733 (21 Jul low), 1.2683 (14 Jul low) and 1.2522 (13 Jul low).
GbpUsd There were a few hairy moments yesterday for GBPUSD as BoE’s King hit the newswires to downplay the significance of the latest GDP reading, but tellingly the temporary sell-off was met with eager buyers clambering to get in on this impressive GBPUSD recovery, and the pair has since pushed to fresh highs of 1.5655. As previously discussed, we feel that the UK GDP figures last Friday were a game changer, and from here we would relish any dips towards the lower edge of the current uptrend channel now seen at 1.5385 to get long. The way things have gone so far, we may not even get a correction that deep as decent support is also anticipated around the 200-day moving average at 1.5545, 1.5525 pivot, then again at 1.5443 (yesterday’s low). Really there is not much standing in the way of an assault on the 17 Feb high 1.5816 in the coming days, and beyond there we open up the possibility of re-testing the top of the 8-week uptrend channel (currently at 1.5950) before the psychologically significant 1.6000.
UsdJpy USDJPY may have slumped in a rather ungainly fashion back below 87.50 in the past few sessions, but the pair is at the very least continued carve out successively higher highs and higher lows since the double bottom around 86.25 levels. The last rally (which topped out at 88.11) was thwarted by a pretty formidable confluence of resistance levels (8-week downtrend resistance, top of 1-week uptrend channel and 88.00 pivot), but we still believe the bulls can overcome these barriers on a subsequent re-test now they are more comfortably spaced out. The 8-week downtrend has now crept down to 87.90 while the top of the current uptrend channel has climbed to 88.25; however thereafter few levels are discernible ahead of our triangle target 88.85. Should the rally have the momentum to continue beyond there, look for sellers at 89.15 (12 Jul high) and 89.50 (28-29 Jun high). The most convincing support level to try getting in on the long trade appears to be the lower edge of the 1-week uptrend which is now seen at 87.10-15 (already had one test of that area this morning), then further supports anticipated at 86.82 (Tuesday’s low) and 86.25 (recent range floor).
UsdChf Despite the bullish engulfing candlestick on Monday/Tuesday of this week AND the important break of the 1-month downtrend channel, the bulls have looked lacklustre in the past 24 hours and have sloppily allowed the 1-week uptrend to break down around 1.0560. This conclusively negates the bullish flag pattern we had proposed yesterday, and seems compelling argument to move to the sidelines for the time being on this one and wait for more favourable risk-reward trades to present themselves. Buyers should be able to catch the fall if it extends to 1.0450, and an extremely important support still remains at 1.0400 so we would look to resume buying down at those levels. Strong selling interest may once again cap rallies at 1.0640-47 (13 Jul & 27 Jul highs and 200-day moving average), and given the propensity of July/August markets to be directionless and range bound, we would actually look to sell at those levels rather than look for a continuation higher. IF the bulls manage to pull their fingers out and effect that break higher, a powerful resistance level around 1.0700 is backed up but the top of the 1-week uptrend at 1.0710.
Plenty of important macro data from the U.S. was published yesterday. Investors were disappointed by the figures and responded mainly by moving away from riskier assets. At first U.S. Durable Goods came negative at -1%, at 12:30GMT later at 18:00GMT Beige book revealed a gloomy outlook for U.S. economy. Although company earnings are still high, yesterday fears about recovery came back to dominate the markets.
Economic News
USD - Traders Shift from EU Debts Concern to U.S. Economic Outlook U.S. macro data came far less than expected. Investors responded by moving away from riskier assets back to buying the Yen and U.S. Dollar. The EUR/USD was slightly down after U.S Durable Goods was published, The USD/JPY traded lower, currently trading at $87.22 as investors feel safer holding the Yen over the USD. The British Pound continued to rally against the U.S. Dollar, despite the move to safer assets.
U.S. demand for Durable Goods, which is usually a sign for economic strength, came negative at -1.0%. Forecasts which already expected a form of decline from last month were more moderate than the actual figure. Traders were surprised by the final figure and reacted by sending markets lower. Later the Beige Book was released by the Fed during mid U.S. day trading. It provided a mixed economic picture but eventually supported the markets from declining further. The report said that the U.S. economy was growing but there were also signs of a slowdown in some regions over the past two months.
Looking ahead to today, traders should follow the release of the Unemployment Claims at 12:30 GMT. A worse than expected result might intensify the current trend and strengthen the greenback further.
EUR - EUR's Recent Rally Losing Steam EUR's rally against its major counterparts stumbled yesterday as new economic data raised fears about the strength of global economic recovery, with the common currency ending lower against its major counterparts.
EUR/USD ended slightly lower yesterday, reaching a low of 1.2968; however, it managed to recover some of its loses to currently trade at 1.3010. The pair seemed to trade without a clear trend and moved mostly sideways. The EUR/JPY, however sent more clear signs of a correction building up. The pair's five days rally ended yesterday after it breached an 11 week high. Signals show that pair should further decline in coming days.
Looking ahead to today, traders are advised to follow the British HPI data at 6:00 GMT as well as the German Employment change at 7:55 GMT. Positive data might bring back some market optimism, pushing the Pound and EUR higher against their counterparts.
JPY - Strengthens on Safe Heaven appeal The JPY strengthened against the U.S. Dollar yesterday as investors expressed their concerns about the U.S. economy by selling the U.S. Dollar and buying the Japanese Yen. The Yen traded higher against most of its major counterparts; however, a strong currency may ultimately weigh on the Japanese economy as it is heavily dependent on exports.
A strong Yen would have bad influence on profits of Japanese companies. Consequently the Japanese government might be forced to weaken their local currency. So far no comments were published regarding Government intervention. As long as the Japanese Bank avoids market intervention the Yen is expected to keep its strengthening momentum.
Looking ahead to today traders should pay attention to the $86.88 support line, crossing down might take the USD/JPY pair even lower. Some analysts estimate that that the Yen could even reach as high as $85 in the coming months.
Crude Oil - High U.S. Inventories Send Crude Oil Price Lower Crude Oil prices ended lower yesterday after U.S Oil Inventories rose by 7.3M barrels. Lately this figure made little impact over Crude Oil prices but yesterday it came quite high compared with expectations of a 1.4M drop.
Demand for durables goods which also came surprisingly lower added to worries that demand for Oil would decrease in the near future as manufacturing declines. Crude Oil price might decline further in the short term if economic figures continue to deteriorate. Investors are worried about a possible double dip, meaning a renewed recession.
Gold price rebounded slightly during yesterday trading session. During the day it reached as low as $1156.25, but thereafter recovered and is currently trading at $1165 Gold price dropped after inflation worries began to fade and analysts begin to worry about another recession or economic slow down.
Technical News
EUR/USD The pair was relatively unchanged yesterday and as such has formed a 2nd consecutive doji candlestick which reflects the bulls and bears inability to move the price significantly. The RSI (14) has crossed below the overbought line, triggering a sell signal. But traders may want to be patient and wait for the RSI line to break its trend line before going short. A rising trend line can be drawn from the low of the RSI line that begins on June 4th.
GBP/USD The pound was stronger yesterday and has risen versus the dollar for the past 6 consecutive bars. This has pushed most oscillators into oversold territory as the Slow Stochastic is showing a bearish cross and the RSI (14) is floating in the oversold territory. However, before going short, traders may want to wait for a breach of a short term trend line that can begins at the bar on June 22nd.
USD/JPY A bearish flag pattern has formed on the 4-hour chart. The base of the flag pole begins at the high on June 14th and runs to the low for the pair at 86.25. The flag pattern is sloping upward with a previous downward trend. Therefore, a breakout may be expected to the downside in the direction of the long term trend. Traders may want to wait for a confirmation of the breakout at a price of 86.80 and enter short.
USD/CHF For the past 15 days the pair has traded in a defined range between the prices of 1.0650 and 1.0400. In this trading range a double bottom reversal pattern may be forming. A confirmation of the reversal pattern will be a close above the 1.0650 resistance line.
The Wild Card Gold The drop in the price of gold shows a potential reversal in the trend. The price has closed below the long term upward sloping trend line for the past two days, confirming a significant breach of the trend line and a breach below the support level of $1169. However, yesterday's trading closed and formed a hanging man candlestick. This may signal an upturn in the price. CFD traders may find a good opportunity to go long on a breach above the $1169 resistance level.
Risk correlated trades had a strong showing yesterday as banking stocks rallied and concerns over the inadequacies of the Stress Test dissipated. The USD lost ground to both the GBP and EUR while longs in JPY and CHF were equally cut. Risky trades continued to benefit throughout the trading day in spite of US Consumer confidence data coming in negative. We especially like the appreciation we saw in sterling. We suspect there has been a fundamental shift in GBP prospects due to the sturdy GDP reading last Friday and we anticipate further upside to sterling in the near-to-mid term.
Asian equity markets are having a roaring day and the positive effects are spilling over into European indexes. We are seeing other encouraging signs as VIX dropped below its 200-day moving average and Gold continues to come under heavy selling pressure. There has been a noticeable lack of 1st tier economic data and we are cautious in accumulating too much risk just yet. These are the dog days of the trading summer – as such, low liquidly and inconsistent participants will continue to be as important as real data.
During the Asian session, the big news was the disappointing Australian Q2 CPI reading which came in well below markets expectations. The market was quick to shift rate hike expectations from August to later in the fall (ACM expects a November hike). The AUDUSD dropped like a rock to .8923 from .9020 in response to the release. With the inflation rate now within the RBA’s 2-3% target, markets now pricing in a late fall hike. The large AUD interest rate differential will further erode, which in turn will lend added support to currencies like CAD and NOK. Look for CAD & NOK to gain in the near term.
We are still highly constructive on the global economy and suspect commodities prices to trend higher which should give AUD a boost against the USD. With all the excitement around AUD, the CPI watchers will now be turning their gaze toward New Zealand.
In NZ, July business confidence and activity outlook surveys showed a significant deterioration from the June results. Analysts are in unanimous agreement that the RBNZ will raise the OCR 25 bps to 3.00% at its policy meeting tonight. Market and media interest will be focused on the accompanying statement released with the rate hike. Although recent NZ CPI readings have come in lower-than-expected, the markets are still pricing in roughly 75 bps worth of hikes between now and the year’s end.
We believe that the RBNZ statement will sound slightly more dovish, signaling a minor shift in interest rate trajectory as policy makers prepare for a global economic slowdown later this year. The sudden adjustment in rate path should translate into short-term NZD weakness, especially against the AUD.
As for today, US Durable Goods data is due to be released as investors continue to look for directional signals for the US recovery. The Fed’s Beige Book will likely reflect recent data softness.
Today's Key Issues (time in GMT): 00:00 EUR GER Jul HICP - prelim, +0.2% m/m, +1.1% y/y exp; prior unch, +0.8%. 07:00 EUR ESP Jun retail sales; prior -1.9% y/y. 08:45 GBP BoE Gov King, other MPC member testimony before Parliament. 10:00 GBP Jun Land Registry house prices. 12:30 USD Jun durable goods orders, +2.9% m/m exp; prior -0.6%. 12:30 USD Jun - ex-transport, +1.0% m/m exp; prior +1.6%. 18:00 USD Fed Beige Book release. 18:30 USD Senate vote on Fed nominees 21:00 NZD RBNZ interest rate announcement, % 3.00% exp, 2.75% prior
EurUsd The symmetrical triangle pattern on the hourly chart is still very much in play, and thus far we have seen a couple of nudges through the 20 Jul high at 1.3028. We are long from the original break above 1.2950 (there was even the re-test of that level yesterday which we suggested as a chance to add to longs) and expect the triangle to yield a target in the region of 1.3290. At present the bulls are steadying themselves above 1.3000 so further progress has been somewhat laboured; the next resistance level is expected at 1.3093 (10 May high) with weak resistance also anticipated at 1.3213 and 1.3254 (14 and 13 May highs respectively). Support at 1.2950 is still valid, with trendline support at 1.2905 –but should the pair drop below there we would have to concede the failure of the bullish triangle breakout, and would then expect technical levels below at 1.2793 (Friday’s low), 1.2733 (21 Jul low), 1.2683 (14 Jul low) and 1.2522 (13 Jul low).
GbpUsd GBPUSD continues to march unwaveringly higher, making easy work of the tangle of technical resistance levels between 1.5525-75 (15 April high, 200-day moving average and 23 Feb high) and going on to touch 1.5627 this morning. As previously discussed, we feel that the UK GDP figures last Friday were a game changer, and from here we would relish any dips towards the lower edge of the current uptrend channel now seen at 1.5350 (coinciding with a recent pivot level) to get long, and set a stop through 1.5300. Really there is not much standing in the way of an assault on the 17 Feb high 1.5816 in the coming days, then only uptrend resistance (currently at 1.5905) before the psychological significant 1.6000. Supports now seen below at 1.5525, 1.5450 and 1.5350.
UsdJpy Finally, a breakout from the 86.25 –87.75 range; and as expected, this has occurred on the topside –in the process activating a double bottom pattern we proposed earlier in the week. Given the depth of the two troughs we should therefore anticipate a target around 88.85, and after this morning’s break above the significant 88.00 pivot level, that now seems an extremely attainable goal. Sellers may still hinder progress up through the remaining trendline resistance around 88.45 but then the next discernable levels are all beyond our target; 89.15 (12 Jul high) and 89.50 (28-29 Jun high). Adding conviction to our view is the bullish engulfing candlestick carved out on the daily chart which suggests the bears have become overwhelmed and further upside is likely. Dips back towards the 87.75 breakout level will likely meet good bids, with the supports below there at 86.82 (yesterday’s low) and 86.25 (recent range floor).
UsdChf The bulls finally got a better grip on USDCHF yesterday, and not only managed to take out the stubborn 1.0565 resistance level, but then to print a bullish engulfing candlestick on the daily chart. We now see a fresh bullish flag pattern possible on the hourly chart which would suggest that on a break above 1.0620 we should go long and aim for a target around 1.0770. Standing in our way before that would be yesterday’s high 1.0640 (roughly coinciding with the 200-day moving average at 1.0644), the top of the 1-week uptrend channel at 1.0685, then the major 1.0700 level. Bidders are very likely to lurk around 1.0565 where the old resistance level once stood, then 1.0450and 1.0400.
The U.S. Dollar advanced on Wednesday, gaining 1% against the Japanese Yen and pushing the EUR back under $1.30, after a report showed U.S. consumer confidence fell more than expected, pressuring equities lower and reducing investors' appetite for risky assets. Economic News
USD - Dollar Rises on Demand for Greenback's Safety The U.S Dollar advanced against most of its major counterparts as a decline in U.S. consumer sentiment to a 5 month low revived demand for the relative safety of the world's main reserve currency. The U.S. consumer confidence for July fell to its lowest level since February with all eyes on consumer durable goods numbers for June later in the session for more evidence about the world's largest economy. The greenback advanced as much as 1.3% to 87.97 Yen in the biggest intraday gain since June 2. Treasury two-year note yields increased as much as 0.06 percentage point to 0.64% in the biggest intraday climb since June 10. The USD/JPY recent weakness has been related to the very low level of U.S. yields, analysts said. And the fact that the yields are rebounding at this stage is likely to lend some support to the pair.
EUR - EUR Erases Gains; Slips Below $1.30 level The European currency hovered below a key level on Wednesday, running into profit taking after it hit a 11-week high against the U.S. Dollar, with attention turning toward the Australian Dollar ahead of crucial inflation data. The EUR slipped below the psychological, and technically crucial, level of $1.30, having hit a high of $1.3045 on Tuesday.
The 16-nation currency held some impressive gains against the Japanese yen, trading above 114 yen after having jumped over 1% on Tuesday to a 2-month high. Traders said the EUR/JPY looked increasingly bullish on charts, especially after it rose above 113.50 yen where it had met lots of offers from Japanese exporters.
Moreover, despite the EUR/USD easing from highs, sentiment toward the single currency remains bullish in the short term with a number of commentators surprised by the resilience of the Euro-Zone economy. On the other hand, doubts remain over the ability of the U.S. economy to avoid a slowdown. Market players say that a sustained break above the $1.30 level could place the single currency against the greenback in a new $1.30-$1.35 trading range in the coming weeks.
JPY - Yen Rises on Safety Demand Japan's currency gained versus all 16 major counterparts ahead of U.S. reports in two days which are forecasted to show economic and business activity grew at a slower pace. The Yen rose from near a two-month low against the EUR on speculation signs of a slowing U.S. recovery will spur demand for safer assets.
The Yen typically strengthens in times of financial turmoil as Japan's trade surplus makes the currency attractive as it means the nation does not have to rely on overseas lenders. The Yen traded at 87.77 per Dollar from 87.90. The currency gained to 113.95 per EUR from 114.24 yesterday, when it reached 114.42, the weakest level since May 18.
Crude Oil - Oil Falls a 2nd Day after Consumer Confidence Drops Crude Oil declined for another day after an industry report showed U.S. crude inventories rose and the Conference Board said confidence among the nation's consumers fell, signaling growth and energy demand may falter. Rising oil production capacity in the Gulf of Mexico after Tropical Storm Bonnie fizzled over the weekend without damaging infrastructure also weighed on Oil prices, analysts said. Oil prices dropped the most in more than 3 weeks Tuesday as the U.S confidence index declined to the lowest level in 5 months. Traders mentioned that there was a sell-off in the crude market because of a fall in U.S. consumer confidence and the sentiment is still weak.
Technical News
EUR/USD Yesterday the pair pushed to its highest level in the past 3 months before falling backwards to finish almost unchanged, forming a spinning top candlestick formation. This may signal indecision on the part of traders and a lack of buyers in the current uptrend.
GBP/USD The pound was a big gainer in yesterday's trading as the cable breached and closed above the resistance level of 1.5520. The pair has been a strong performer as of recent, recording gains over the past 5 trading sessions. However, technical resistance is forming on the daily chart. The RSI (14) is dropping below the overbought zone while the Slow Stochastic oscillator is forming a bearish cross, indicating the next move may be to the downside. Traders may want to tighten their stops on any long positions.
USD/JPY The yen suffered during yesterday's trading, rising as high as 87.96 while closing above the 20-day simple moving average and the downward sloping trend line that began on June 14th. However, traders may be able to fade the trend as a bearish cross has formed on the 4-hour Slow Stochastic oscillator, indicating that the pair's next move may be lower. Traders can target the resistance level of 87.40 with an extended target at the year to date low of 86.25.
USD/CHF The pair may see a continuation of its recent downtrend in today's trading as the RSI for the pair floats in the overbought territory on the 2 hour and 8 hour charts with most other indicators floating in neutral territory. Traders may be advised to go short for the day.
The Wild Card GBP/NZD The pair may see some downward correction today as the RSI for the pair is floating in the overbought territory on the hourly and 2 hour charts while a bearish cross is evident on the 2 hour and 4 hour charts Slow Stochastic, indicating an imminent downward movement. Furthermore, a breach of the upper Bollinger Band is evident on the 2 hour chart. Forex traders may be advised to go short for the day.
The substance and meaning of Friday’s Stress test results are still be hotly debated. Financial pundits are putting enormous emphasis on the European open as the barometer of the market’s sudden confidence in the results. We are still unconvinced about the stress tests and doubt that a single market open/trading day will create the directional rush some participants are looking for. FX markets initially took on risk in Asia but the gains were quickly eroded.
Seven of the EU banks, out of a total of 91, failed the stress test. The test did not find any troubled institutions in countries such as Italy and Portugal and just one in Greece. Of the banks that did fail, they only needed to 3 million Euros to meet their Tier-1 capital ratio of 6%, quite a low figure for major banks. The EU’s widespread denial of the possibility of a sovereign default is vexing to analysts, but it’s understandable from a political and market stability standpoint.
Overall, if the purpose of this test was to gauge the probability of a sudden bank collapse in the EU, than it misses the mark. We maintain the view that Europe’s problems are largely structural and thus no test will address these problems. The macroeconomic assumptions used in the adverse scenarios were not very difficult nor believable. Ireland’s GDP growing 1% is not an emergency scenario.
Markets will continue to watch LIBOR and credit-default swap spreads carefully as well as the equity markets’ reactions – especially to see which banks come under heavy selling pressure.
The Euro’s strength is limited as domestic growth prospects will diminish as the austerity measures kick in. Global growth is still decelerating and the credibility of the single currency has been damaged in recent years. In addition, we have our eye on the Swiss Franc to outperform across the board. The Swiss version of the stress test, released Friday prior to the EU test, was more rigorous and comprehensive. With the added scrutiny, market participants can be confident in Switzerland’s banking sector. We suspect capital will continue to flow from Europe, into Switzerland, as investors seek out a safe haven for their assets.
We are still very impressed with the UK growth figures released last Friday. Q2 GDP figures came in well ahead of expectations at 1.1% q/q and 1.6% y/y, ahead of the 0.6% q/q & 1.1% y/y expectations. While PMC member Posen has raised the question of further QE to prevent the UK’s economy from taking another dip, we are leaning more to the views of Sentence that inflationary pressure needs to be tackled now. We will be watching for the opportunity to go Long sterling, especially in the EURGBP.
Today’s final thought is on the Yen. There has been a noticeable lack of rhetoric surrounding its recent strength. The current government coalition believes that markets themselves should set prices, even though there has been no noticeable erosion in exports (June exports increased a whopping 27.7% y/y). This week’s June CPI will be in negative territory and we believe it’s only a matter of time until Japanese rhetoric begins and we see the Yen lose ground.
Today's Key Issues (time in GMT): 07:30 SEK Jun trade balance; last SEK2.7 bln surplus. 07:30 GBP Details of UK financial supervision reform. 14:00 USD Jun new home sales, 335k AR eyed; last 300k. 00:00 PLN Interest rate announcement, % 3.50 exp/prior
EurUsd Well, the European stress tests were just as underwhelming as expected, so for now EURUSD’s short-term uptrend remains intact and the markets look pretty directionless this Monday morning. Our gut instinct is that the medium-term direction for this pair will be lower, but in the short-term we would be willing to play this one either way depending on the outcome of a potential symmetrical triangle pattern now visible on the hourly chart. The lower edge of the triangle coincides with the short-term uptrend line, so a break below that support (currently 1.2825) would be the signal to go short with a target below around 1.2480. Given that target is some distance away, supports on the downside are a potential hazard at 1.2793 (Friday’s low),1.2733 (21 Jul low), 1.2683 (14 Jul low) and 1.2522 (13 Jul low). Should the bullish triangle scenario play out instead then we need a break above 1.2950 to trigger long entry, and eye a target above at 1.3300. Next resistance is expected at the 100-day moving average 1.2874, 1.3028 (20 Jul high) and 1.3093 (10 May high).
GbpUsd After the false break of the 6-week uptrend last week GBPUSD has bounced emphatically higher, and impressive UK GDP figures on Friday has catalysed the rally further to highs of 1.5501. In doing so, the pair has now surpassed the 15 Jul highs at 1.5472 and is now expected to make a move on the more significant 1.5525 (15 Apr high). Above there lies yet more technical resistance (namely the 200-day moving average 1.5558 and 23 Feb high 1.5575) which should stall the rally on the first visit, but beyond there the skies are clear for a run on 1.6000. Nearest support is back down around 1.5350 pivot level, with the lower edge of the 6-week uptrend now coming in below at 1.5280. Should the trend break lower once more then first stop on the downside will be 1.5125 (last Wednesday’s low), followed by 1.5080.
UsdJpy The bearish flag pattern we had been tracking last week has now decisively been dead and buried by the move back above 87.50, and if anything we look to be carving out a range between 86.25 –87.75. At current levels towards the upper end of the range, the most attractive strategy is to sell some and await a return to 86.50ish levels, but ensuring we keep a tight stop on the topside to keep the risk/reward ratio manageable. There is a possibility that from here, a break above that range ceiling (87.75) could indicate a double bottom chart pattern has been activated, and if so, we should be getting long there and aiming for a target above of 88.85.Sellers are expected to step in around 88.00 (former pivot), 89.15 (12 Jul high) and 89.50 (28-29 Jun high).
UsdChf Finally, someone told the bulls about the break of the 3-week downtrend channel and we managed to get a bullish engulfing candlestick pattern on the daily chart to finish the week; it only took about 3 days... The decisive burst higher on Friday afternoon hit a peak of 1.0564 but progress has been halted by resistance coinciding with the 19 Jul highs, so for now the pair is now consolidating above 1.0500. We see a potential bullish flag pattern on the hourly chart that suggests a break above 1.0560 should be taken as the signal to go long, with a target on the topside around 1.0715; however we think buying on a dip to 1.0500 (the lower edge of the flag) also represents decent value with 1.0450 likely to offer some protection below. Only resistance levels above to be wary of are the 14 Jul highs at 1.0618 and the 200-day moving average at 1.0640.
After a long time waiting, the Euro-Zone's famous Bank Stress Tests results were finally published on Friday evening. The results failed to reassure investors regarding the stability of the European banking system as analysts claimed that the test weren't strict enough. As this week begins, the reliability of the tests will remain the main topic. Will it eventually boost the Euro?
Economic News
USD - The Dollar Ends A Volatile Trading Week Following Mixed Data from the U.S. The Dollar saw mixed results against the major currencies during last week's trading session. The Dollar had ups and downs vs. the Euro, and eventually the EUR/USD level closed at the 1.29 level. The Dollar also slightly strengthened against the Yen, while falling against the Pound.
The Dollar's volatile session came as a result of the mixed data from the U.S. economy. On one hand, the housing sector provided positive data last week. The U.S. Building Permits report showed that 0.59M new residential buildings permits were issued during June. The meaning of the data is that the quantity of future construction will rise; obtaining a permit is among the first steps in constructing a new building.
However on the other hand, the unemployment reports delivered negative signals. The weekly Unemployment Claims report showed that jobless claims in the U.S. increased more than forecasted to 464,000. The number of individuals who filed for unemployment insurance for the first time during the past week rose from 427,000, and failed to reach expectations for 449,000.
As for the week ahead, many interesting economic reports are expected from the U.S. The most significant publications look to be the New Home Sales, the Consumer Confidence, Durable Goods Orders indices, the Unemployment Claims, and the Gross Domestic Product (GDP). All these reports have potential to impact global trading and the Dollar in particular, and traders are suggested to follow the end results.
EUR - Stress Tests Fail to Ease Investors' Concerns from a Possible Debt Crisis The Euro saw a volatile session during last week's trading. The Euro began last week's trading with a bullish trend vs. the Dollar and the Yen. However the Euro then saw sharp drops and by the end of the week, resumed to its previous levels.
The Euro had a rising trend with the beginning of the week as positive data from the Euro-Zone supported the 16-nations currency. The German Producer Price Index (PPI) rose by 0.6% in June, beating expectations for a 0.2% rise. The report suggested that inflation in Germany rose for the 4th consecutive time, reassuring investors that the German economy is recovering. The European Industrial New Orders report also provided an unexpected positive data. The report showed that industrial orders in the Euro-Zone rose by 2.8% in May, well above expectations for a 0.1% drop.
However, by the end of the trading week, the Euro erased its profits, as the European Bank Stress Tests failed to reassure investors concerns from a possible sovereign crisis. The tests showed that merely 7 banks have flunked the stress test, out of 91 major banks that were tested. The supposedly positive data failed to create an impact in the market as investors felt that the tests may not have been strict enough. However, traders should take under consideration that European governments are putting a lot of efforts in the attempt to convince investors regarding the reliability of the tests results.
As for the week ahead, a batch of data is expected from the Euro-Zone. Traders are advised to focus on the German Preliminary Consumer Price Index (CPI), which will prove if the German inflation is indeed rising as last week's PPI data showed. Traders should also keep in mind the affects of the bank stress tests, as these results will continue to impact the market this week.
JPY - Yen Weakens Against the Majors The Yen fell against most of the major currencies during last week's trading session. The Yen dropped about 100 pips vs. the Dollar and about 300 pips against the Pound, and the GBP/JPY pair is now trading near the 135.50 level.
The Yen dropped last week due to speculations that Asia's economic recovery is advancing. These speculations have increased risk-appetite in the market, and have turned investors to look for riskier assets. The Yen is considered to be a safe-haven currency, and tends to fall as risk aversion weakens. The speculations came following several reports which showed that South Korea's economy grew faster than analysts forecasted, and Japanese exports rose more than expected.
As for this week, many interesting publications are expected from the Japanese economy. The main news events that traders are advised to follow are the Retail Sales on Monday and the Tokyo Core Consumer Price Index (CPI) on Thursday. If the reports will continue to provide positive signals, the Yen might weaken further as investors will continue to look for higher-yielding assets.
OIL - Crude Oil Prices Consolidates Around $79 a Barrel Crude oil prices continued to climb during last week's trading session. A barrel of crude oil was traded around $76 a barrel at the beginning of last week and as the week progressed, crude oil prices soared, and a barrel of crude oil is now trading around $79 a barrel.
Crude oil strengthened last week due to several positive economic reports from the U.S. and the Euro-Zone. The positive reports have created speculations that global energy demand will increase, and as a result, crude oil prices consistently rose. The bullish trend halted close to the weekend as concerns regarding tropical storm Bonnie have eased due to reports claiming that the storm has weakened.
As for this week, traders are advised to follow the main publications from the U.S. and the Euro-Zone, as they have significant affect on oil prices. Trades should also follow the U.S. Crude Oil Inventories report on Wednesday as this tends to have an instant impact on spot crude oil prices.
Technical News
EUR/USD Last week's trading has led to a doji candlestick formation on the weekly chart indicating a potential reversal lower for the pair. Traders will want to combine this signal with other technical indicators for confirmation before entering short. The next significant resistance level rests at the 38.2% Fibonacci retracement level at 1.3110. The next support level is found at last Wednesday's low of 1.2730.
GBP/USD The 2-month bullish correction has pushed the price above significant technical resistance levels, signaling a shift in the long term trend of the pair. The weekly chart shows the price broke the long term downward sloping trend line that began in July of 2008. The price has also moved above the 200-day simple moving average line. Traders will want to be long on the pair with the next resistance level coming in at 1.5520, April's high. USD/JPY Last week the pair failed to break below the support level of 86.25. Momentum for the pair has reversed as the Momentum (10) is trending higher. The price is looking to break above the resistance at the 20-day simple moving average line. A breach above this line could take the pair to the resistance level at 89.15, close to the long term downward sloping trend line. The potential correction could lead to a good setup to enter short in the direction of the trend.
USD/CHF The Relative Strength Index on the 4-hour chart shows the pair in overbought territory, indicating a downward correction could take place. That being said, according to most other technical indicators, the pair is trading in neutral territory with no clear direction. Traders may want to take a take a wait and see approach today, as a clearer picture may present itself later.
The Wild Card AUD/USD The Stochastic Slow on the 8-hour chart indicates that a bullish cross has formed, meaning a downward correction may occur today. This theory is supported by the Relative Strength Index on the 4-hour chart. Forex traders may want to go short in their positions for this pair today, as bearish movement will likely occur.
The amount of nervous energy in today’s FX market has already translated into some choppy, range-bound trading. The source is obviously the impending release of the EU bank stress test due to be issued at 16:00 GMT.
Today, German IFO data came in much stronger than expected spiking the EURUSD 40 pips rallying up to 1.2965. In the back of our minds, we remember that torrent of support risk-correlated trades gained on the release of the US stress test despite the market’s criticism then. Nevertheless, we remain unconvinced that today’s risk appetite will receive the same boost.
The EU stress test lacks the rigor of the US test and has lost enormous credibility based on the handling of the assignment. Swiss regulators highlighted this fact when the FT reported that they had conducted their own bank stress tests which were twice as stringent. The FT reported that the Swiss regulators conducted 13 different mega-risk scenarios including the collapse of the credit market and a drastic fall in GDP. I would suspect that investors will look at the Swiss test and feel kind of slighted when the actual EU tests & methodology are released.
As we have yet to see the actual report, the assumptions we’re making are based solely off official statements and newswires, thus we may be proved incorrect. The most important factors for the release will be the credibility of the results, the transparency of information and the explanation of all assumptions made during the research.
According to the most recent reports, all vital banks (read: too big to fail) will pass including Germany’s Landesbanken and all Greek banks. If all Greek banks are set to pass this test, something must be awry somewhere. To create the illusion of authenticity, the EU may throw a few minor banks under the bus. There are still significant EURUSD shorts lingering in the market and if the report is truly first-rate, we could see some heavy short covering and quickly.
In the UK this morning, the Office for National Statistics released their first estimate for Q2 GDP. The numbers came in much stronger than expected at +1.6%, exceeding the +1.1% consensus among economists and a -0.2% previous reading. The surprise number significantly decreases the probability of further QE by the BoE. Although an entire strategy cannot be based off one data point, the BoE’s MPC will most likely focus more on inflation and less on growth in future meetings. Perhaps Mr. Sentence, the lone dissenter in the last meeting, may not have been too far off base after all.
Finally, the ECB’s Trichet suggested that fiscal tighten was necessary around the globe and should not be delayed. The comment is in direct contrast to the Fed’s view that some level of stimulus was still required, a point just reiterated by Bernanke this week. We don’t expect any reaction in the USD, but it will be interesting to monitor because strict fiscal policy compounded by loose monetary policy should be extremely supportive for the underlying currency.
Today's Key Issues (time in GMT): 07:30 EUR ITA Jul consumer confidence index, 103.9 exp; last 104.4. 08:00 EUR GER Jul Ifo sentiment index, 101.6 exp; last 101.8. 08:00 EUR GER Jul Ifo current conditions index, 101.7 exp; last 101.1. 08:00 EUR GER Jul Ifo expectations index, 101.6 exp; last 102.4. 08:00 EUR ITA May retail sales; last -0.3% m/m, -0.5% y/y. 08:30 GBP Q2 GDP - prelim, +0.6% q/q, +1.1% y/y exp; last +0.3%, -0.2%. 08:30 GBP Jun BBA mortgage lending data 16:00 EUR Stress Test results for individual banks expected start 17:00 EUR CEBS press conference regarding Stress Test results
EurUsd We may have written EURUSD off prematurely yesterday as our short trade at 1.2790 was thwarted by the bulls managing to break back within the 4-week uptrend channel. Fortunately, leaving a tight stop just above the trendline around 1.2830 shielded us from being dragged all the way back up to 1.2933 highs, but it has somewhat dented conviction in our short-term bearish view (the medium-term bearish view still prevails). Not only does the break back inside the uptrend signal that the bulls are not quite done, but there is also a bullish engulfing candlestick on the daily chart which also suggests the bears are lacking the energy to do much about it at the moment. We are currently toying with the 100-day moving average at 1.2881 but next resistance levels on the topside are expected at 1.2933 (yesterday’s peak), 1.3028 (20 Jul high) and 1.3093 (10 May high). The lower edge of the 4-week uptrend now comes in at 1.2830, but should there be another break below there we would once again attempt a short with a view to re-visiting 1.2733 (yesterday’s low), and 1.2683 (14 Jul low) in extension.
GbpUsd Yet another currency pair to give us the head-fake this week, GBPUSD’s break below its 6-week uptrend touched a low of 1.5125 before rebounding sharply back up towards 1.5350 resistance (19 Jul high). This 1.5350 level still poses a difficult challenge for the bulls to overcome, especially as 1-week downtrend channel resistance comes in just ahead of there at 1.5340; but should they manage to push it higher then look for next resistance up at 1.5472 (last Thursday’s high), and 1.5525 (15 Apr high). Next support is that lower edge of the 6-week uptrend at 1.5250; but if the trend breaks lower once more then first stop on the downside will be 1.5125 (Wednesday’s low), followed by 1.5080. Should we managed to conquer those supports, there is a much clearer path towards the next downside targets of 1.4992 (100-day moving average), then the 12 Jul low 1.4949.
UsdJpy Yesterday we outlined the two possible scenarios in play for USDJPY –the first being a potentially bullish symmetrical triangle pattern with a target at 88.15, and the second one a larger bearish flag pattern which had not yet been activated. That latter pattern now looks to have become activated by the sell-off through trendline support at 87.00-05, and with that we now feel that the smaller symmetrical triangle pattern is as good as dead in the water. The classically defined target on the downside for this new flag pattern is 84.30 with supports ahead of there eyed at 86.27 (16 Jul low) and Nov 2009 lows of 84.83; but as we have mentioned a couple of times recently, down at those levels we would be playing Russian roulette with possible BoJ intervention so anything below 85.50 seems an ambitious enough take profit level for our fear/greed ratio. Any rallies from here are likely to meet fresh sellers around 87.15-20 (back side of the flag) where those who missed the break-out first time around will want to jump in, then further resistance seen at 87.57 (this week’s high from 20 Jul), 88.00 (former pivot), 89.15 (12 Jul high) and 89.50 (28-29 Jun high).
UsdChf The 3-week downtrend channel has been violated a number of times in the past few sessions, but the bulls failed to capitalize on the upside break and the pair is has since tumbled back towards major support at 1.0400. Until we get a decisive break out one way or another –either below 1.0400 or above the downtrend resistance 1.0470 –we are likely to be confined to achingly tight ranges. Those who favour buying on dips should only do so around 1.0400, as the landscape below 1.0400 is dotted only with stale support levels at 1.0365 and 1.0230. Sellers are likely to step in back up towards 1.0450 former pivot, aforementioned downtrend channel resistance at 1.0470, then 1.0560 (19 Jul ) highs.
Risk appetite was pared down during the Asian session as investors chose to focus on Fed Chairman Bernanke’s dovish comments. Bernanke's semiannual report to Congress basically reiterated the position reported in the FOMC minutes and policy speeches. However, the markets seemed to have latched on the words “we recognize that the economic outlook remains unusually uncertain. We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed." That statement sent a rush of capital back to recent safe havens in the US dollar, Swiss Franc and Japanese Yen. Just as USD, CHF and JPY all received their boost, US yields & equities dropped like a stone with 10y yields falling 10bp as the chairman spoke.
As Europeans sat down at their collective desks this morning, the merits of the stress test are now being hotly debated. The chasm emerging between proponents and opponents is considerable. On one side are EU officials who believe everything will be repaired by this magical report and on the other side is the real market, which remains overall skeptical and unconvinced. For those that have been reading our reports for the last two weeks, we firmly remain in the skeptical camp. One of the CNBC anchors summed up our opinion best when speaking to a Greek finance official declaring that “if Greek banks pass, the stress test fails.” The increased dialog surrounding this issue is obviously due to the proximity of the data release, further amplified by the Wall Street Journal’s report that EU officials are looking to publish the results before tomorrow’s European open rather than at its close.
This begs the question, if the regulators haven’t even cemented questions regarding the distribution of their report, how confident can we feel in their thoroughness in analyzing complex balance sheets? The uncertainty and debate still surrounding this report is caustically eroding confidence. We still hold that the stress test will not provide the transparency needed, will not build nor shore up confidence in the EU and will leave us with more questions than answers.
In the UK, BoE MPC minutes revealed a 7-1 vote in favor of an unchanged policy rate with Andrew Sentance being the lone dissenter…again. The committee further voted unanimously to hold the QE program unchanged at £200 bn. There was a discussion of increasing QE easing, however no member actually voted for the move. BoE Governor Mervyn King still believes that inflation will continue to ease as growth is expected to deteriorate a bit further. Given these developments, we suspect the sterling will continue to come under selling pressure as the risk is now skewed towards policymakers opting to hold rates steady longer than the market currently expects.
Over the past few days, CAD remains the relative outperformer in the FX market. Canadian retail sales and their Monetary Policy Report are due out today and we believe that growth expectations will continue to be adjusted to the upside - giving the CAD even further support.
Today's Key Issues (time in GMT): 08:30 GBP Jun retail sales, +0.5% m/m, +1.0% exp; last +0.6%, +2.2%. 09:00 EUR May ind new orders, unch m/m, +20.2% y/y exp; last +0.9%, +22.1%. 13:30 USD FOMC Chair Bernanke semi-annual House testimony 14:00 EUR Jul consumer confidence index; last -17. 14:00 USD Existing home sales, mn saar 5.20 exp 14:00 USD Leading indicators index, % m/m Jun -0.3 exp 15:00 ZAR South Africa: Interest rate announcement, % Jul 6.50% 14:30 CAD BoC Monetary Policy Report.
EurUsd As the credibility of the European bank stress tests is put up to increasing scrutiny, the bears continue to pile the pressure on EURUSD; and in the last 24 hours we have seen the 3-week uptrend channel break down, leading to a low of 1.2733. From here the risk-reward profile strongly favours short positions, so we would look to use the back side of that 3-week uptrend as a good entry level for shorts; that trendline resistance is seen at 1.2790 currently, so we’d be happy getting in around there and setting a stop just above 1.2830 (yesterday’s US session high). First destination on the downside will be the 14 Jul low 1.2683, although it’s worth noting that today that level coincides with a very short-term downtrend support so the pair will likely bounce off there on the first attempt. Ultimately we see this bearish trend eventually taking another look at 1.2522 (13 Jul low) and 1.2483 (2 & 6 Jul lows), and very possibly a further extension back towards 1.2000. Should the bears relent enough for the pair to break back within the uptrend channel at 1.2790, expect further selling interest to lie around 1.2840 (support-turned-resistance from earlier this week), the 100-day moving average 1.2887, and 1.2925.
GbpUsd After a choppy and indecisive few days trading, we feel GBPUSD is gathering momentum for a move lower –a view based on yesterday’s break below the significant 6-week uptrend and reinforced by a bearish engulfing candlestick on the daily chart over the last 2 days of this week. We now look to sell around 1.5200 levels –the back side of the 6-week downtrend seen at 1.5210 –and await a return to 1.5125 (yesterday’s low). Further downside is highly possible but likely to become laboured below 1.5125 as trendline support is currently seen around 1.5110 and a significant former pivot level remains at 1.5080.Should we managed to conquer those supports, there is a much clearer path towards the next downside targets of 1.4992 (100-day moving average), then the 12 Jul low 1.4949. The risk-reward profile does look a little edgy should we break back above the uptrend at 1.5210, with next resistance not seen until 1.5350 (19 Jul high), 1.5472 (last Thursday’s high), and 1.5525 (15 Apr high).
UsdJpy Yesterday we outlined the two possible scenarios in play for USDJPY –the first being a potentially bullish symmetrical triangle pattern with a target at 88.15, and the second one a larger bearish flag pattern which had not yet been activated. That latter pattern now looks to have become activated by the sell-off through trendline support at 87.00-05, and with that we now feel that the smaller symmetrical triangle pattern is as good as dead in the water. The classically defined target on the downside for this new flag pattern is 84.30 with supports ahead of there eyed at 86.27 (16 Jul low) and Nov 2009 lows of 84.83; but as we have mentioned a couple of times recently, down at those levels we would be playing Russian roulette with possible BoJ intervention so anything below 85.50 seems an ambitious enough take profit level for our fear/greed ratio. Any rallies from here are likely to meet fresh sellers around 87.15-20 (back side of the flag) where those who missed the break-out first time around will want to jump in, then further resistance seen at 87.57 (this week’s high from 20 Jul), 88.00 (former pivot), 89.15 (12 Jul high) and 89.50 (28-29 Jun high).
UsdChf The 3-week downtrend channel has been violated a number of times in the past 24 hours, but as of yet the bulls have failed to capitalize on the upside break and the pair is continuing to stutter around the trendline resistance. We are still short at 1.0530 from yesterday’s trade recommendation (taking the view that a lack of directional impetus from either the bulls or the bears made it a prime range-trading environment) and are looking at a first target of 1.0450 (Monday’s low), with 1.0400 (double bottom seen last week) as a possible extended target. Some bulls may favour buying on the dips towards, 1.0400, but should they be wrong the landscape below 1.0400 is only dotted with stale support levels at 1.0365, 1.0315 (trendline support), then 1.0230 –could be a nasty plunge with few buyers to slow the descent.
Both the euro and British pound fell against the safe haven currencies yesterday, following a speech from FED Chairman Bernanke which caste doubt over the pace of the global economic recovery. While the euro has traded steadily against the U.S. dollar in overnight trading, it continues to fall against the yen.
Economic News
USD - USD Sees Moderate Gains Following Return to Risk Aversion The U.S. dollar broke the bearish trend it had been experiencing since early last month yesterday, following a speech by the Fed Chairman which led to gains for safe haven assets. The speech from Chairman Bernanke was unlike his more recent statements, in that it did not paint a solid picture of the global economic recovery. Following the speech, investors dumped riskier currencies in favor of the greenback.
Both the euro and British pound tumbled versus the dollar. EUR/USD has dropped over 100 pips over the last 24 hours, and currently stands at the 1.2768 mark. GBP/USD dropped close to 200 pips over the course of yesterday's trading session, before staging a slight comeback. At the moment, the pair is trading around the 1.5180 level.
While risk aversion appears to be the predominant market sentiment at the moment, investors will be cautiously awaiting several U.S. economic indicators set to be released today. At 12:30 GMT, the weekly U.S. unemployment figures are set to be released. With analysts predicting a slight increase in unemployment over last week, investors may continue to buy up safe haven assets in the afternoon, thereby boosting the dollar.
In addition, traders will also want to pay attention to the existing home sales report set to be released at 14:00 GMT. A decrease in home sales from last month is predicted, which if true will likely lead to further risk aversion. That being said, any unexpected increase in the home sales figure may lead to gains for the euro against the greenback.
EUR - Euro Breaks its Bullish Streak. Falls Against Yen After a more than two month bullish streak, the euro saw serious losses against the safe haven currencies throughout the day yesterday. In addition to the 100 pip loss against the U.S. dollar, the euro also fell versus the yen. EUR/JPY has fallen over 200 pips in the last 24 hours. Analysts attribute the drop to a speech yesterday from the Fed Chairman, in which he made statements that created doubt in the pace of the global economic recovery.
Today, the euro may be able to recover some of its losses depending on the results of the French and German manufacturing data, set to be released at 07:00 GMT and 07:30 GMT, respectively. Analysts are forecasting both figures to show expansion in the manufacturing sectors of France and Germany. If the predictions turn out to be true, investors may be enticed to buy up some of the riskier currencies like the euro in morning trading. At the same time, U.S. data set to be released later in the day, are expected to show further declines in the American economy. If true, the euro may see some more losses against the dollar and yen.
JPY - Yen Soars Against Majors as Risk Aversion Returns Following yesterday's gains, the yen continued its bullish trend against the majors in overnight trading. Since 20:00 GMT last night, GBP/JPY has tumbled around 85 pips to its current level of 131.33. Meanwhile, it appears that the JPY has fully confirmed its status as the premier safe-haven currency by making substantial gains against the U.S. dollar. The dollar dropped some 60 pips during overnight trading against the yen. Currently USD/JPY is trading around the 86.50 level.
Today, a lack of Japanese news events means that yen values will likely be determined by U.S. economic indicators. Traders will want to pay attention to the U.S. Fed Chairman's testimony at 13:30 GMT and the Existing Home Sales Report at 14:00 GMT. Should either of these events lead to further uncertainty in the pace of the global economic recovery, the yen will likely continue its bullish trend as a result.
OIL - Oil Prices Tumble Following Surprise Increase in Reserves Investors were surprised to learn of an increase in U.S. crude oil supplies yesterday. The news indicated that oil demand in the world's largest energy consuming country was less than originally thought, causing oil prices to tumble. Since yesterday afternoon, the price of crude oil went from 78.60, to its current level of 76.40.
Analysts are predicting a further drop in prices today, assuming the U.S. unemployment data and existing home sales figure come in as forecasted. Both news events are expected to illustrate the slow pace of the U.S. economic recovery. Typically, during times of economic uncertainty, oil prices tend to fall. At the same time, should any of the American data come in better than expected, the price of crude may rise as a result.
Technical News
EUR/USD The pair slipped yesterday to the minor support level near 1.2770 following the bearish engulfing candlestick pattern on the daily chart. Despite the change of the trend to the upside, current momentum is lessening, shown by the falling Momentum (14) indictor and a Slow Stochastic that is also heading lower. The next support for the pair rests at the 1.2670 level.
GBP/USD Yesterday's price action presents two key points on the daily chart. The price of the cable rose as high as the lower channel line which was previously broken and is now being used as a resistance barrier. Despite the sharp drop in value of the pair, the price managed to close above the 20-day simple moving average (SMA). Traders can use the SMA as a support level and as a basis for an entry long on the pair with a target at the 1.5300 level. USD/JPY The Relative Strength Index on the 4-hour chart shows an acceleration of the downtrend for the pair and could lead to a further drop in the price. The pair is currently testing the support level at 86.25. A breach below this level could take the pair to the 84.80 level as the daily chart shows a lack of technical support between the two levels.
USD/CHF Tuesday's trading ended slightly lower for the day but formed a hanging man candlestick pattern, signaling an end to the upward movement in the pair. Yesterday's bearish move in the pair confirms the correction has run its course and the pair looks to head lower to its next support at 1.0400. The Wild Card Oil Yesterday's sharp drop in price may have made for a good entry opportunity to go long on spot crude oil. The price closed at $76.35, near the 38.2% Fibonacci retracement level from the previous bearish trend. A breach back above this price could give CFD traders an opportunity to enter long with a target at the resistance level of $78.10.
* Risk rally stalls, more downside likely * EU bank stress test results are keenly awaited * UK Inflation debate may be fuelled * Bank of Canada Rate hike expected * Key data and events to watch next week
Risk rally stalls, more downside likely
Risk assets (stocks, commodities, JPY-crosses) started out the past week on solid gains, but ultimately failed to overcome key resistance levels. In stocks, the fact that 20 out of 23 US earnings reports beat expectations and shares could not advance should be alarming. In reality, though, it should also have been expected--as the outlook for the US recovery continued to slide, the future outlook for stocks was undermined (and earnings are mostly backward looking indicators anyway). The market is still in the process of adjusting to a more sluggish 2H 2010, with US assets bearing the brunt at the moment, but we also think there is more to go in re-pricing for a slower global recovery.
In terms of price levels, the S&P 500 failed below the key 1100 psychological level and the bottom of the Daily Ichimoku Cloud around 1095, keeping the downside focus intact. A bearish engulfing line on the daily S&P candlesticks also highlights downside risk ahead. WTI crude oil prices never even managed to test the recent highs just below the $80/bbl area, and finished down on the week. EUR/USD topped out at the 61.8% retracement of the April-June decline, which came in at the psychologically significant 1.3000 level. The USD index extended losses below the daily cloud, but may have found a base above the key 82.00 level, just above the weekly cloud top at 81.90. AUD/JPY, the closest correlated FX pair to stocks, was rejected from the daily cloud up in the 77.30/78.30 area, mirroring the same S&P failure. Lastly, the commodity currencies have shown renewed signs of weakness against the USD, and they are frequently a leading indicator for broader USD-based moves, suggesting USD weakness may be set to reverse.
Over the course of the past week, several key correlations broke down in the short run, but other more meaningful correlations persisted. The major anomalies were in outsized EUR gains, followed closely by GBP, and extreme USD weakness. We look at EUR and GBP strength as mainly the result of another wave of short-covering, similar to what occurred in the middle of May. In this respect, we would note the outsized gains in EUR/AUD, EUR/CAD, GBP/AUD, and GBP/CAD. If it were a case of pure USD weakness, those crosses would not have seen such gains, reinforcing our view that this was a position-driven adjustment. Anecdotally, the break above the 1.2750/2800 area was heavily stop loss driven. Also, according to recent correlations, a weaker USD should have boosted stocks, oil and gold, but clearly that didn't happen either.
Taking a step back and looking at the bigger picture, US weakness undermines the prospects for the global recovery overall. From that view, many of the market moves in the past week make more sense: oil and stocks lower on slowing global outlooks; JPY-crosses lower on heightened risk aversion over the deteriorating outlook; and JPY and CHF strength on safe haven flows. We think the bulk of EUR and GBP short-covering has likely occurred and we are leery of chasing those currencies higher. Anticipating that increased risk aversion may eventually lead to the USD rebounding on safe haven demand, we would prefer to be sellers on remaining strength in EUR/USD between 1.3000-1.3150 and in GBP/USD between 1.5400/5530. The likely more reliable way to trade expected further risk pullbacks would be to sell JPY-crosses, especially AUD/JPY, CAD/JPY and NZD/JPY on remaining strength.
EU bank stress test results are keenly awaited
The first results of the EU bank stress tests are due on July 23. Credit analysts have been busy drawing up lists of which banks are likely to have failed; if the tests are to be perceived as credible then failures are considered to be inevitable. In contrast, the tone of many European officials has been confident. The Deputy Spanish Finance Minister Campa has said that Spain “can only win” from the publication of the tests, Bank of Italy Governor Draghi has stated that the stress tests will demonstrate that the capitalization of Italian banks is well above minimum levels and Bank of Ireland Governor Honohan has stated that Irish banks have already been through more severe tests. The IMF’s Strauss-Kahn has concluded that there will be some small institutions that will have to be refinanced. The official rhetoric along with a decent result to the Spanish bond auction and Greek bill sale this week has supported the EUR. Clearly the EUR may come under pressure if the stress tests bring many casualties. It could also be sold if the stress tests produce too few failures, as the tests will be seen as providing insufficient transparency to the interbank market. There could be a thin line where the results appear to be relatively agreeable and the EUR can derive support. However, having reached EUR/USD 1.300 already, upside potential for the EUR could be running dry.
UK Inflation debate may be fuelled
The debate on whether inflation pressures are building in the UK intensified a month ago when it was revealed that MPC member Sentance had voted for a rate hike at the June policy meeting. Since then Sentance has maintained his hawkish view although the CPI release has shown a fall in the headline rate and labour data has brought a moderation in the growth rate of earnings. The publication of the FOMC minutes this week re-opened the possibility that the Fed may ease policy again before it hikes. While this prospect cannot yet be dismissed in the UK, market expectations are favoring a policy tightening in the UK ahead of the US and this possibility has allowed for a better tone in cable in recent sessions. Sterling could find additional support on the back of the Q2 advance GDP report in the week ahead, which is expected to show relatively good growth. The impact, however, is likely to be short-lived given prevailing concerns that the UK growth rate will stutter in H2 on the back of the government’s austerity measures. The old range high of cable at USD.15525 is likely to offer decent resistance, a break below the USD1.5230 level may suggest additional losses are in store. Bank of Canada Rate hike expected
On Tuesday July 20, the Bank of Canada meets to decide on interest rates. We agree with the market consensus for a second consecutive rate hike of 25bps to 0.75% as recent economic data out of Canada supports policy tightening. A look at the jobs report underscores this as 93.2k jobs were added in June, more than 4 times analysts’ expectations. To put this in perspective, a proportionate number in the U.S. (whose economy is about 10 times larger) would be the creation of roughly 930,000 jobs. That is an impressive number and keep in mind that higher employment propels the economy forward. There has been some discussion that the BOC may tighten more aggressively, however we do not agree with this view. As inflation remains subdued there is no apparent need for more aggressive tightening. Year over year CPI is currently 1.4% which is below the 2% target inflation rate and the bank recently projected core inflation at or below 2% through 2012. In their forward looking guidance, policy makers are likely to take a cautious tone given the concerns over the Euro zone and slow down in global growth highlighted by a softening demand in commodities. More detailed thinking can be expected in Thursday’s Monetary Policy Report. Key data and events to watch next week
The calendar in the US is modestly light in the week ahead. Housing numbers kick off the week with the July NAHB Housing Market Index and continues into Tuesday with June Housing Starts and Building Permits. The data slate for Thursday sees weekly Jobless Claims, June Existing Home Sales, and June Leading Indicators. Fed Chairman Bernanke will deliver the semi-annual monetary policy out look to the Senate Banking Committee on Wednesday.
Eurozone data is relatively light but significant with a heavy emphasis on the aggregate EZ results of the bank stress tests on Friday. May Euro-Zone Current Account data is scheduled for Monday as is May Construction Output. No further data is scheduled until Thursday when PMI Composite, Services, and Manufacturing Output Indexes are to be released. Thursday wraps up eurozone data releases for the week with May Industrial New Orders and Euro-Zone Consumer Confidence. In Germany, Tuesday sees June Producer Prices with July PMI Manufacturing and PMI Services surveys to follow on Thursday. Friday closes out the data week with the July IFO Business Climate Index.
A moderate week of data lies ahead in the UK with June Public Sector Net Borrowing, June Mortgage Approvals, and the July CBI Optimism Index on Tuesday. Wednesday will have the Bank of England Minutes followed by June Retail Sales figures on Thursday. Friday wraps up the UK data session with the advance estimate for Q2 GDP.
Data out of Tokyo is light with May Leading and Coincident Indexes to be released on Tuesday. There is significant event risk though as BOJ intervention cannot be completely dismissed with USDJPY trading at current levels.
Canada begins a significant week of data with the Bank of Canada Rate announcement on Tuesday. Expectations are for an increase of +0.25% to 0.75%. Up next are May Wholesale Sales and May Retail Sales due out on Wednesday and Thursday. Friday wraps up the week with June CPI and Bank of Canada Core CPI set to be released.
The calendar down under begins with the release of the RBA minutes from the July meeting on Monday and continues with the Q2 NAB Business Confidence survey on Wednesday. Thursday wraps up the week with Q2 Import and Export Price Indexes.
The U.S. Core CPI is the primary publication today that is set to determine the level of the dollar when the report is released at 12:30 GMT. The other main releases that are set to dominate forex trading, especially for currencies such as the dollar and euro is the publication of the U.S. TIC Long Term Purchases and Prelim Consumer Sentiment at 13:00 GMT and 13:55 GMT respectively. Traders may find good opportunities to enter the market following these vital announcements.
Economic News
USD - USD Falls on Negative Economic Data The dollar fell broadly against most of its major currency pairs on Thursday, as soft inflation and manufacturing data added to concerns about the strength of the U.S. economy. By yesterday's close, the dollar fell around 1.5% against the EUR to 1.2940, a 2-month low. The dollar experienced similar behavior against the GBP and closed at 1.5455.
U.S. producer prices declined for a third straight month. The data came just a day after minutes of the Federal Reserve's latest meeting revealed that policy makers think they may need to do more to boost the economy if a sputtering recovery slows any further. The news helped push the EUR to its highest against the dollar since May.
Another leading indicator released yesterday was U.S. Unemployment Claims. This number handedly beat last week's result but failed to provide strength to the dollar as investors may be waiting for key data due to be released today to implement their trading strategies.
As for today, data releases are expected from the U.S. economy. These figures are expected to set the tone for the USD's pairs and crosses. Special attention should be given to the Core CPI which is expected to be unchanged from its previous reading. Traders pay close attention to this figure as it has a strong correlation with the value of the U.S. dollar. Also today, the Prelim UoM Consumer Sentiment is scheduled and should also have an impact on the market because if it delivers unfavorable figures it will validate a problematic U.S. economy, and the USD is likely to weaken as a result.
EUR - EUR/USD Hits 2-Month High The EUR strengthened against most of its major counterparts yesterday, continuing to prove for the time being that this is a solid currency that traders can rely on to provide them with steady profits. The 16 nation currency extended gains versus the USD on Thursday, nearing 1.2940 for the first time in 2 months after the Philadelphia Federal Reserve's business conditions index fell sharply in July. The EUR experienced similar behavior against the
JPY and closed up at 113.10. Weakness in the Philadelphia's Fed's mid-Atlatnic district added to concern about the U.S. economy, which has been heightened in recent days by a clutch of disappointing inflation, manufacturing and retail sales data.
The single currency, which slid below $1.19 in June on euro-zone debt trouble, has since risen by more than 8% after smooth government debt auctions in Greece, Portugal and Spain eased concerns.
JPY - Yen Experiences Mixed Results against Major Currencies The yen completed yesterday's trading session with mixed results versus the other major currencies. The JPY was broadly unchanged versus the CHF yesterday and closed its trading session around the 83.85 level. The JPY also saw bullishness against the USD and closed at 87.50.
The JPY's trends will be affected by the rallies of its primary currency pairs today. It seems that the USD and EUR are expected to continue a volatile trading session today, especially against the Japanese currency. Traders should keep a close look on the news coming from the U.S. and Europe as these economies will be the deciding factors in the JPY's movement today, especially the U.S Core CPI at 12:30 GMT. It is also advisable for traders to follow any unexpected comments coming from key Japanese governmental figures, as this is also likely to lead to further JPY volatility.
OIL - Oil Prices Fall Based on Weak U.S. Data Oil fell below $77 a barrel on Thursday after disappointing U.S. economic data curbed expectations for future demand growth. Oil prices fell as low as $75.80 before it rebounded again and closed at $77.35
Oil has traded between $70 and $80 this month as investors ponder how much a pullback of government stimulus spending could undermine global economic growth and crude demand in the second half.
However, Crude oil prices were supported by the weekly inventories report from the Energy Department's Energy Information Administration on Wednesday, which showed crude supplies shrank more than analysts had forecasted, a sign demand may be improving.
Technical News
EUR/USD Bullishness in the pair continues as the price breached and closed above the upper channel line that the pair has been trading in since early June. The close was also above the 100-day simple moving average line. The 10-day RSI is sloping sharply higher, indicating that the momentum is to the upside. Near term resistance for the pair rests just below 1.3100.
GBP/USD The pound was a strong mover in yesterday's trading as the cable closed above the 23.6% Fibonacci retracement level for the long term downward trend, as well as a close above the long term downward sloping trend line that began in July of 2008. Traders should be long on the pair with a minimum target at the resistance level of 1.5520.
USD/JPY A significant drop in the value of the pair was registered yesterday as the pair fell as low as the support level at 87, the year to date low. The downward momentum looks to continue as an absence of technical resistance on the charts could move the pair as low as 84.80, the November 2009 low.
USD/CHF Yesterday the pair breached below the near term resistance levels of 1.0480 and 1.0430, ending the short term consolidation that the pair had experienced. The next target for the pair will be the 74.6% Fibonacci retracement level from the previous bullish trend at a price of 1.0350.
The Wild Card Oil The daily chart shows two candlestick patterns that hint to a slowdown of the recent bullishness of spot crude oil. Wednesday's trading ended slightly higher but formed a doji candlestick, signaling potential short term weakness. Yesterday's trading was more volatile with the pair falling as low as the support level of 75.80 and rising as high as 78.06, forming a long legged doji candlestick. This shows indecisiveness on the part of traders and signals wavering support for the bullish move. CFD traders may want to tighten their stops on any long positions they may have in spot crude oil.
A noticeable void of fresh news has created a lacklustre trading environment which continues to promote USD selling. Asian equity markets were higher across the board with Shanghai leading the charge up 2.31%. In addition, yields firmed and commodities rallied as investors concerns over a double dip or potentially a meltdown subsided. However, currently risk appetite seems shaky and temperamental, with safe-haven trades such as JPY & CHF failing to surrender meaningful ground. On this hot, data de-void summer Friday we would be looking to fade risk correlated trades especially the closer we get to the European close. The big news yesterday was the US treasury Department stopped short of labeling any country (ie China) as a currency manipulator. The move was highly anticipated but well received when the report actually hit the street as the benign language should help ease trade tensions further. The report also noted that the recent decision by Chinese officials to halt the CNY peg was a positive development but would "monitor closely the pace of appreciation" and hinted that the Treasury still believes the CNY is seriously overvalued. Today China’s car sales slowed to a 14 month low but still printed a very respectable 19.4% y/y. Given this figure and other robust economic indicators we suspect the markets are undervaluing the rate of appreciation in the CNY against the USD. We will be watching commodity currencies particularly the AUD as the inter-dependant rally in commodities & China should support further appreciation.
Yesterdays ECB meeting provided very little new information as it was universally expected they would hold rates steady. However, Trichet sounded surprisingly optimistic about the EU economy and believed the market had an overarching tendency to be excessively negative on the domestic situation in the eurozone. More importantly, Trichet failed to discuss the critical bank stress test other then he believes the report was important and "action will have to be taken where needed after the tests."
In the UK the BoE MPC overlooked the elevated CPI reading and left policy rate unchanged. We suspect that inflation will continue to be a problem for the BoE and the previous MPC split vote is a clear indication of the growing concern within the central bank. While the sterling has received a boost from its recently adjusted rate path we suspect that given the UK's weak fiscal position, a move higher in rates will be sterling negative in the mid term.
As stated earlier we would be inclined to sell into any risk rally given the tentative nature of buyers and growing concern over Japan's Upper House elections over the weekend. Should the ruling government lose the fiscal discipline, which has allowed the country to run massive debt-to-GDP ratio, could be in jeopardy. Giving the transitory nature of the current sovereign debt crisis we wouldn’t rule out Japan coming under heavy scrutiny. Might be a good time to consider selling JPY.
Today's Key Issues (time in GMT): 07:30 SEK Industrial production, % m/m May 08:00 NOK CPI, % m/m (y/y) Jun 08:30 GBP Trade balance, £ bn May 08:30 GBP Producer input prices, % m/m (y/y) Jun 08:30 GBP Producer core output prices, % m/m (y/y) Jun 08:30 GBP Producer output prices, % m/m (y/y) Jun 08:30 GBP Current account, £ bn 14:00 USD Wholesale inventories, % m/m May 0.5 Exp, 0.4 prior 11:00 CAD Unemployment rate 8.1% exp, 8.1% prior 23:01 GBP BRC retail sales monitor, total sales, 3.0 prior 23:01 GBP RICS housing market survey, price bal Jun 22 prior
EurUsd The combination of Trichet’s upbeat assessment on Eurozone data coupled with decent gains in the equity markets has been sufficient to finally push EURUSD up through the 1.2675-85 resistance zone (representing the 13 & 21 May highs). We are however still wary that a bearish rising wedge formation may be playing out on the hourly chart, and the doji candlestick on the daily chart seen Wednesday does make us wary that the bears could still snatch this one. The upper edge of the wedge has repelled 5 or 6 rallies already, and now comes in around 1.2725-30. Should we threaten a break of the lower edge of the wedge (now eyed at 1.2645), the potential for a significant collapse lower is great, so we would advise anyone long to adjust their trailing stops to just below that level. For everyone else, look to sell towards the top the wedge, or on a break below 1.2645. Supports expected 1.2550 (7 Jul low), 1.2468 (former resistance from 20 Jun), 1.2410 (50-day moving average), 1.2400, then 1.2300. Should the wedge be negated by break above 1.2730, next resistance is eyed at 1.2750 then 1.2957 (100-day moving average).
GbpUsd Easy money in GBPUSD this week as we managed to scalp another 70-80 pips out of this 1.5080 –1.5230 range but this time from the short side; as you may recall from yesterday’s report, we went short just above 1.5200, and took profit at 1.5130 to give us ample cushion before the uptrend channel support came into play. Exactly according to script the pair tickled that trendline only briefly (around 1.5105) before rebounding higher today. With that uptrend occupying a significant chunk of the trading range now (currently seen at 1.5130), we have refrained from trying to get too greedy and play the upside (but those who did flip back to long positions on that last oscillation are sitting pretty on a tidy 70 pips or so of gains), and instead we wait to see whether the uptrend support or the 1.5230 range ceiling will be the first to capitulate. Should the uptrend channel break down, next supports expected at the 100-day moving average 1.4993, then major support at 1.4855. Should the uptrend resume, we’d go long on a break above 1.5230 and aim for another test of the 30 April high 1.5390. Next resistance above there is seen at trend channel resistance at 1.5455 trendline resistance.
UsdJpy As discussed yesterday, we have gone long on the break above 88.20, and thus far have been reaping the benefits of good USD claims data and equity market gains; both of which have resulted in upward pressure on USDJPY –hitting a high of 88.71 so far. Just to re-iterate our plan on this one; there looks to be a double bottom formation on the hourly chart with a neckline at 88.20, and which suggests a target on the topside at 89.40 –a level that still has a bit of breathing space before the cluster of resistance levels come into play between 88.60 and 88.77 (1-month downtrend resistance and 25 Jun high). Those who missed the breakout the first time around can still look to try and get in on the long trade should we re-test the neckline (88.30-40 still looks tasty for an entry point), and stops can be placed 10-20 pips below the 8 Jul lows 88.00. Resistance above still remains at 88.95 (20 May low), then 89.50 (28-29 Jun high), whilst buyers are likely back down at 87.65, then 86.97.
UsdChf An altogether uninspiring few sessions for USDCHF –with the break above the 1-month downtrend being more of a sluggish continuation of range-trading rather than an impulsively bullish push higher. The bearish engulfing candlestick on the daily chart on Tuesday makes the breakout look even less compelling, so we are in no hurry to relinquish our view that this pair goes lower in the short-medium term. We now prefer to sell on rallies back towards the 1.0580 pivot level, and aim for another test of yesterday’s lows of 1.0481. Supports below are eyed at the 1.0480 floor that has propped the pair up over the last couple of days and 1.0435, whilst resistance above 1.0580 is seen at the 1-week-downtrend resistance 1.0595, then 1.0700, 1.0780 and 1.0910.
It’s been a slow week for economic data thus far, so it comes as some relief that today has finally given us something meaty to get our teeth into. Swedish headline CPI this morning dipped slightly below expectations at 0.0% MoM, 0.09% YoY, but it was somewhat of a mixed bag as underlying inflation ticked higher. Although the Riksbank recently hiked rates for the first time since the onset financial crisis, they seem likely to remain cautious about the pace of future tightening. We are also awaiting two central bank rate decisions today; namely the BoE and ECB. There are no changes expected from the BoE this month, with rates static at 0.50% and the asset purchase target at GBP200bn; but the prospect for the path of interest rates in the UK has certainly become more interesting since the revelation of a split vote at the last meeting. The most recent release showed that annual inflation pared back to 3.4% in May; down from the prior 3.7% seen in April but still well in excess of the 2.0% target and indeed the 3.0% threshold set by the Treasury. Ultimately, even if MPC member Sentence (the sole dissenter looking for a hike last month) does manage to sway some of his borderline colleagues to consider a hike as well, it is unlikely the hawks will muster the numbers for an actual hike at this meeting. Instead we will have to wait for the release of the Minutes on 21 July to hear the juicier points of discussion. Shortly after the BoE we will also get the latest ECB rate decision where analysts are in unanimous agreement that the ECB will keep interest rates at 1.00%. Officials are likely to repeat verbatim the language of previous statements that current monetary policy remains “appropriate”. The official statement will provide the usual recap of the latest economic picture (unlikely to hold any surprising views), but once again, most market and media interest will concern the Q&A portion of the press conference. Trichet is almost certain to be asked to give his opinion on recent Eurozone crisis developments, but don’t expect him to reveal too much here as given the sensitivity of Eurozone sentiment he is likely to be politic in his choice of answers.
EurUsd Just as we asserted yesterday, EURUSD managed to defy the murmurs of risk aversion felt at the start of the session, and has now surged even further in this leg of the rally to a high of 1.2688. We didn’t even get close to seeing our long entry level of 1.2500 before the pair pushed all the way past our 1.2650 target; but we have seen the rally halt precisely where we had expected first resistance to come in around 1.2675-85 (13 & 21 May highs). As previously mentioned this week, the next area of supply above there is 1.2750 (11 May high), and given the enormity of EUR-shorts that have accumulated in the market it seems highly plausible that once 1.2685 gives way, there could be an accelerated liquidation of other shorts. Of concern to the bulls however, will be the fact that a doji candlestick was printed on the daily chart yesterday, and the current rally looks to be carving out a rising wedge formation on the hourly chart – a classic sign that a reversal may be due. The lower edge of that wedge comes in at 1.2600, so we would advise anyone still long to adjust their stops to just below that level, and anyone square to be willing to going short on a break below there. Supports expected 1.2550 (7 Jul low), 1.2468 (former resistance from 20 Jun), 1.2421 (50-day moving average), 1.2400, then 1.2300.
GbpUsd GBPUSD remains in a consolidation range between 1.5080 and 1.5230, so after nailing the range trade from the long side yesterday (going long 1.5090, taking profit at 1.5180 – see yesterday’s report), naturally our reaction to finding ourselves back above 1.5200 this morning has been to sell a few and look for a move back towards 1.5100. We are slightly cautious about being too greedy on this oscillation however as the uptrend channel support has now crept within the trading range (at 1.5095), so perhaps smarter target should be in the region of 1.5130. Should the uptrend channel break down, next supports expected at the 100-day moving average 1.4996, then major support at 1.4855. Should the uptrend resume, expect supply at 1.5227-9 (2 & 6 Jul high), followed by the 30 April high 1.5390 and uptrend channel resistance at 1.5425.
UsdJpy We’ve done a complete round trip in USDJPY over the past two days; from pressuring a break above 88.00 on Tuesday, to yesterday’s collapse towards critical support at 86.97, and now today’s emphatic rebound all the way back up again. In fact, the prospects for USDJPY look a whole lot more bullish having gone through that failed test of 86.97, as the latest rally now looks to have carved out a double bottom formation on the hourly chart. This morning’s surge above 88.20 has compelled us to go long, and set our sights on an upside target of 89.40 (which falls comfortably ahead of the 1-month downtrend channel resistance of 89.75 and 25 Jun high). Our conviction is also bolstered by the hammer candle on the daily chart yesterday which suggests the bulls are starting to regain control in this downtrend. Resistance above still remains at 88.95 (20 May low), then 89.50 (28-29 Jun high), whilst buyers are likely back down at 88.00 (5 & 6 July highs), 87.65, then 86.97.
UsdChf An altogether uninspiring few sessions for USDCHF – with the break above the 1-month downtrend being more of a sluggish continuation of range-trading rather than an impulsively bullish push higher. The bearish engulfing candlestick on the daily chart on Tuesday makes the breakout look even less compelling, so we are in no hurry to relinquish our view that this pair goes lower in the short-medium term. We now prefer to sell on rallies back towards the 1.0580 pivot level, and aim for another test of yesterday’s lows of 1.0481. Supports below 1.0580 are eyed at 1.0500 and 1.0435, whilst resistance above 1.0700 is seen at 1.0780 and 1.0910.
Risk trades are under threat one again after the few sparse economic releases of the week have so far managed to disappoint and the momentum of the recent rebound rallies starts to fade. This morning’s Eurozone final GDP reading confirmed a 0.2% QoQ pace of growth in Q1, but German factory orders in May significantly undershot estimates at -0.5% MoM (compared to consensus estimates of 0.3%). Admittedly, the latest figures were sweetened by decent upward revisions to the print last month (to 3.2% from 2.8%), but the net of these figures was still much softer than anticipated, and as such EURUSD has found itself struggling to hold its head above 1.2550.
EurUsd Risk appetite definitely feeling a bit more vulnerable today, but with the bullish engulfing candlestick carved out on the daily chart at the start of this week, we do still feel that EURUSD can progress further to the upside on this corrective rally. The 6-month downtrend channel (1.2485) now looks unquestionably broken by yesterday’s price action, so we aim to try and get long on a re-test of that trendline back towards 1.2500, and eye a first target above at 1.2650. We anticipate decent sellers will be lurking around 1.2675-85 (13 & 21 May highs) and 1.2750 (11 May high), but given the enormity of EUR-shorts that have accumulated in the market it seems highly plausible that once one gives way, there should be an accelerated liquidation of other shorts. Supports expected 1.2550, 1.2468 (former resistance from 20 Jun), 1.2432 (50-day moving average), 1.2400, then 1.2300.
GbpUsd GBPUSD remains in a consolidation range between 1.5080 and 1.5210, but the slump in risk appetite over the past session has brought us back down towards the lower edge of the current uptrend channel. With 1.5080 still intact, we remain buyers on dips in this pair, so aim to go long around 1.5080-90 with a stop a little way below the trendline support (seen at 1.5050), looking for a test of 1.5200 in due course. Should we be completely wrong-footed and get a continued move to the downside, we are wary that the 1.5080 level may also represent the neckline of a double-top in GBPUSD which would suggest a collapse back towards 1.4930 levels is plausible. In the meantime, buyers are likely to step in on dips back towards the 100-day moving average 1.4999, and the major support at 1.4855 remains intact. Should the uptrend resume, expect supply at 1.5227-9 (2 & 6 Jul high), followed by the upper edge of the 4-week uptrend at 1.5395, then the 30 April high 1.5390 and 15 April high 1.5525.
UsdJpy Having twice failed to overcome supply at 88.00, USDJPY has plunged through 87.33 support (reaction low seen post-payrolls), and is now headed straight for a test of last Thursday’s critical support 86.97. According to the symmetrical triangle pattern we have been using as a guide, the eventual target for this move is around 86.20, but arguably, any break below 86.97 would open up a vast area down to 84.82 (2009’s low) with little discernible support expected in between. The somewhat flakey 3-week downtrend suggests some trendline support may come into play around 85.60, but given how easily that channel was violated on the topside yesterday, we don’t hold much conviction in its predictive power on the downside. Resistance above still remains at 88.00, 88.95 (20 May low), then 89.50 (28-29 Jun high).
UsdChf An altogether uninspiring few sessions for USDCHF – with the break above the 1-month downtrend being more of a sluggish continuation of range-trading rather than an impulsively bullish push higher. The bearish engulfing candlestick on the daily chart makes the breakout look even less compelling, so we are in no hurry to relinquish our view that this pair goes lower in the short-medium term. If anything, we’d look to buy off the bottom of the range (1.0578) and try to go for another test of 1.0700. Supports below 1.0580 are eyed at 1.0500 and 1.0435, whilst resistance above 1.0700 is seen at 1.0780 and 1.0910.
Another day sparse of economic releases presents itself, with this afternoon’s ISM non-manufacturing as the sole focus left ahead of this evening’s World Cup semi-final. The earlier release of Switzerland’s CPI print has provided some food for thought however; with the June reading coming in at a much lower than estimated 0.5% YoY (consensus 0.9%), down from last month’s 1.1% print. The significance of this, as we have previously asserted, is that all forecasts for continued CHF gains going into the end of the year (on the back of comparative fundamental strength and perceived safe-haven status) are contingent on the SNB allowing those gains to take place. Very recently, the SNB committee appeared to give the green light for the market to dictate where EURCHF should trade – independent of aggressive interventions from the central bank – but based on the view that deflation was no longer a threat to the Swiss economy. A mild downtick in annual inflation had already been expected from today’s release, but a reading that goes quite so far below the prior month’s level is bound to raise a few eyebrows and cause traders with extensive EURCHF shorts to start squirming.
Today's Key Issues (time in GMT): 14:00 USD ISM Non-manufacturing (Jun); exp: 55.0, prev: 55.4
EurUsd Unfortunately the risk sell-off on the Asian open today was enough to trigger our stop at 1.2500 from yesterday’s trade recommendation, but the pair has since boomeranged back upwards to tickle the underside of 1.2600. Despite our disappointment about the failed long yesterday, this does still feel like the start of a corrective bullish phase for EURUSD in our view, and taking a look at the daily chart we can see that the 6-month downtrend channel is at significant risk of capitulating should the pair remain above the trendline at 1.2500. We still therefore like to buy EURUSD on dips back towards 1.2500, and eye a first target above at 1.2650. We anticipate decent sellers will be lurking around 1.2675-85 (13 & 21 May highs) and 1.2750 (11 May high), but given the enormity of EUR-shorts that have accumulated in the market it seems highly plausible that once one gives way, there should be an accelerated liquidation of other shorts. Supports expected 1.2480 (overnight low), 1.2443-68 (50-day moving average and former resistance from 20 Jun), 1.2400, then 1.2300.
GbpUsd GBPUSD remains in a consolidation range between 1.5080 and 1.5210, and meandering along the middle of its 1-month uptrend channel. We are certainly still buyers on dips in this pair, but ideally prefer to see cheaper entry levels towards the lower bound of the current uptrend before getting in. That lower edge is today seen at 1.5030, so we set a limit order just above 1.5050 and expect another test of 1.5200 in due course. Should the squeeze out of short-risk positions continue beyond that target, the next levels of supply anticipated on the topside are the 1.5229 highs seen Friday, followed by the upper edge of the 4-week uptrend at 1.5355, followed by the 30 April high 1.5390 and 15 April high 1.5525. Buyers are likely to step in on dips back towards the 1.5080 overnight lows, the 100-day moving average 1.5005, and the major support at 1.4855 remains intact.
UsdJpy Despite the USD sell-off post-payrolls, USDJPY managed to stabilize on Friday, and thus far, 86.97 (seen last Thursday) remains the low watermark in this downtrend. The doji candlestick carved out on the daily chart on Friday could suggest that the overwhelming bearishness that has driven the market for the past couple of weeks may be due for an imminent correction, however resistance at 88.00 has thus far kept a lid on gains. The potential symmetrical triangle pattern we highlighted on the hourly chart yesterday was eventually broken to the downside, but the follow-through has been far from compelling. We have taken half our short off the table already as the price has drifted back above the 87.75 break-out level, and now leave the remaining half-position to either play out according to the planned target of 86.20, or for us to stop out on a break above 88.00. Working in our favour is the fact that supports on the downside are disparate; 87.33 is the reaction low seen post-payrolls, 86.97 last Thursday’s low, then the 2009 low of 84.82. in contrast, stumbling blocks of resistance on the topside still remain at 88.20 (back side of week downtrend), 88.95 (20 May low), then 89.50 (28-29 Jun high).
UsdChf This is another pair that has been trading sideways since the end of last week, but there has been a nervous dip below 1.0580 at the start of today’s session which suggests the equilibrium is starting to bubble over towards a break-out. We still think this pair goes lower in the short-medium term so keep an eye on whether 1.0578 support gets violated again, then view next support at 1.0500. Should the reverse scenario play out (as portended by the inverse hammer on the daily chart on Friday), there is a good likelihood of sellers expected at 1.0625 coinciding with the 4-week downtrend, 1.0700 (psychological level and Friday highs), then 1.0800.
Currency markets are relatively quiet at the start of the week; US desks are likely to remain empty as the Independence Day holiday is observed, and the morning’s data releases already done and dusted which leaves us predominantly at the whim of headline risk and equity market moves. This morning’s Swiss retail sales posted an extremely robust 3.8% YoY increase (albeit in a volatile series) compared to consensus estimates looking for 1.8% (and a prior month print of 1.3%. Of course a good number like this release can only bolster our view that the Swiss economy is going to be one of the strongest in Europe in the coming year, but more important this week for CHF-watchers will be tomorrow’s CPI reading. One of the key developments in the past month that has allowed the CHF to strengthen so impressively is the removal of SNB rhetoric warning about the potential for deflation – and thereby the tacit understanding that the central bank is stepping aside from currency intervention for the time being. From a fundamental perspective, the relative strength of the Swiss economy (which should bode well from the franc in periods of risk appetite), coupled with the perception of the currency as a safe-haven (which should also insulate and perhaps boost it during times of risk-aversion), means we believe that EURCHF can extend its journey to 1.25 levels in the remainder of the year without much difficulty. This however, is acutely reliant on inflation remaining stable; and if tomorrow’s reading suggests another lurch lower in inflation is on the cards then there is little doubt the SNB will step in to counter these CHF gains with force.
EurUsd EURUSD continues to benefit from the liquidation of short positions, managing to top out at 1.2611 on Friday after the US non-farm payrolls release – an impressive level considering that the pair had languished below 1.2200 just a day prior. Rather than considering this a near-term top, we actually believe further topside gains may be attainable given the bullish flag pattern that has been activated on the hourly chart. We have gone long around 1.2540, setting a stop at 1.2500, and eye a first target above at 1.2650 (to take off half our position). Admittedly, using the traditional method for inferring flag targets, we should really be aiming for 1.2860 above, but given our expectation that decent sellers are lurking around 1.2675-85 (13 & 21 May highs) and 1.2750 (11 May high) – added to the belief that July tends to lead to slower, sideways markets, we feel that taking half the position off early may give us the opportunity to reload a second time later on. Supports expected 1.2456068 (50-day moving average and former resistance from 20 Jun), 1.2400, then 1.2300.
GbpUsd GBPUSD largely consolidated on Friday after Thursday’s thundering rally higher, and for the time being the pair remains locked between 1.5150 support and 1.5210 resistance. From a broader perspective, the 4-week uptrend looks extremely healthy (in spite of last week’s false break), and the pair is presently meandering roughly in the middle of that channel. Should the squeeze out of short-risk positions continue, the next levels of supply anticipated on the topside are the 1.5229 highs seen Friday, followed by the upper edge of the 4-week uptrend at 1.5320, followed by the 30 April high 1.5390 and 15 April high 1.5525. Buyers are likely to step in on dips back towards the 1.5150 level, the 100-day moving average 1.5012 (also the neckline of our old head and shoulders pattern), and the major support at 1.4855 remains intact.
UsdJpy Despite the USD sell-off post-payrolls, USDJPY managed to stabilize on Friday, and thus far, 86.97 (seen last Thursday) remains the low watermark in this downtrend. The doji candlestick carved out on the daily chart on Friday could suggest that the overwhelming bearishness that has driven the market for the past couple of weeks may be due for an imminent correction, however we prefer to wait for further confirmation before attempting a long. The most obvious place to find that confirmation seems to be the potential symmetrical triangle pattern on the hourly chart which estimates an upside target of 89.50 should we get a break above the upper trendline around 88.00. If the inverse scenario plays out, we would also be willing to go short on a break below 87.70, in which case the bearish target of the triangle lies around 86.20. Potential stumbling blocks of resistance on the topside still remain at 88.35 (back side of 3-month downtrend), 88.95 (20 May low and recent pivot), then 89.50 (28-29 Jun high), while on the downside the technical levels are far more disparate; 87 33 is the reaction low seen post-payrolls, 86.97 Thursday’s low, then the 2009 low of 84.82.
UsdChf This is another pair that has been trading sideways since the end of last week, and this in spite of weekend comments from the SNB’s Hildebrand about the franc’s volatility of late. We still think this pair goes lower in the short-medium term so eye supports at 1.0600, Thursday’s low of 1.0578, then 1.0500. The potential threats to this scenario in the short term however include the inverted hammer candlestick on the daily chart which may be the signal to bulls that a near-term reversal of the downtrend is brewing. Should this be the case, there is a good likelihood of sellers expected at 1.0685 coinciding with the 4-week downtrend, 1.0700 (psychological level and Friday highs), then 1.0800.
The ripping rally higher in EURUSD and a host of other EUR-crosses has had many market participants asking what on earth could have prompted such a reversal – and in the backdrop of yet another slump in global equity indices which has traditionally been the fuel for EUR-weakness. A simple and easy scapegoat would be to point the finger at the often treacherous trend-reversals effected by month-end and quarter end flows – but undermining that explanation is the fact that the month end happened a day earlier. Instead, we feel that yesterday’s rally was simply a long overdue cleansing of short positioning that has become more and more stifling as the bear trend has matured; and the trigger for that reversal coming now is simply the fact that the EUR has actually fared pretty well against some significant risk events of late. In a week that’s seen the expiry of the ECB's 12m liquidity operation, bond auctions in Spain and France, a German Presidential Election and Moody’s announcement that Spain’s credit rating is under review, EURUSD has not (as it once might have done) reacted with a withering retreat lower. Instead, the worst case scenarios many had priced in have not precipitated, and in fact, the US data this week has been utterly dismal which has no doubt dampened at least some of the blind conviction that buying USD is the right thing to do during periods of economic uncertainty and risk-aversion.
EurUsd Despite equities remaining heavy yesterday, the simple fact that the EUR has navigated a treacherous week of risk events without capitulating (and the fact US data has been lousy), has triggered a massive squeeze in EURUSD and EUR-crosses, including a morning star candlestick pattern on the daily chart suggesting that more upside may be on the cards. On the topside now we watch for first resistance to come in at 1.2545-55 where two different trendlines are expected to lure sellers, but above that junction we have a lot of fresh air until 1.2685 (highs from 13 & 21 May) and 1.2750 (11 May high). Supports expected 1.2470 (50-day moving average), 1.2400 former resistance-turned-support, then 1.2300.
GbpUsd Yesterday we noted that the completion of our head and shoulders chart pattern looked to have broken the 3-4 week uptrend channel which suggested the downside was vulnerable; however in tandem with EURUSD, GBPUSD has instead roared higher to highs of 1.5205 – just a stone’s throw from the major 1.5210 resistance. Should the squeeze continue, the next levels seen on the topside are the upper edge of the 4-week uptrend at 1.5285, followed by the 30 April high 1.5390 and 15 April high 1.5525. Buyers are likely to step in on dips back towards the session lows 1.5150, the 100-day moving average 1.5017 (recall the neckline of our old head and shoulders pattern was also in that vicinity at 1.5012), and the major support at 1.4855 remains intact.
UsdJpy After putting up a brave fight all week, the 87.99 support finally gave way yesterday (and who could blame it given the glut of awful US data), and a cascade of stops took us all the way to lows of 86.97. The rebound back up towards 88.25 former support has found bears waiting to pounce, and we now feel that another slump is likely to ensue in due course. How far that might be is anyone’s guess, but the only technical levels we note on the downside are yesterday’s 86.97 low, then the 2009 low of 84.82. Further resistance above 88.25 is seen at 88.45 (back side of 3-month downtrend), 88.95 (20 May low and recent pivot), then 89.50 (28-29 Jun high).
UsdChf EURCHF has once again been the dominant driver of USDCHF and after a searing rally higher for most EUR-crosses, we have seen USDCHF tugged higher with it (despite the market’s urge to sell USD). Thus far the rally has not managed to break back above the ceiling of sellers expected at 1.0700, but if it does, more resistance levels litter the skies at 1.0750 (yesterday’s US high), 1.0790 (ultra short-term pivot level), and 1.0800. Further resistance above there due at 1.0924 (the low from 10 May) and the 100-day moving average 1.0946. We still think this pair goes lower in the short-medium term so eye supports at 1.0600, yesterday’s low of 1.0578, then 1.0500.
The Riksbank convened today for the first rate decision since April, and in line with forecasts, the central bank raised the repo rate 25bps to 0.50%. In the last statement from the April meeting, some members had argued for keeping the repo rate unchanged at 0.25% for the rest of 2010, but attitudes have thawed as the Swedish data in the interim has largely been very encouraging. Q1 GDP smashed estimates with a 1.4% QoQ pace of growth, CPI is continuing to tick higher, and unemployment has dipped back below 9% (8.8% last). Furthermore, Swedish retail sales released on Tuesday came out at an impressive 1.6% MoM (May data), equating to 2.7% YoY growth – well above the expected 1.0% MoM, 0.3% YoY predicted by analysts. The accompanying statement acknowledged that the economy was developing strongly, and forecast CPI at 1.2% this year, 2.0% in 2011, with GDP at 3.8% this year, 3.6% in 2011. Unsurprisingly the effects of the Eurozone debt crisis have had an impact on the future projected path of rates, with the statement asserting there may not be the need for as big a rise, and indeed one member, Ekholm, voting against this month’s hike.
EurUsd With yesterday’s price action influenced by significant month-/quarter-/half-year- end flows, EURUSD and the EUR-crosses have enjoyed a squeeze higher off their lows. Despite EURUSD’s 1.2170 major support (15 Jun lows and 50.0% fibonacci retracement of 1.1827 - 1.2468) having been breached once on Tuesday, the pair managed to rip higher back through 1.2260 resistance, coming to a halt only once it had touched 1.2305. Equity markets however remain weak so downside definitely looking like the more vulnerable from here; supports expected 1.2152 (Tuesday’s low), 1.2130 (downtrend support), then 11 Jun low 1.2045. On the topside now we watch for first resistance to come in at 1.2305 (yesterday’s highs), 1.2345 (2-week downtrend resistance), 1.2398 highs from this week’s Asian open and 1.2468 (18 Jun and 21 Jun highs).
GbpUsd Flexibility has been rewarded in GBPUSD over the past 24 hours. The 1.5012 support gave way mid-way through the European session, activating a head and shoulders pattern on the hourly chart so despite starting yesterday long, we quickly flipped to a short position to ride out the downside – and the bet has paid off handsomely. The 1.4895 target was achieved this morning, with the pair overshooting only as far as 1.4874 before rebounding higher. In achieving our target, the pair also looks to have broken its 3-week uptrend, so we would be wary that further downside may yet be on the cards. Expect rallies to meet sellers back at that trendline around 1.4930, then further resistance at 1.5012 (head and shoulders neckline), 1.5129 (Monday’s high) and 1.5210 last seen 4 May. On the downside the major support at 1.4855 remains intact, but only weak support at 1.4800 below that before a nasty plunge to 1.4690.
UsdJpy USDJPY has actually held up rather well considering the enormous sell-orders rumoured to be going through in yesterday’s month-end fixes. Admittedly the pair has touched new lows on the week at 88.08, but not a bad effort considering that the pair also had to contend with a bearish engulfing candlestick on the daily chart from the beginning of the week. The lack of more extensive downside price action has not yet however equated to much momentum on the upside either, with the pair still struggling to muster up much fight against the back side of the old three month downtrend. We still expect sellers to linger around there at 88.55, with further pockets of supply at 88.98 (20 May low), 89.50 (28 Jun high) and 89.75. Below us little standing in the way of further declines towards the 6 May low 87.99, with some further support expected at 87.55.
UsdChf A different day but the pattern remains the same; EURCHF has once again cracked open new lows of 1.3047 and down with it, USDCHF has managed to edge its way to 1.0710. The downside now looks extremely vulnerable; with only weak support at 1.0700 and 1.0600 below. Resistance levels litter the skies at 1.0760 (today’s European session high), 1.0790 (ultra short-term pivot level), and 1.0800. Further resistance above there due at 1.0924 (the low from 10 May) and the 100-day moving average 1.0948.
All the elements are in place for this to be a lively and volatile month-end, but equity market performance may well be the overriding factor driving currency movements. The massive losses yesterday have only compounded the sense of risk aversion in the market, and as such we’ve seen a concerted sell-off in commodity currencies, EUR and GBP – coinciding with increased demand for USD, JPY and to a lesser degree, CHF. Being month-end however, there are further factors to consider today including large and erratic flows around (and in the run-up to) the London 4pm fix. For one thing, this will be the day that Moody’s latest downgrade of Greece will be felt across the bond markets; as portfolio managers obliged to hold only investment-grade securities will be forced to sell out of Greek sovereign debt and into other bonds. Whilst the direct impact on EURUSD should be minimal (as the likelihood is that the proceeds of such Greek bond sales will go towards the purchase of other EUR-denominated assets), the effect on Greek yields could be severe, and in turn it will be interesting to see whether other fragile EU member’s yield spreads widen. Aside from that we also await the latest ADP employment report from the US which is expected to show a 60k gain in Jun (following the 55k gain in May). Whether this will yield reliable clues as to Friday’s non-farm payrolls print however, is debatable.
EurUsd The ugly sell-off in global equity indices has continued to express itself in the currency markets via downward pressure on EURUSD, with momentum sufficient to puncture even the 1.2170 support on the downside (which represented 15 Jun lows and the 50.0% fibonacci retracement of 1.1827 - 1.2468). Much of the price action today is likely to be dominated by equity market moves – with the added volatility of month-end fixing flows later in the day. Downside definitely looking like the more vulnerable from here, but supports expected 1.2152 (yesterday’s low), 1.2100 (downtrend support and psychological level), then 11 Jun low 1.2045. Rebounds are likely to be slowed by resistance at 1.2260 (former support now turned resistance), then by the former uptrend channel which is now seen at 1.2330. Above there, the next resistance levels to watch will be 1.2360 (2-week downtrend resistance), 1.2398 highs from this week’s Asian open and 1.2468 (18 Jun and 21 Jun highs).
GbpUsd How fickle we can be… Yesterday we got long GBPUSD looking at playing the bullish flag pattern after the break above 1.5075 (stop 1.4990, target 1.5180), and indeed we are still long having survived a couple of dips down the lower end of 1.5000; but we already have one eye on the next trade after this, and today the prospect is altogether more bearish. Obviously, if the bulls can keep the pair supported above the psychologically important 1.5000 level then we’ll stick with our long position and hope to ride our way up to the 1.5180 target; but should the slump in risk appetite foil that plan, then there is actually the possibility of playing a head & shoulders pattern on the hourly chart if we see a break of the neckline 1.5012. Measuring from the tip of the head, we can infer a target for this pattern around 1.4895 – a level that coincides very nicely with support from the 1-month uptrend. On the topside, next resistance above is due at 1.5129 (Monday’s high) and 1.5210 last seen 4 May.
UsdJpy The heavy tone still hangs over USDJPY, with yesterday’s slump taking us as far as 88.29 and rumours of large USDJPY sell-orders for today’s month-end fixing sounding ominous. If that weren’t enough, the price action yesterday looks to have carved out at bearish engulfing candlestick pattern on the daily chart which suggests the bears are easily overwhelming any bullish interest, and further downside may be to come. This morning’s slow grind back higher has not managed to break back above the former downtrend line (88.70) so we expect sellers to linger around there, and further pockets of supply at 88.98 (20 May low), 89.50 (28 Jun high) and 89.75. Below us little standing in the way of further declines towards the 6 May low 87.99, with some further support expected at 87.55.
UsdChf With further SNB rhetoric as encouragement, EURCHF has managed to skim fresh lows at 1.3167, and in turn USDCHF has managed to edge its way to 1.0802. The downside now looks extremely vulnerable; with next support not anticipated until 1.0732 (where 2 May low coincides with a shallow downtrend support), and downtrend resistance at 1.0860 likely to cap any rallies. As such, we adjust our limit orders to sell USDCHF to 1.0860, with resistance above there due at 1.0924 (the low from 10 May) and the 100-day moving average lies just above there at 1.0948.
The heavy slump in Asian equity markets overnight has transmitted into an ugly start for European indices as well, so unsurprisingly the currency markets have reacted by punishing risk-correlated EUR and commodity currencies whilst fleeing to the relative safe havens of the USD, JPY and CHF. The economic calendar between here and Friday is hardly scintillating, and with one eye on the holiday weekend coming up it is likely that the simplistic risk-on/risk-off pattern of currencies tracking equity markets will continue. This morning’s Swedish retail sales came out at an impressive 1.6% MoM (May data), equating to 2.7% YoY growth – well above the expected 1.0% MoM, 0.3% YoY forecast by analysts in a Bloomberg survey. This strength seems to bolster arguments that the Riksbank will raise rates when they convene this Thursday, and indeed the consensus is already expecting that policymakers will increase from 0.25% to 0.50%. In the last statement from the April meeting, Riksbank Deputy Governor Svensson had argued for keeping the repo rate unchanged at 0.25% for the rest of 2010, but even his attitude seems to have thawed in recent weeks as his most recent comments show.
EurUsd Well, our efforts to go long at 1.2300 yesterday have fallen flat with the slump in equities knocking EURUSD into our stop just through 1.2260 support. The collapse has carved out a bearish engulfing candlestick on the daily chart, and also meant that the 1-week uptrend channel is now broken; meaning rallies back towards that trendline (currently 1.2305) are likely to be cut off by sellers. Those caught long may yet have some reprieve as 1.2209 major support below remains intact, and 1.2170 is waiting to provide back-up just below (that area represents 15 Jun lows and the 50.0% fibonacci retracement of 1.1827 - 1.2468). Admittedly, from here our bias is pretty neutral as the lethargy of summer holiday markets may simply mean we revert to tracking equity indices. Should any rallies manage to penetrate back inside the former uptrend, the next resistance levels to watch will be 1.2375 (2-week downtrend resistance), 1.2398 highs from this week’s Asian open and 1.2468 (18 Jun and 21 Jun highs).
GbpUsd GBPUSD looks a bit more stable than EURUSD at the moment, with a possible bullish flag pattern already underway on the hourly chart. Yesterday’s break above 1.5075 has activated the pattern, and using the length of the flagpole from the 25 Jun low 1.4857, we eye a target above at 1.5280. This morning’s slump in equities has wiped out most of the initial move’s gains which will allow some late comers to get a second chance to get in on the action, but this may also be a warning to be prudent; especially as the market mood seems very fickle and tied to the prevailing performance of equity markets. As such, we’d probably aim to be more conservative in managing our target, instead looking to take at least half the profits off the table at the upper edge of our current uptrend channel (currently 1.5180). Ideal area for stops is just below the psychologically important 1.5000 level; which is doubly shielded by the 100-day moving average 1.5033 and yesterday’s lows at 1.5018. On the topside, next resistance above is due at 1.5129 (overnight highs) 1.5180 (top edge 3-week uptrend channel), then 1.5210 last seen 4 May. Should 1.5000 support give way then we’re jumping ship sharpish as the technical supports are scarce until 1.4688 (22 Jun low).
UsdJpy USDJPY has not stuck around to consolidate for long, and after the Nikkei shed over a percent in the Asian session, the pair has quickly resumed its decline to lows of 88.57. This move has now even overshot the downtrend support around 88.85, and there is now very little standing in the way of further declines towards the 6 May low 87.99. Expect rallies to be short-lived from now on, as pockets of selling interest are likely to appear at 88.98 (20 May low), yesterday’s high 89.46, and last week’s pivot level 89.75; with further sellers predicted around 90.00 and the 200-day moving average 90.86.
UsdChf Another day, another fresh low in EURCHF (the most recent low 1.3250), and dragged along with it is its cousin USDCHF. Yesterday we saw the pair dip to lows of 1.0818, and this morning we have taken another stab at that level though only getting as far as 1.0829. The downside now looks extremely vulnerable; with next support not anticipated until 1.0732 (where 2 May low coincides with a shallow downtrend support), but given the pair has not yet managed to match the lows from the day before we may have some scope for a quick relief rally. Ideally, we would like to see a bounce back towards 1.0924 (the low from 10 May) to get in on the short trade; knowing that the 100-day moving average lies just above there at 1.0947.
