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.
(Reuters) - There has been just an inkling in recent weeks that financial markets might start to take their lead from the 'real' economy again after three years of being tossed about by their own panics and periodic exuberance.
Since the finance industry flailed into its crisis of confidence, doubting its own practitioners and the governments who became over-dependent on them, it has been almost impossible for households and companies to work out what markets are trying to predict about production, employment and consumption.
The net result has been the tail wagging the dog.
Guess the ephemeral mood of global markets six months hence -- voracious risk appetite or bunker-seeking safety -- and you might just stand a chance of predicting where businesses, consumers and policymakers would be forced to follow.
And while PIMCO asset managers predict a post-crisis 'new normal' of years of sluggish growth and policy angst, many yearn for an 'old normal' where finance reflects, rather th7an dictates, what is happening in the real economy where people produce and consume goods and services.
A VERY FINANCIAL COUP
For some, the credit crisis and aftermath had been fomented for decades by a more than a doubling of financial services to some 7.5 percent of the U.S. economy in the 40 years to 2007.
"The 3 percent of GDP (gross domestic product) that was made up of financial services in 1965 was clearly sufficient to the task, the proof being that the decade was a strong candidate for the greatest economic decade of the 20th century," Jeremy Grantham, Chairman of Boston-based asset manager GMO, told clients this month.
Lauding this month's U.S. financial regulation bill, he added: "The extra 4.5 percent would seem to be without material value except to the recipients. Yet it is a form of tax on the remaining real economy and should reduce by 4.5 percent a year its ability to save and invest, both of which did slow down."
Former International Monetary Fund chief economist Simon Johnson's 2009 Atlantic magazine essay, "The Quiet Coup", took a more conspiratorial view of the same phenomenon in sketching the lobbying power of the financial industry over that period.
Johnson estimated U.S. financial sector profits, which had never topped 16 percent of overall corporate profits in the decade to 1985, soared to 41 percent by the noughties. Average financial sector compensation as a share of the average in other industries almost doubled to 181 percent.
There was a similar development in Britain, where financial services had reached 8.5 percent of total output just before the crisis.
Deregulation, privatization, trade globalization and demographic trends were all catalysts for this growth in finance and the current regulatory backlash against the banks is unlikely to return the sector to its 1960s size.
But if knocking the froth off finance allows a more even relationship between real economic trends and financial markets, there may be a chance of tempering the endless boom and busts.
CHANGE AFOOT?
Is there any sign of that happening right now? Well, just an inkling.
In the past three years, financial and investment flows have been violently herded in and out of "safe-haven" cash and liquid assets, correlations zoomed between all asset classes and geographic regions, and risk gauges -- largely volatility measures -- careened from historic lows to highs and back again.
This mass behavior had been building for 20 years. Computer trading strategies supercharged the effect over time.
Yet as this year's euro zone sovereign debt crisis ebbs into the second half of the year, the herd seems for now to have stopped stampeding from its own rifle shots and may be listening more carefully to the underlying economy again.
Mindful of near-zero interest rates in cash, an expected dash back to safe-haven money market funds never really materialized during the worst of the euro crisis in April and May and 2010 outflows from these funds are still close to half a trillion dollars.
Partly as a result, stresses evident in lock-step asset correlations have ebbed and investors seem easier with idiosyncratic trends in selected stocks and credits.
Equity volatility has halved from April/May peaks and quartered from post-Lehman Brothers highs in 2008 and is holding closer to 20-year averages just above 20 percent rather than returning to unrealistic pre-2007 levels in single digits.
Even the world's main exchange rates between the U.S. dollar and euro -- long captive to "risk on/risk off" swings -- are starting to reflect interest rate gaps more than stress.
For active and diversified investors, this is how it is supposed to be and allows them to do what it says on the tin.
To be sure, we've been here before. But there are rays of hope for some return to old normals.
(Graphic by Scott Barber; Editing by Ruth Pitchford)
A decline in US 3-month libor below 0.50% coupled with solid Q2 company earnings have buoyed demand for carry trade strategies, driving high yielding and commodity currencies through key resistance levels vs the USD. It is debateable how long momentum can be sustained in a context of faltering momentum in the US. The idea that additional policy stimulus by the Fed could be required and would re-flate risk assets appears misplaced when elsewhere fiscal stimulus is withdrawn and liquidity is unwound. With the EU bank stress tests finally behind us, we look ahead to a G10 calendar next week dominated by the MPC testimony to the TSC and the first estimates of US Q2 GDP. Month-end implies currency and bond portfolio rebalancing. In five of the last six months, the re-weighting resulted in EUR/USD firming an average 0.5%. In contrast, GBP/USD only gained in month-end fixings in March and May.
Recap
The recap for fx this week reads very similar to that of two weeks ago. A rally in global equities propelled the AUD to the top of the G10 table, helping the currency to gains of 3.3% vs EUR, 2.6% vs USD and 2.5% vs GBP. A 1.1% q/q jump in UK Q2 GDP boosted GBP and helped the pound to record a 1.3% gain vs the JPY and 1.2% vs the EUR. GBP/USD ended the week above 1.5350, having traded as high as 1.5450. EUR/USD was equally unable to cling on to the best levels above 1.29 as profit taking emerged on the release of the EU bank stress tests following earlier bidding on a 3-year high for the German IFO.
UK Q2 GDP surpassed the most bullish estimates as the ONS reported a 1.1% q/q jump in output vs 0.3% in Q1. This still leaves the economy 4.7% below the starting pointof the recession in 2008, and will not tempt the MPC to change its view that the economy may weaken in the second half of 2010. The MPC minutes were remarkably more dovish on growth and members Posen and Dale did not hold back to warn of the dangers ahead. Retail sales also beat consensus estimates by climbing 1% in June. A marked decline in the retail deflator to 1.3% and a fall in inflation expectations back below 3% will comfort the MPC about the inflation outlook. Public finances recorded a bigger deficit in June, with borrowing reaching £14.5bln and data for May revised up to £17.0bln.
A good start to the week for UK rates reversed on Friday on the strong GDP release, causing yields to end the week on a high. 5y swaps climbed to 2.47%, up 6bp on the week. 10y yields rose above 3.40% to a 3.43% high. A deceleration in inflation pressures should keep yields capped going into August, with downside risk to the US macro data providing better levels to buy. The 3mth Libor/Ois spread widened one bp to 24bp. The 2y/10y swap spread widened 2bp to 198bp, and 10y swap spreads stayed flat at 2bp. A disappointing 2016 gilt sale drew lower than previous cover of 1.38x (1bp tail) .
G10 FX - GBP/USD, ST Trend Still Bullish
Back in June we noted that by flirting with a return to the 1.4784- 1.55 trading range in place between February and May, GBP/ USD had approached a crossroads, and how an improved technical picture and a rebound in correlations with equities and commodities pointed to further upside in the short-term (1.54 topside). This week we review our call and state that even though GBP/USD has posted impressive gains in July, there is no compelling case to drop the bullish near-term picture. Though the correlation of GBP/USD has eased back to statistically insignificant levels since the June comment (see chart), the divergence between UK and US macro indicators (see chart) brings the potential of further upside over the coming weeks before potential profit taking sets in ahead of the August MPC meeting and the Inflation Report on August 11.
The retreat of USD crosses since June has been led by a net change in speculative positioning and is marked by a net reduction in short JPY, EUR and GBP contracts. Disappointing US macro data since June has added downside USD pressure and is fuelling talk that the Fed may engage in a new round of policy stimulus in Q3/Q4 to prevent the economy from losing further steam. Though the jury is out whether the Q2 slowdown is a blip or start of a downtrend, a decline in US 3-mth libor below 0.50% and a rally in short-dated FF futures curve indicates that the market is taking a more pessimistic view. Additional US measures would threaten to drag the USD lower vs non-QE currencies or currencies where exceptional measures are gradually phased out.
Though strong UK Q2 GDP (+1.1% q/q) took the market off guard and lifted GBP/USD above 1.54, one cannot ignore the dovish observations by the MPC and individual comments by members Posen and Dale. This could lead investors to re-engage in accumulating GBP short positions into early August. To what extent the Budget will bear down on the Bank's growth and inflation forecasts will become clear in the next Inflation Report. Minutes from the July MPC meeting hint that growth prospects may be scaled back. Depending on whether inflation and inflation expectations also recede, talk of additional policy loosening (a greater than 50% probability accordng to MPC member Posen) would cloud the outlook for GBP vs other G10 currencies, especially those where performance is linked to positive interest rate spreads and elevated correlation with equities and commodities.
Based on our quantitative metrics, the correlation of GBP/USD with risk assets has receded markedly to the point that price action in stocks has become statistically insignificant for short term direction. Rate differentials between the US and the UK have also faded as a driver for GBP/USD, offering no clear sense of direction for the cross. Though we are tracking changes in correlations closely, this means is that markets are inclined to put more weight at present on corporate flows and a divergence between US and UK macro indicators, but with confidence about deficit reduction equally playing a part.
Technically, to sustain the upward short-term move GBP/USD has to overcome 1.5454, the July 15 high. Beyond 1.55 lies a cluster of resistance at 1.5524 and 1.5578. A breakout of the February- May range would bring 1.5814 into play.
The Euro managed to erase most of its weekly losses against the Dollar yesterday, as investors expect bank test results to show that the Euro-Zone's condition is stabile. The market waits to hear that the Euro-Zone's debt crisis is not a threat to the region's stability. Will the Euro strengthen following the test results?
Economic News
USD - Bernanke's Testimony to Weaken the Dollar The Dollar slid against most of the major currencies during yesterday's trading. The Dollar lost about 180 pips against the Euro today as the EUR/USD reached above the 1.2900 level once again. The Dollar also saw a 150 pips drop against the Pound.
The Dollar's bearish trend came as a result of Fed's Chairman Bernanke's testimony before the House Financial Services Committee. Bernanke stated that there is an unusually uncertain outlook for growth, yet he added that the Fed's near zero interest rates are already very simulative. He also added that if the recovery seems to be faltering, the Fed will consider different alternatives, such as lowering borrowing costs. It seems that investors expected the Fed Chairman to have a more proactive approach, as several economic data that were published during the last month have shown that the U.S. economic recovery isn't progressing as well as expected.
In addition, while Bernanke has delivered his speech, the Department of Labor has released the weekly Unemployment Claims data. The report showed that jobless claims in the U.S. have increased by 37,000 to 464,000, beating expectations for merely 449,000 claims. The combination of Bernanke's speech along with the poor employment data has weakened the Dollar against most of its major counterparts.
As for today, traders are advised to follow U.S. equity markets as they have a large correlation with Dollar's trading. Traders should also follow the European Bank Stress Test Results, which will be released tomorrow. The results might have a significant impact on thee major currencies, and traders should be prepared.
EUR - The Euro Soars Following Positive Economic Data from the Euro-Zone The Euro strengthened against all the major currencies during yesterday's trading session. The Euro gained about 180 pips against the Dollar, about 100 pips vs. the Pound, and about 250 pips against the Yen.
The Euro's strengthened against its major rivals as several positive economic reports were published. The German Flash Manufacturing Purchasing Managers' Index rose to 61.2 in July, from 58.4 on June. It is a survey of about 600 purchasing managers, who are asked to rate their level of business conditions. In addition, the European Industrial New Orders rose by 3.8% during May, beating expectations for a 0.1% drop. The report also showed that compared to the same month last year, industrial sales rose by 22.7%. The Euro-Zone's economic condition is considered to be somewhat fragile due to the high debts of several European nations. As a result, the batch of positive data has a significant affect on the Euro. Investors are looking for reasons to believe that the Euro-Zone is recovering and such positive reports are all they can ask for.
Looking ahead to today, many interesting publications are expected from the Euro-Zone. First of all will be the German Business Climate report. This is a survey of about 7,000 businesses, who are asked to rate their current business conditions and expectations for the next 6 months. The survey is expected to remain at its high level above 101. In addition, the Euro-Zone's Bank Stress Test Results are due today. The results are expected to reveal the European banks' stability, and whether the capital reserves are sufficient. Positive report will further support the Euro, however if the results won't be as satisfying as expected, the Euro might erase yesterday's profits.
JPY - Yen Drops On All Fronts The Yen fell against mot of its major rivals during yesterday's trading session. The Yen dropped about 100 pips against the Dollar, and about 250 pips against the Euro. The Yen also slid 200 pips against the British Pound.
The Yen tumbled yesterday on speculations that the Japanese leadership is looking to weaken the national currency in order to stimulus economic growth. The Japanese press is reporting that the government will pressure the Bank of Japan to take more steps to support the economy. The Japanese economy relies greatly on its exporting, and a weaker Yen will support Japanese exporters. In addition, the current instability in Japanese politics is damaging the Yen's safe-haven image, and as a result the currency seems less appealing in times of uncertainty.
As for today, traders are advised to follow the major publications from the U.S. and the Euro-Zone, as they tend to have a large impact on the Yen. Special attention should be given to the Euro-Zone's Bank Stress Test Results, which appears to be the news even which will have the largest affect ion the market today.
Crude Oil - Crude Oil Reached Above $79 a Barrel Crude oil rose over $79 a barrel for the first time in nearly 11 weeks. Crude oil began yesterday's trading session around $76.40 a barrel, and gained about 300 pips in a single day, to peak at the $79.40 price.
Crude oil rallied yesterday following notifications that EBay Inc. and Caterpillar Inc. saw higher earnings than expected during the last quarter. In addition, several positive economic reports were published from the Euro-Zone yesterday, suggesting that energy demand in Europe will recover soon. Another support for crude oil prices was the Dollar's bearish trend against most of the major currencies. Crude oil is traded in Dollars, and thus when the greenback weakens, oil prices tend to rise as a result.
As for today, traders are advised to follow equity markets in the U.S. as they tend to be highly correlated with crude oil trading. In addition, traders should take notice of the Euro-Zone's Bank Stress Test Results. The results are expected to reveal the region's banks stability in light of the high debts of several European nations. This report might impact global trading, and traders should be prepared.
Technical News
EUR/USD The pair has recorded much bullish behavior yesterday. However, the technical data indicates that this trend may reverse anytime soon. For example, the 4-hour chart's Stochastic Slow signals that a bearish reversal is imminent. . Going short with tight stops might be a wise choice.
GBP/USD The daily chart is showing mixed signals with its RSI fluctuating at the neutral territory. However, there is a bearish cross forming on the 4-hour chart's Slow Stochastic indicating a bearish correction might take place in the nearest future. When the downward breach occurs, going short with tight stops appears to be preferable strategy.
USD/JPY The pair has been range-trading for a while now, with no specific direction. The Daily chart's Slow Stochastic providing us with mixed signals. All oscillators on the 4 hour chart do not provide a clear direction as well. Waiting for a clearer sign on the hourlies might be a good strategy today.
USD/CHF The cross has been dropping for the past several days now, as it now stands at the 1.0430 level. However, the 4-hour Chart's RSI is already floating in the oversold territory indicating that a bullish correction might take place in the nearest future. Going long with tight stops may turn out to be the right choice today.
The Wild Card Crude Oil Crude Oil prices rose significantly yesterday and peaked at $79.20 per barrel. However, there is a bearish cross on the 4-hour chart's Slow Stochastic suggesting that a recent upwards trend is loosing steam and a bearish correction is impending. This might be a good opportunity for forex traders to enter the trend at a very early stage.
The persistent overshoot of UK CPI inflation above the government's 2 per cent target has started to raise concerns that price pressures are becoming entrenched. In 19 of the past 27 months, annual CPI inflation has exceeded the market consensus expectation, suggesting the models adopted by the economics community have failed to fully capture the current dynamics driving UK inflation or its measurement. In June, the annual CPI rose by 3.2%, the eighth consecutive month it has been above the 2 per cent target. Other key measures of UK inflation have been similarly strong.
The elevated level of UK inflation stands at odds with price trends elsewhere. In many other developed countries, inflation has either fallen or remained low as spare capacity in the product and labour markets has constrained the pricing power of both employers and employees (as traditional output gap models would suggest), see chart a.
To date, the relatively high inflation outturns in the UK have generally been dismissed as temporary, reflecting the coincidence of various one-off factors that could be expected to wash out of the inflation rate over time. Principal amongst these are the rise in VAT earlier this year, the unusually sharp rise in petrol and secondhand car prices over much of 2009, and the lagged impact of earlier sterling weakness on import prices.
Adjusting for these "temporary" factors, the inflation environment does indeed appear far more benign. Excluding the rise in indirect taxes, for example, annual inflation (measured by CPIY) has declined from 3.1% to just 1.6% over the past year. Furthermore, the composition of UK inflation suggests the rise has been heavily influenced by the increase in transportation costs. Rising transportation costs alone contributed 1.4 percentage points (pp) to annual CPI inflation in June (see chart b). Over time, these "temporary" influences should fade.
Nevertheless, it is becoming increasingly difficult to argue that inflation is being driven by these "temporary" influences alone. Although headline inflation has dropped from a peak of 3.7% to 3.2% in recent months, "core" inflation (exc food and energy) has remained broadly unchanged at around 3%. It is clear that underlying inflation pressures have not eased as sharply as expected given the challenges facing the UK. The stickiness of inflation has been particularly noticeable in the services sector. While goods price inflation has fallen by over 1pp since January, services inflation has risen by broadly the same amount.
The resilience of core CPI inflation, coupled with the recent rise in UK inflation expectations, has begun to raise doubts on the MPC about how quickly inflation will fall back. The 2.5 pp rise in VAT next January only adds to the uncertainty.
Notwithstanding this, we expect underlying inflation pressures to moderate over the medium term. Although estimates differ, there is little doubt that the UK is operating with significant spare capacity. This spare capacity is clearly evident in the labour market. The level of employment has fallen by over 1mn since early 2008, nominal wage growth has stagnated, while real wages and unit labour costs are both now falling. Although economists may have fallen short of accurately forecasting inflation in recent years, with appropriate lags, there remains a reasonable correlation between inflation and the degree of economic slack. Chart c shows the relationship between the UK output gap and the change in RPIY inflation (retail prices excluding mortgage interest payments and indirect taxes). We have chosen RPIY instead of CPIY as it has a much longer history, but the two series are closely related.
The chart suggests that the output gap leads changes in annual RPIY by around four quarters. When the output gap is negative (i.e. the level of output is below potential) inflation tends to fall, and vice versa. The relationship suggests that inflation pressures are likely to moderate sharply over the coming years.
Nevertheless, as the shortcomings of UK inflation forecasts in recent years have highlighted, this output gap analysis does not provide a complete picture. The UK is a relatively open economy that is highly sensitive to external price shocks emanating from currency or commodity price movements. Our forecast assumes that neither movements in sterling nor commodity prices contribute significantly to changes in the inflation outlook over the coming years.
It also makes no allowance for possible structural changes in the transmission mechanism as a result of the credit crisis. Economic models are not particularly good at forecasting turning points. That challenge is made all the greater given the disruption to credit channels and the uncertainty surrounding estimates of trend growth. It is possible that, over the short run at least, the desire of firms to rebuild profit margins to repair their balance sheets may, when coupled with the increase in VAT in January, cause inflation to remain higher for longer.
Notwithstanding these risks and uncertainties, we retain our central forecast that UK inflation is likely to fall over the coming years. Our latest inflation projections are shown in chart d. Headline CPI inflation is forecast to drop to around 2.6% by the end of the year and to remain around this level through 2011, as the new VAT increase impacts, before dropping back below 2% from early 2012.
The annual RPI is also expected to slow sharply. Our RPI forecast builds on our CPI profile, but takes into account the expected profile for house prices and mortgage interest payments. Although we expect the inflation environment to weaken, mortgage interest payments are likely to rise modestly next year as the MPC seeks to reverse some of the insurance easing put in place during the credit crisis. While this should put upward pressure on the RPI, this is likely to be overshadowed by relatively weak house price growth and a general weakening of price pressures elsewhere. As such, we expect RPI to fall towards 2% over the medium term.
* 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.
* US growth slower; retail trade and manufacturing sector weaker * Fed sees growth risks return, puts exit discussion on hold * Money market rates in eurozone climb further, liquidity withdrawal continues
US Growth Doubts Weigh on Dollar
This week the euro continued its rally against the US dollar and against most commodity and emerging market currencies. The majority of European currencies have managed to hold their ground versus the euro - some (such as the pound Sterling and the Scandinavian currencies) more than others (e.g. the Czech koruna, the Hungarian forint and the Swiss franc). The yen, like the latter, has slipped somewhat against the euro.
The euro gained over 3 cents versus the dollar and is currently approaching 1.30. Its sharp rebound is partly due to thin trading. The holiday season is starting to have an impact on sales volumes and exchange rate movements. The unwinding of short euro positions, which had been built up at the height of the debt crisis, also boosted the euro. The main reason for the euro's recovery, however, was probably a shift in market focus. For weeks on end, the spotlight had been solely on the credit risks of European countries and banks. The implementation of a rescue package for countries potentially at risk of default at the eurozone level and austerity packages at the national level has restored investors' confidence to some extent. Markets are now focusing more on the relative growth outlook for the major economies and monetary policy stance.
Thus the forex markets' reaction pattern is changing. Up till recently, the dollar has served as a safe haven currency, when equity markets, economic data or credit spreads have sent out crisis signals. The risk on/risk off mechanism seems to be becoming less significant, and the more traditional correlation between growth and interest rate differentials and the exchange rate is gaining importance. And here the US have fallen behind the eurozone.
Eurozone: Confidence is slowly returning
Compared to the crisis scenarios acted out in the markets over the last few weeks, the European economy is doing quite well so far. Second quarter data are expected to be strong, and according to the economic indicators, an end of the expansion is not yet in sight. The German economy, the eurozone's main growth driver, seems to be in quite good shape.
At the same time, money market rates in the eurozone are climbing. Even though the ECB claims not to have changed its monetary policy stance, the withdrawal of liquidity, which had started at the beginning of July when the €442bn one-year tender matured, is continuing. This week too, a good €15bn of central bank loans were not renewed. The Eonia overnight rate has now risen to almost 0.50%, the 3-month Euribor stands at 0.86%. The more liquidity the ECB drains from the system, the more money market rates are determined by the main refinancing rate, which, at 1%, is quite high compared to that of other countries. Simultaneously, 2-year Bund yields have risen from 0.55% at the beginning of the month to 0.80% currently.
USA: Hopes are dashed
The situation in the US is exactly the other way round: after production had picked up, employment had started to rise and even the housing market had shown signs of improvement, markets had begun to hope that the upswing was gathering pace. These hopes have been dashed, however, by the latest data. After the expiration of the homebuyer tax credit, the housing market plummeted; excluding temporary Census-related hiring, the number of new jobs created is so small that the unemployment rate is still almost at its peak. The latest economic data published this week were also disappointing: retails sales declined again in June; industrial production fell in June, and the first regional surveys show that the weak trend is set to continue in July; furthermore, the trade balance deteriorated again in June.
The Fed is more downbeat too. The minutes of the FOMC meeting of 23 June state that the economic outlook has deteriorated somewhat; a number of committee members see an increase of downside risks. The changes in the outlook are "relatively modest", however, and do not warrant any additional monetary policy accommodation.
That sounds relatively harmless at first, just like a confirmation of the present monetary policy stance. It should be borne in mind, however, that the discussions in the central bank have completely changed direction. Up until a few weeks ago, the debate had focused on identifying the right time to embark on an exit from the extremely expansive monetary policy. Now, all of a sudden, the question whether the central bank should implement further monetary easing measures, to prevent the recovery from faltering, has taken centre stage.
The change in discussion is reflected in the development of interest rates. On Thursday, 2-year T-note yields fell for a time to their lowest level ever, 0.58%, and now stand at 0.60% - the same level as at the beginning of the month. In a comparison between Treasury and Bund yields, within the space of a mere six weeks, spreads have altered from a significant interest rate advantage of around 30 points for the US bond to a disadvantage of 20 points.
We are expecting the situation responsible for these developments - weakness in the US, relatively robust economy with tendency for higher money market rates in the eurozone - to continue over the next few weeks. Against this backdrop, the euro should remain well supported. However, beyond 1.30, the air will get thinner for EURUSD.
The main highlight of today’s session will be the latest reading of US CPI for Jun, where markets are anticipating the headline rate to decelerate -0.1% MoM to 1.2% YoY. Obviously, inflation readings in the US are unlikely to be viewed with any anticipation that a higher reading will prompt a hike just yet, but the release does take on a greater significance in the light of recent Fed rhetoric. Richmond Fed President Lacker commented yesterday that he would not like to see inflation much lower than this and added that inflation expectations pointed to actual inflation heading higher in the coming months. Obviously, the big risk is that today’s print (like many recent inflation readings from the G10) will err to the low end of expectations, in which case we could get another wave of pressure on US Treasury yields. Given the correlation between Treasury yields and USDJPY of late, we would therefore expect a below expectation CPI print to force another leg lower in USDJPY – which is already perched precariously on one of its last support levels (86.97) ahead of the November 2009 lows at 84.83. Elsewhere the market is largely being driven by position covering as more and more participants drift off for summer holidays; the major beneficiaries are predictably EURUSD and GBPUSD (both of which have gained around 2.5% over the course of the week), and given these moves have broken a number of significant resistance levels along the way, we feel the follow-through could take us back above 1.3000 in EURUSD and 1.5500 in GBPUSD.
EurUsd Patience has paid off in EURUSD this week as our bullish flag pattern activated all the way back down at 1.2735 has finally hit its target of 1.2950. Since peeking its head above our target level, the pair has reached a high only fractionally above at 1.2955, and since then pared back slightly to 1.2890 levels. The daily close above the 100-day moving average yesterday (currently 1.2917) does suggest to us that a return to 1.3000 levels is on the cards at some stage, but given the 400+ pip rally in what has been an uneventful week in fundamental terms, we feel that the risk-reward profile is skewed against initiating longs at these heady heights. For the time being then, expect mean reversion players to sell ahead of 1.2955, and plenty of supply to linger around the psychologically important 1.3000 level (which should hold on the first attempt), with 1.3093 (10 May high) also on the horizon. Nearest supports are seen at 1.2890 (this morning’s retracement low), 1.2780 former pivot, and 1.2683 (Wednesday’s low).
GbpUsd GBPUSD has continued its staggering rally this week, can you believe we were languishing around 1.4950 on Monday morning? The latest conquest for the pair has come in the form of a break above the 30 Apr highs 1.5390, and indeed a fresh push to highs of 1.5472. Next resistance on the topside is now eyed at 1.5525 (15 Apr high) and 1.5583 (200-day moving average), and 1.5816 (17 Feb high), with buyers likely to step in on any dips back towards 1.5390. As mentioned earlier in the week, our bullish bias will only be threatened by a fresh break below 1.5230, in which event we would expect next supports at the 1.5080 former neckline, then the 12 Jul low 1.4949.
UsdJpy Well, the double bottom pattern we had been playing all week totally bombed yesterday with the collapse of 88.00 support, and the follow-through has taken the pair all the way back down to the major 86.97 support (the 1 Jul low) first thing this morning. Perhaps we’re foolish to be favouring the long side again so soon, but down at these levels it seems like a very cheap bet to buy just above 87.00 with a stop through 86.80, and look for a relief rally back towards 87.80. Obviously it’s worth not being too greedy considering that the downtrend remains the dominant force of late, we’re especially cautious as decent selling interest is likely to precipitate around 88.00 (the back side of former support). Should we get burned by a plunge through 8.86.97 support, bulls are likely to scatter for the hills and focus will once again turn to the November 2009 low of 84.83. Conversely, in the event of a break above 88.00 today, next resistance comes into play at 88.20, 89.15 (12 Jul high), and 89.50 (28-29 Jun high).
UsdChf The downtrend has finally won out in USDCHF with a decisive break below 1.0480 (8-9 Jul lows) yesterday leading to a quick dip to lows of 1.0402. Thus far, a second push at those 1.0400 lows has bounced back higher, but rather than buy off this horizontal support, we wait on the sidelines and look to add to shorts on a break lower. Resistance likely to come in at 1.0450 intraday resistance, 1.0480 and 1.0550 (yesterday’s high), meanwhile the landscape below 1.0400 is only dotted with stale support levels at 1.0365, 1.0335 (trendline support), then 1.0230.
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.
It seems like market participants are sleeping in this morning along with all of Spain. Markets opened with a yawn as low liquidity and directional USD buying set the morning FX trend. With no real market-moving data today, prices appear to moving counter to the little new information we did receive this weekend -- we suspect this intraday trend to reverse mid-day. Asian regional indexes are broadly higher while European markets opened flat following Friday’s positive close compounded by the anticipation of a strong US earning’s season.
In Japan this past weekend, the ruling DPJ party couldn’t hold onto their micro-thin coalition majority in the upper house but were able to secure their strong control over the more dominant lower house. Credit agencies Moody and S&P were quick to issue statements that election results in Japan would have no direct effects on Japanese sovereign ratings, but both did mention that Japan’s lack of a concrete fiscal strategy could threaten future ratings. Currently the JPY is operating under its safe-haven status and has a strong correlation to US yields. We suspect that mid-term market participants will soon turn their sovereign debt crisis crosshairs on Japan and some heavy Yen selling will ensue.
The Bank of Japan will hold their two day policy meeting this week. Although no change in the current 0.10% rate is expected, we’re anticipating the central bank to release information pertaining to a lending scheme aimed at stimulating bank loans to commercial enterprises.
China kicked off the week by releasing a stronger-than-expect trade surplus, hitting a monthly all-time high record. Chinese June exports rose by a stronger-than-expected 43.9% y/y to USD 137.4 bn and imports came in at the softer-than-expected but respectable 34.1%. The trade surplus will likely contribute to mounting pressure to further allow the CNY to appreciate. In addition, the strong Chinese report will alleviate market concerns about the pace of the export recovery while demand from developed and emerging economies continues to recover at a steady rate. The Chinese numbers help to take the wind out of the double-dip recession-apocalypse conspiracy theories currently permeating the market.
Today’s ultra-light economic calendar will further allow markets to give extra attention to the EU finance minister’s probable comments pertaining to the EU bank stress tests. The German newspaper Handelsblatt reported that the stress tests will be more robust than originally chartered and cited the ECB’s Stark that “the assumptions will be made in a way that the test results will be credible.” Barring any glaring failures or obvious mis-assumptions, the reports should be broadly positive for the Euro in the near term.
Today's Key Issues (time in GMT): 08:30 GBP GDP - final, % q/q (y/y) Q1
EurUsd The bearish wedge on the hourly chart has finally kicked into play for EURUSD (after the break below 1.2650 on Friday afternoon), and since then the pair has drifted lower to 1.2577 lows. We have gone short on the break out (as explained in Friday’s report) but for the time being, the pair is being held up by support from the back side of an old uptrend channel around 1.2590. We believe the downside does look vulnerable to a re-visit of 1.2483, so set a downside target for shorts around 1.2510-20, and leave a stop just above 1.2650 post-breakout resistance. This short trade is in contrast to our medium term view that EURUSD goes higher (after the recent break of the 6-month downtrend), but ultimately, the slow summer holidays are prime conditions for range-trading so feel that this strategy is an extremely realistic and achievable bet in the meantime. Immediate support is expected at 1.2553 (7 Jul low), 1.2468 (former resistance from 20 Jun), and 1.2396 (50-day moving average). Next resistance is eyed at 1.2650, 1.2722 (Friday’s high), then 1.2946 (100-day moving average).
GbpUsd The bears climbed all over GBPUSD at the end of last week, and eventually the 1-month uptrend could hold on no more. Soon after the break lower at 1.5135, the pair plunged through the floor of the formerly lucrative 1.5080 –1.5230 range, and since then the sell-off has extended all the way to a low of 1.4960. Without much imagination it is possible to see a triple top formation on the hourly chart, and given the width of the old range we would expect a very manageable first target of 1.4930-40, with further downside easily possible. Next support is eyed at 1.4874 (1 Jul low), with another cluster of support around 1.4850-55 (23 & 25 Jun lows), and the 100-day moving average 1.4986. Sellers will almost certainly precipitate in numbers back towards the old range floor of 1.5080, and once again at the back side of the former uptrend 1.5170.
UsdJpy The Japanese upper house elections over the weekend were a disaster for Naoto Kan’s ruling DPJ, but a welcome shot of adrenaline for our long USDJPY trade which has come within 25 pips of hitting its target. Recall that we are still long from the double bottom break out at 88.20, and are aiming for a target above at 89.40. It is worth noting that the 1-month downtrend channel resistance has crept onto the horizon at 89.50 above and may start to lure in sellers ahead of our target, so we remain open to using some discretion on when to take profits off the table, but ideally, the 89.40 target can be achieved before the downtrend starts to complicate matters. Should the move have the momentum to burst through the 1-month downtrend next resistance beyond lies at 89.50 (28-29 Jun high), and 90.73-8 (coinciding with the 25 Jun highs, 50-day and 200-day moving averages). Nearest supports expected at 88.20 neckline, 88.00, then 86.97.
UsdChf The bears look to have run out of steam after the last three days of last week carved out a morning star formation on the daily chart, and this morning’s rally looks to threaten the 1-week downtrend channel. Significantly we have managed to take out resistance clustered around 1.0580 that represented the neckline of a possible double bottom, and now the skies are clear for a revisit of 1.0700 levels. Buying on dips towards 1.0580-1.0600 now looks to be the mood of the day, but watch for progress to slow as we approach the area of resistance above 1.0660. It is unlikely the pair is going to break above 1.0700 on the first go so bears will look to sell more back up there, knowing that further protection lies just behind at 1.0750-70.
Stronger than forecast employment data from Australia and Canada along with short covering in risk assets boosted the AUD, CAD, NZD and NOK, but doubts over momentum have not disappeared as markets square up to the first reports of US Q2 company earnings. With market positioning still overwhelmingly short EUR, we look for bearish EUR trends eventually to be reasserted on profit taking ahead of July 23, release date of the bank stress tests. Correlation with risk assets remains elevated for higher yield and commodities currencies, but with the balance tipping in favour of a second rate hike by the Bank of Canada later this month, the CAD looks well placed to resume its upward move vs the AUD. The prospect of a 7th drop in the UK claimant count rate in June may neutralise this month's rally in EUR/GBP. Greece will tap the capital markets on Tuesday. Recap
A rally in global equities propelled the AUD to the top of the G10 ranking, helping the currency to log a 4.7% gain vs the JPY, a 4.4% gain vs GBP and a 4% profit vs the USD. GBP fell against all G10 peers, but losses were limited to 1.3% vs the EUR and 0.7% vs the USD. The weakness in sterling was partially attributed to the compression in UK/G10 yields. UK/EU 2y benchmark yields fell into negative territory for the first time since February. The unwinding of safe haven flows put the JPY at the bottom of the G10 table, with losses ranging between 5% vs the AUD to 0.4% vs GBP, despite the report of record JGB buying by China in May and a 0.5% upward revision by the IMF to Japan's 2010 growth outlook.
UK economic data came up short of expectations this week for most of the releases, except for the bullish report by the NIESR on Q2 GDP. The NIESR estimates that the economy expanded by 0.7% q/q in Q2, down from an upward revised 0.9% in Q1. The BoE left Bank rate and the APF unchanged at 0.50% and £200bln, respectively. The services PMI slipped to 54.4 in June from 55.4 in May, marking a 3rd drop in 4 months. The global trade deficit widened to £8.0bln in May, a 3-month high as imports rose 2.4% to £29.5bln, the highest since Jul-08. Industrial output rose a stronger than forecast 0.7% m/m in May, and PPI output price inflation slowed to 5.1% in June vs 5.7% in May (core up to 4.8%).
A mixed week for UK rates but overall yields stayed within the tight recent ranges and close to the cycle lows observed since mid-May. 5y swaps finished the week at 2.44% and 10y yields dropped back to 3.32% following a very solid session on Friday post weaker PPI and trade data. The prospect of lower June CPI data next week could bring the prospect of new lows and a bull flattening of the 2y/10y curve. The 3mth Libor/Ois spread narrowed a fraction to 22.5bp. EUR libor/Ois also tightened to 27bp (-5bp). The 2020 gilt sale drew very solid demand and was covered 2.45 times (0.2bp tail). G10 FX - EUR/USD Update: No 'Stress'?
The rally in EUR/USD from a 1.1877 low in June to a 1.2722 high on July 9 begs the question whether the negative trend has reversed and whether additional upside should be targeted. Though additional gains towards the 1.2800-50 area cannot be ruled out in the short-term, we think bullish EUR momentum is set to fade over the coming weeks and drag the cross back below 1.25.
Rationale for the EUR/USD bounce since June:
1/ record short EUR positioning and consequent short covering
2/ a deterioration in the US economic backdrop vs Germany and a tightening in actual and implied EU/US rate differentials
3/ fading of the USD as safe haven refuge since SNB policy tweak on Franc (June 17)
4/ cautious optimism surrounding recent EUR government bond auctions, a successful transition from ECB one-year LTRO to a 3- month tender Key factors to watch
1/ A rise in the Eonia swap curve is not a sign that the monetary policy bias at the ECB is normalising. A change in ECB money market operations since the expiry of unlimited one-year liquidity last week and the drain of excess liquidity explain the rise in the 3-mth Eonia swap rate above 0.70%, but this does not imply that the chance of an ECB rate hike has now increased. President Trichet confirmed this in the July 8th press conference and council member Stark has also warned not to read too much in higher money market rates. Uncertainty in the months ahead, bank stress tests and nervousness in funding markets will keep the ECB sidelined into 2011, but may result in EUR libor rates staying above US and UK libor equivalents.
2/ The stalling of US economic growth in Q2 is in contrast to Germany where activity has accelerated. Early indications show that the euro zone economy probably expanded in Q2 at the fastest rate since Q1-08 (+0.7% q/q) whereas in the US, dreadful housing and weak confidence and labour market data suggest the opposite, causing speculation of the Fed resuming asset purchases. This has helped EUR/USD to rally from the 1.1877 low but in our view only partially explains the break above 1.25.
3/ As we have stated before, the aversion for the USD follows the decision of the SNB on June 17 to drop its ultra-dovish stance and halt its policy of Franc intervention as deflationary pressures in Switzerland recede. This has promoted the swissy as the new refuge of choice. The starting point of the USD reversal in June also incidentally coincided with the appointment of Japanese PM Kan on June 4, though Mr Kan's explicit desire for a weaker yen means one should not overstate Japanese politics for the retracement in USD/JPY below 88.0. The move does not reflect the heavy buying of foreign denominated government bonds (Treasuries) by Japanese investors over the last 8 weeks. Instead, record buying of short-term JGBs by China may have kept the JPY artificially strong, though the safe-haven status of the JPY cannot be underestimated if US Q2 company earnings disappoint.
4/ A widening of the EU/US 2y benchmark spread has been a powerful driver of EUR/USD as chart 2 demonstrates. In comparison to the 10y spread, the correlation of EUR/USD with 2y spread recently rose to 0.8. The 2y spread now stands at 15bp, the highest since March. The deterioration in US macro data bears some explanation for the move in spreads, though the reversal from overbought conditions in short-dated bunds also has to be cited as bank shares bounce back ahead of the release of the EU stress tests on July 23. An unsatisfactory response to the latter would inevitably cause EUR sentiment to wobble and the compression in EU/US spreads to resume, even though EU governments have committed to backstop facilities to recapitalise individual institutions. This would possibly include the 440bln eur stability mechanism agreed in May.
5/ Speculative IMM positioning has been overweight EUR short contracts for most of Q2 and has only recently started to reverse some of these positions. At -83,500 contracts, overall EUR shorts are still above recent norms (see chart 3), suggesting that the market retains a still 'natural' bearish view of where EUR/USD is headed. However, the counter-argument is also true and argues that the scope for short covering remains powerful if USD sentiment continues to sour.
6/ The correlation of EUR/USD with risk assets (S&P 500) flipped markedly in July, with the sharp fall pointing to complete opposite price behaviour between stocks and the currency pair. In other words, the sharp fall in equities has not translated into safe haven USD flows, as the dollar index testifies. The release of US Q2 earnings from next week onwards will in our view be key to sentiment in risk assets. Positive results may help negative US D sentiment to stabilise, with participants potentially also inclined to take profits in EUR/USD ahead of the release of the stress tests on July 23.
Today was the second day of gains against the U.S. currency for the Canadian dollar, as the rebound of the stocks and the rising prices for crude oil increased the attractiveness of the growth-linked currencies.
The Standard & Poor’s/TSX Composite Index, Canada’s main gauge, went up 0.9 percent, while the Dow Jones Industrial Average rose by 1.4 percent. Futures on crude oil, the biggest nation’s export, gained 2.2 percent to $73.55 per barrel on the New York Mercantile Exchange. The news proved favorable to the economic growth outlook, boosting the currencies, tied to the growth, including the loonie.
The correlation of the Canadian currency to the price of crude oil is 74 percent, and 89 percent to the Dow. A correlation of 100 percent would indicate the moves in lockstep.
USD/CAD traded near 1.0492 as of 18:50 GMT today after it opened at 1.0542. EUR/CAD traded near 1.3267 down from the opening level of 1.3309.
(Reuters) - The euro slipped on Wednesday but was holding not far from a seven-week high, with traders saying it could rise further in the near term due to doubts about a recovery in the U.S. economy and positive technical signals.
The euro eased 0.4 percent to $1.2578, after meeting resistance around the May 21 high of $1.2673 and on selling from a hedge fund. It hit $1.2663 on trading platform EBS on Tuesday, the highest in about seven weeks.
Still, one positive factor for the euro was the fact that it finished Tuesday's U.S. trading above resistance at the bottom of the daily Ichimoku cloud -- a signal that its entrenched downtrend may be over.
The euro in mid-December slid beneath the cloud on the Ichimoku chart, the Japanese chart pattern that is closely followed across markets, and had mostly traded below it since then. But its rise back into the cloud suggests the single-currency may have entered a consolidation phase.
"The euro is in a retracement phase in the wake of its drop to below $1.2 and could rise back toward the top of the cloud," said Tokichi Ito, deputy general manager for Trust & Custody Services Bank's forex team.
While worries about the euro zone's debt woes linger and market players refrain from actively taking long positions in the euro, Ito said the euro may see a short-covering bounce toward $1.2800, near the top of the daily Ichimoku cloud.
The euro was also supported after a strong response to a syndicated Spanish debt sale. The robust demand eased some of the worries about the debt problems in the euro zone, although traders said they would remain cautious until the stress test results of the euro zone's banks are out later this month.
"What we are seeing is some position adjustment which is driving the euro," said Tony Morriss, senior currency strategist at ANZ. "The common theme that is gaining ground in currency markets is the U.S. dollar is being weighed down by soft U.S. economic numbers."
A Financial Times column headlined "The ECB may yet turn to quantitative easing" was also a talking point in the market, mildly pressuring the euro.
Traders said that the world's other major central banks may also need to ease policies further in the event of a U.S. double-dip and that the implications for currencies were far from clear.
The dollar index edged up 0.2 percent to 84.235, staying near a two-month low of 83.825 hit this week. The dollar index lost ground on Tuesday after a lackluster report on business activity in the U.S. service sector.
The dollar held steady against the yen at 87.49 yen, not far from a seven-month low of 86.96 yen hit on EBS last week.
The yen has made solid gains against the greenback in recent sessions on the back of growing worries about an economic slowdown in the United States and falling stock markets.
Those concerns got a boost from a disappointing jobs report from the U.S. late last week. That followed a raft of weak reports which suggested consumer spending, housing and factory activity were moderating.
"I think what we will see for a while is dollar selling, coupled with bouts of backing off from risk-taking when there are any sharp falls in equities," said Akira Hoshino, chief manager for Bank of Tokyo-Mitsubishi UFJ's foreign exchange trading department.
The yen is one currency that may benefit in this market environment, Hoshino said.
Market players said the yen took in stride a Kyodo news agency poll showing that Japan's ruling Democratic Party could win fewer than 50 seats in an upper house election on Sunday, a result that could put Prime Minister Naoto Kan's job on the line and stall efforts to curb huge public debt.
"It is hard for the market to show a definite reaction," said Osamu Takashima, chief fx strategist Japan for Citibank Japan.
While a political crisis for the ruling party could be regarded as a negative for a country's currency, any such impact in this case could be offset by the fact that market players regard Kan as someone who favors a weaker yen, he said.
The Australian dollar, which has had a strong correlation with Asian shares and the market's risk appetite in general, dipped 0.5 percent to $0.8480, giving back some of its 1.5 percent climb the previous day, as Asian share prices fell.
The Australian dollar rose and appetite for risk got a boost in the previous session after the Reserve Bank of Australia gave an upbeat assessment of the economic outlook for Asia and the domestic economy.
(Additional reporting by Anirban Nag in Sydney and Hideyuki Sano in Tokyo; Editing by Joseph Radford)
(Reuters) - Crude prices fell below $72 on Wednesday on a slightly stronger U.S. dollar, reversing earlier gains of as much as 0.6 percent boosted by forecasts of a second weekly fall in U.S. inventories.
Prices tracked volatile equities in the past two days, paring gains on Tuesday after a report from the Institute for Supply Management (ISM) showed a slowdown in the U.S. service sector. But the expected tightening of U.S. crude and gasoline supplies allowed oil to shrug off falling Asian equities on Wednesday.
U.S. crude for August fell 24 cents to $71.74 a barrel by 0706 GMT (3:06 a.m. EDT) on Wednesday after advancing as much as 40 cents to $72.38 a barrel earlier. ICE Brent for August fell 25 cents to $71.20.
"Yesterday's non-manufacturing data fell more than expected, so investors have a wait-and-see approach," said Serene Lim, a Singapore-based oil analyst with ANZ.
"The market is pricing in a drop in crude inventories, but if inventories fall less than expected, we might see prices falling."
U.S. crude stockpiles probably fell 2.6 million barrels in the week to July 2, a Reuters survey showed on Tuesday, as imports may have dropped for a second straight week.
Gasoline inventories were forecast down 300,000 barrels on average, following a surprise modest build in the prior week, while supplies of distillates, including heating oil and diesel, probably posted their sixth straight weekly increase, adding 1.5 million barrels.
The American Petroleum Institute will publish weekly inventory data on Wednesday at 2030 GMT, followed by government statistics from the Energy Information Administration (EIA) on Thursday at 1500 GMT. Both reports come a day later than usual because of the independence day holiday on July 5.
CORRELATION WITH STOCK MARKETS
Asian stocks fell on Wednesday as investors worried global growth was faltering, while the euro held near a 7-week high as investors pared long positions in the dollar on doubts about the resilience of the U.S. recovery.
"Investors are still very concerned about the economic outlook," said Lim, adding that prices may test the $68-$70 range before the end of the month.
"I don't think oil could decouple from the stock markets. It's quite highly correlated these days. Whatever is going to happen in the stock market will have some impact on crude prices."
A weather system over Mexico's Yucatan peninsula and the eastern Gulf of Mexico had a 30 percent chance of developing during the next two days into a tropical cyclone, a category that includes tropical storms and hurricanes, the U.S. National Hurricane Center said late on Monday.
The system's course so far has been similar to that of Hurricane Alex, which in late June forced Mexican oil terminals to shut and U.S. producers to curb output.
Global oil output will rise faster than first expected in 2010 with a strong rebound in prices from the depths of the crisis ensuring growing demand will not stretch supplies for at least another year, a Reuters poll of 10 top oil-tracking analysts and organizations found on Tuesday.
Despite an increase in risk aversion in June, the month ended up being difficult for the U.S. dollar whose index contracted by 0.65% to close the month at 86.019. The index nevertheless traded as low as 85.091 at some points.
The moves came despite a 5.2% decline in the S&P 500 and a 3.55% drop in the Dow Jones Industrial average, with both indexes finishing off the month at their lowest levels since October 2009.
Although much of the concerns come from speculation of a slowdown in Europe, the moves are also attributable to some downbeat economic data.
The ISM manufacturing index for May fell to 59.7 from 60.4 while the non-manufacturing index remained unchanged at 55.4. More notably, however was a 431k gain in nonfarm payrolls for May, faster than the prior month’s 270k increase, but slower than forecasts for a 536k gain. The kicker was in the private sector jobs component, which only created 41k jobs contrary t expectation for a 180k gain and prior 218k increase.
To add insult to injury, retail sales excluding auto fell by 1.1% month-over-month compared to calls for a 0.1% increase, and durable goods excluding transportation rose only 0.9% versus forecasts for a 1.0% increase. In additional final Q1 GDP was revised lower to a 2.7% annualized growth rate despite forecast for a 3.0% gain.
On the inflation front, core CPI remained at 0.9% year-over-year.
Meanwhile on the central bank front, the FOMC left its benchmark interest rate unchanged at 0.25%, as expected, but toned down the language on the economy, suggesting that things may be slowing down in the United States.
Implied market forecasts have only 31 bps worth of rate hikes priced in for the next twelve months.
Given recent developments, the USD started to resume its role as a risk averse currency, managing some gains against many major currencies as the month developed. That being said, it wasn’t enough for the USD to definitively outperform.
Going forward, the main concern remains whether or not the European fiscal crisis is going to cause a global economic slowdown, and possible relapse in the U.S. economy. June also saw the end of the first time homebuyer tax credit, causing many to believe that a fresh downgrade of the U.S. housing sector is in the works.
EUR
June was a topsy-turvy month for the euro, which, when all was said and done, only lost 68 pips against the USD to close off the month at 1.2238. That being said, EUR/USD hit 1.1877, its lowest since March 2006, over the course of the month.
The declines were primarily due to fresh concerns surrounding the region’s ability to slash budget deficits. The euro continued to suffer as traders watched Portuguese, Greek and Spanish bond yields rise at every national bond auction, suggesting that countries are slowly having more difficulty raising capital.
In addition, Moody’s downgraded Greece to junk status, and there are concerns that Spain will be the next to follow down the chopping block.
Stocks were mixed, with the eurostoxx giving up 0.73%, but the German Dax surprisingly managing gains of 0.36% (the only major stock index to record a gain in June).
That being said, the weakness in the euro is proving a boon to European exporters, with Germany’s Ifo business climate index rising to 101.8 despite calls for a decline to 101.2 from 101.5. Meanwhile the nation’s employment record was solid, with the unemployment falling 45k in May and 21k in June, with the unemployment rate falling to 7.7%.
Meanwhile, euro zone GDP advanced 0.6% year-over-year, beyond calls for a 9.5% gain, and euro zone CPI fell to 1.4% in June, compared to calls for a 1.5% gain and prior 1.6% increase.
On the monetary policy front, the European Central Bank seems context to continue buying government bonds and holding liquidity auction for the banking system, suggesting that while the status quo is firmly in place, there are little chances of a rate cut.
Implied market forecasts have 40.2 bps worth of rate hikes priced in for the next twelve months.
Going forward, the story stays the same. Watch the ratings agencies for further downgrades to Spain Portugal, Greece, Ireland, or Italy.
GBP
June was a great month for the pound sterling, which, bolstered by solid promises to cut the budget deficit, shot up against major currencies. When the dust had settled, cable has amassed a respectable 407 pip gains against the USD to close off the month a 1.4945. The main attraction, however, was the 2772 decline in EUR/GBP which closed at 0.81876.
As stated previously, the main culprit for the moves were very though promises from the UK’s newly elected Conservative government, which pledged to slash the budget deficit to £20 billion by 2015 to 2016. The government also said the UK would borrow £149 billion from the public this year, falling to £116 billion in 2011 and then £89 billion the following year. In addition, it plans to hike the value added tax to 20% from 17.5% starting January 4, and hike the capital gains tax on high income earners to 28%, with middle and lower income earners to pay 18%. Also, a levy on bank balance sheets will be introduced starting in 2011.
The news sparked a ripple of upbeat reaction from the ratings agencies, which said the nation may manage to hold on to its AAA rating if it adheres to the plans.
The Bank of England was also hawkish in June, with Monetary Policy Committee Member Andrew Sentance voting for a 25 bps rate hike at the beginning of the month citing inflation pressures. The move gave additional support to the pound sterling.
Economic data was on the backburner for the UK in June, although annual CPI growth fell to 3.4% from 3.7% the month prior, further than calls for a 3.5% level. Also, jobless claims declined by 30.9k in May, further than expectations for a 20k contraction. The claimant count rate also unexpectedly fell to 4.6% despite calls for no change to the prior 4.7% level.
Sterling also ignored a 4.36% drop in the FTSE 100.
Going forward, we have yet to receive definitive assessments from the ratings agencies regarding the UK budget, but everyone is expecting the nation to hang on to its AAA rating.
If the UK gets cut, expect sterling to drop. On the other hand, if the hawkish momentum at the Bank of England persists, that would be sterling positive.
Implied market forecasts for priced in 25.2 bps worth of hikes in the next twelve months.
JPY
The global risk aversion proved to be a boon to the Japanese yen which gained 283 pips against the USD to close off the month at 88.43.
Economic fundamentals and central bank speak were completely ignored in June, with markets buying the yen aggressively on the back of massive declines in global equities, and speculation that the global economy could be heading towards a double-dip recession again.
For starters, a move by the Bank of Japan to make direct loans to the private sector was broadly ignored by the yen. Additional funds to the Japanese system should in theory have been a negative for the currency.
On a side note, implied market forecasts have no rate hikes or cuts priced in for the next twelve months.
Meanwhile the region’s economic fundamentals continues to strengthen with GDP growing 1.2% quarter over quarter in Q1 despite calls for a 1.0% gain, and annualized growth up 5.0% versus forecasts for a 4.2% increase.
Also, Japanese deflation slowed in June, with Tokyo CPI falling 0.9% year-over-year compared to expectations for a 1.3% slide and prior 1.4% shortfall. Meanwhile National CPI was down 0.9% in May versus calls for a 1.1% slide and prior 1.2% decrease. Again, bearish results for the yen.
On the flip side, the Nikkei 225 fell 3.74% over the course of the months, adding to the currency’s gains.
Going forward, risk appetite continues to be the main driver behind the Japanese currency, and all signs point to more strength in the yen.
AUD
June was a dismal month for the Australian dollar which, despite stronger economic fundamentals, was weighed down by a dovish sounding central bank, and concerns of a global economic slowdown.
While AUD/USD finished the month off only 51 pips lower at 0.8408, the pair seesawed between a high of 0.8859 and 0.8083.
Starting the bearish momentum was a decision to leave rates unchanged at 4.50% by the Reserve Bank of Australia, along with the affirmation that rates are fine where they are, and that there are concerns about the impact of the European fiscal crisis on the global economy.
Implied market forecasts have 2 bps worth of rate cuts priced in for the next twelve months, with a 10% chance of a cut at the next meeting.
AUD was also weighed upon by some deteriorating economic data out of China (note that many trades view the Australian dollar as a proxy for Chinese economic performance). On the equities front, S&P/ASX failed to give the currency a lift with the index declining by 2.91%.
The only redeeming factor for the currency was its economic performance, with GDP rising 0.5% in Q1, in line with expectations, but annual growth higher by 2.7%, beating the consensus for a 2.4% increase.
Also, the country created 26.9k jobs in May, faster than forecasts for a 20.0 increase, and the unemployment rate unexpectedly fell to 5.2% from 5.4%.
Going forward, keep an eye out for China, which will continue to weigh on the Australian dollar if growth continues to slow. The currency is also susceptible to the risk picture in equities.
CAD
June was a tough month for the Canadian dollar, which gave up 194 pips against the USD to close off at 1.0639.
The declines were mostly due to increases in risk aversion, heightened by a possible slowdown in the global economy.
The TSX alone was down 3.48%, and the gains in NYMEX crude were insufficient to support the currency.
A notable development for June was a 25 bps interest rate hike form the Bank of Canada to 0.50%. Although the markets were expecting the move, the central bank appeared reluctant to continue hiking rates, given a weak accompanying statement to the decision. As a consequence markets have priced in a 64% chance of a hike in July, with 94 bps worth of hikes for the next twelve months.
Otherwise, Canada’s economic fundamentals were mixed in May, with the economy creating a solid 24.7k jobs for the month, faster than expectations for a 15.0k gain, but the unemployment rate remaining at 8.1% in spite of forecasts for a drop to 8.0%.
On the flip side, core retail sales were down 1.2% on the month despite calls for a flat reading and GDP came in flat for April in spite of expectations for a 0.2% gain.
Going forward, it seems the Canadian dollar is being battered by global risk aversion, but supported by strong crude oil prices and rate hike expectations.
For now, at least risk aversion is the dominant theme.
NZD
June was a relatively good month for the kiwi dollar which managed to outperform on the back of upbeat economic fundamentals and a hawkish stance from the Reserve Bank of New Zealand.
At the end of the month, the Kiwi dollar was one of the few outperformers, with NZD/USD gaining 42 pips to close the month at 0.6874.
The story begins at the beginning of June when the Reserve Bank of New Zealand hikes interest rates by 25 bps to 2.75%, in line with expectations. The central bank also promised that more monetary policy tightening was in the works. Consequently, markets have priced in a 76% chance of another 25 bps hike at the next meeting, with 109 bps worth of hikes pried in for the next twelve months.
In terms of economic performance, Q1 GDP was in line, with the economy growing 0.6% on the quarter and 1.8% on the year. Going forward, we know that the Australian and New Zealand dollars tend to mimic one another, but that with the RBNZ hiking and the RBA holding, that correlation may break down somewhat.
CHF
The Swiss Franc was the outperformer of the month, with USD/CHF collapsing 775 pips at 1.0774 and EUR/CHF tumbling 1042 pips at 1.3184. The primary culprit was the Swiss National Bank which said that the deflation threat in Switzerland was virtually over, promoting no additional foreign exchange interventions to keep the franc weak.
The SNB’s decision to leave rates unchanged at 0.25% was all but ignored by the markets which bought the currency aggressively on the back of the end of interventions by the SNB.
Implies market forecasts have priced in only 19 bps worth of rate hikes for the next twelve months.
Otherwise, the economic data were mixed, with the economy growing only 0.4% quarter over quarter in Q1 despite calls for a 0.7% increase, but rising 2.2% year-over-year compared to calls for a 1.8% gain.
Also, the unemployment rate remained unchanged at 4.0-% despite forecasts for a decline to 3.9%.
Meanwhile, CPI, slowed to an annual 1.1% growth rate in May from 1.4% previously, further than forecasts for a 1.2% growth rate.
Going forward, watch CPI. If it starts falling further, the deflation threat could cause the SNB to renter its weak Franc position.
COMMODITIES
June was a great month to be in commodities, with concerns about budget deficits and risk aversion feeding the gold rally to new record highs.
At the end of the month, Gold had added another $25.07 per ounce to finish at $1242.25, but not before setting a new record high at $1265.30.
The primary motivating factor behind the move was concerns that more government will have trouble paying down the budget deficits, weakening the value of their currencies. Indeed, as confidence in FX continues to wane, gold continues to move higher, and this trend shows no signs of slowing for now.
Silver was unable to capitalize on the move, rising only $0.055 to close at $18.615 in June.
On the crude oil front, the commodity managed gains of $1.66 in the NYMEX contract to finish at $75.63, but nevertheless remains under pressure on the back of concerns surrounding the global economic recovery. If global fundamentals start deteriorating, expect Crude to decline.
The recent equity market losses make for gloomy analysis, and coupled with renewed fears over US growth prospects, US Treasury yields have found themselves under immense pressure in the past week. For the currency trader, the decline in risk appetite should broadly favour the USD, but the drop in yields is something to keep an eye on in terms of USDJPY in particular. Historically there has been a decent correlation between Treasury yields and USDJPY, and unsurprisingly the activity in the Treasury market this week has coincided with a profoundly bearish downtrend for USDJPY that threatens another look at 88.00 levels. Should the pressure on yields continue, the JPY is therefore likely to outperform the USD, and expect EURJPY, AUDJPY and other JPY-crosses to give the most bang for your buck on the downside. Looking at today’s calendar, there is not a great deal to get inspired about; the only major economic release will be the third reading of US Q1 GDP; but no surprises are expected and the rate is likely to be confirmed at 3.0% QoQ annualized. The latest G20 summit is due to begin imminently in Toronto, but one can’t help but feel the bristle of excitement surrounding these meetings has waned considerably as past incarnations have rarely produced concrete outcomes. High on the agenda will be the various suggestions and recommendations for a bank tax or levy to address the need to recoup some of the costs of the financial crisis from its perceived perpetrators, but we certainly won’t be holding our breath for a unified agreement on that one. The wires will no doubt be cluttered with quotes from various politicians asserting their own views on the matter, but in the currency space this will likely play second fiddle to the Brazil-Portugal match this afternoon and Spain’s must-win clash with Chile later on.
EurUsd Morning all, after the thrills and spills of Slovakia vs. Italy yesterday, the developments in EURUSD over the past 24 hours seem rather humdrum. As nasty short squeeze across the EUR-crosses yesterday afternoon made light work of violating the 1.2328 resistance (23.6% fibonacci retracement of 1.1876 – 1.2468) and subsequently the 1-week downtrend around 1.2360; but as of yet we haven’t seen buyers gather enough momentum to sustain the break higher. We now perceive a very short-term uptrend that has been in play since the middle of this week, and which now threatens to overthrow the 1-week downtrend as the dominant short-term trend. Expect uptrend support at 1.2295-1.2300, and given the breach of 1.2350-70 once already, we predict another push higher through the 1-week downtrend at 1.2335, which should allow a second crack at yesterday’s high 1.2388 and 1.2450-70 (28 May high at 1.2452, recent double top highs 1.2468). Should the sell-off continue back through this uptrend (i.e. a resumption of the 1-week downtrend), next pockets of support are due around 1.2260 (yesterday’s lows), 1.2209 (the low water mark this week) and 1.2170 (where the 15 Jun lows coincide with the 50.0% fibonacci retracement).
GbpUsd The short/medium-term trend for GBPUSD remains upward, but as we anticipated, there was some paring back of recent gains in yesterday’s session. At the present time we linger towards the upper edge of 2 different uptrend channels which does not make fresh long entry attractive from a risk-reward perspective, so instead we look to wait for a deeper correction before buying back in. Those with itchy trigger fingers should probably hold fire until 1.4850 levels before re-loading longs, but for the more cautious, the next best area for buyers will be around trendline support currently 1.4780. This latter area does however, currently sit below Wednesday’s ledge of support at 1.4800 and the 50-day moving average at 1.4817, so we feel 1.4820-30 levels presents the best compromise (especially as the trendline support will only drift higher as the session progresses). 1.5000 still represents a major psychological barrier for rallies, but the latest surge to highs of 1.5012 does suggest to us it will not remain so for long. Above there the 100-day moving average is hovering at 1.5044 and the 10 May high at 1.5055.
UsdJpy The pressure on US Treasury yields has weighed heavily on USDJPY this week, and after the break of 89.80 crucial support, we have seen an extended collapse to lows of 89.23. Thus far the sell-off has been caught by demand around 89.26 (25 May low), but given the tremendously bearish tone of late we would not be surprised to see another dip to the vulnerable supports below; 88.95 (20 May low), then 87.99 low from 6 May). For the time being, price action will be very sticky above 89.75, with further sellers predicted around 90.00, the 200-day moving average 90.88, Monday’s 91.48 high, then last Wednesday’s highs at 91.82.
UsdChf After Wednesday’s short squeeze came to an abrupt halt at 1.1138 (identical to Monday’s high), the bears have jumped all over this pair and pushed it below 1.1000, touching a low of 1.0985. Our directional bias in the very short term is neutral (with a bearish preference in the medium-term), so we would expect a bounce off this 1.0985-1.1000 support, then look to sell rallies towards 1.1138. We ultimately believe that after this period of consolidation, the bearish trend will extend further; next major support is expected at 1.0924-44 (10 May lows and 100-day moving average) – and as such should be respected as a likely platform for a rebound on the first visit.
(Reuters) - Gold rallied toward $1,250 an ounce on Thursday, gaining nearly 1 percent as the renewed sovereign credit risk and an equity market slump prompted investors to pile into safe-haven assets.
The metal jumped $10 early in the session as U.S. stock markets tumbled to session lows on economic worries. Bullion has recouped the previous session's losses due to a less optimistic growth outlook from the Federal Reserve and lackluster housing data.
Lingering fears over European credit contagion pressured markets, traders said. Greece's finance minister called for "great moves" to safeguard the banking system and European policymakers defended austerity plans ahead of a G20 summit.
"When there is uncertainty in the market, people tend to go to gold as a safe haven in a flight to quality," said Jeff Pritchard, analyst at California-based broker Altavest.
Spot gold was at $1,245.05 an ounce by 2:30 p.m. EDT (1830 GMT), versus $1,235.20 late in New York on Wednesday. U.S. August gold futures settled up $11.10 at $1,245.90.
Having hit a record $1,264.90 on Monday, prices have struggled to make further headway, which has left the market prone to short-term setbacks.
Gold came under pressure earlier as it reestablished its traditional inverse correlation with the dollar .DXY, and the link strengthened later as the U.S. currency fell.
Year-to-date, the euro has dropped about 14 percent amid questions about the viability of the common currency after a flurry of sovereign credit downgrades.
"It's a central theme and a lot of what we've said about gold is that the credit problems on the sovereign side are the main driving force behind the rise in gold right now," said Nic Brown, senior analyst at Natixis.
The unfolding sovereign debt crisis in Europe remained in focus as index-linked fund managers ditched Greek government bonds, widening the spread between Greek yields and other benchmarks and increasing the cost of insuring Greek government debt against default.
"There is a total lack of confidence in fiat currencies. So, people chose to take money to safer haven which is primarily gold and silver, which tend to do better than most other commodities in retaining their value in times of crisis," said Michael Daly, gold specialist at Chicago-based futures broker PFGBest.
U.S. stock markets fell sharply for a second straight day after the Fed acknowledged a faltering pace of U.S. economic recovery on Wednesday as it renewed a vow to hold benchmark interest rates exceptionally low for an extended period. .N
A drop in weekly U.S. initial jobless claims and a rise in big-ticket manufactured goods offered some hope about the fragile economic recovery. But the market still believes U.S. interest rates will remain low.
"Low interest rates are generally good news for precious metals. We believe that the Fed and the ECB (European Central Bank) will remain on hold for quite some time because of the European debt problems," said Tobias Merath, an analyst at Credit Suisse.
Technical analysts were upbeat on the market's ability to breach new highs, despite its current lack of traction.
Altavest's Pritchard said gold is trading sideways in an "ascending triangle" pattern, and prices could breach their upward channel.
In other precious metals, platinum was at $1,565 an ounce versus $1,566.00 on Wednesday, while palladium was at $475 from $471.00, having earlier fallen as much as 2.3 percent.
Supply worries boosted sentiment for platinum group metals after a union representing workers at South African utility Eskom won the right to begin a strike that could disrupt power supply and hurt industry and mines during the soccer World Cup.
Silver rallied in line with gold, rising to $18.70 an ounce from $18.45 the day before.
(Additional reporting by Amanda Cooper and Veronica Brown in London; editing by Jim Marshall)
US dollar weakness and Swiss Franc strength translate into an interesting setup heading into the UK Budget, the FOMC and G20 summit next week, and is manifested in USD/G10 crosses approaching potential breakout territory and a rebound in volatility. GBP, NOK, SEK and the CHF all look set to test recent highs as equities negotiate one-month highs Underlying trading themes have not changed and should primarily continue to revolve around sovereign debt risk and the timing of a yuan reval, with US Q2 company results moving onto our radar. We stick to our longer-term bullish USD view but are pragmatic in a context where gold is hitting new highs and deteriorating US macro data and pressure from the G20 to curb public deficits have taken some wind out of the dollar's sails.
Recap
Gold rose to a new high above $1,260 and platinum also rallied as US dollar weakness returned, but unconfirmed sources report that China was behind the strategic purchases of the precious metals. However, the decoupling with copper is striking and tells us of potential divergence in view over the path for risk assets, also characterised by the sideways price action in major equity benchmarks. GBP experienced a mixed week, gaining ground vs the USD, but posted substantial losses vs the CHF (sharing the pain with the rest of the G10). GBP/CAD rose 0.9% and GBP/JPY firmed 0.7%. The CHF was the star performer after the SNB changed its position on deflationary risks and the strength of the Franc. The CHF gained 3.4% vs the USD, 1.9% vs GBP, and 1.4% vs the EUR.
UK CPI inflation slowed to 3.4% y/y in May from 3.7% y/y in April. RPI inflation eased to 5.1% y/y from 5.3% y/y. The core CPI rate dropped back below 3% to 2.9% y/y. Stronger than expected labour market stats for May reported a fall in total jobless claims back below the 1.5mln threshold, though the employment rate slipped and inactivity rate ticked higher. The RICS reported a bounce in its May house prices index to 22% from 19%, a 4- month high. In his annual Mansion House speech, BoE governor King said that a hike in Bank Rate would precede asset sales. The governor reiterated that inflation should ease back in the months ahead, but shared his concern and said is closely monitoring the rise in inflation expectations.
UK 5y swaps closed near the highs of the week at 2.61% after touching the upper limit of the 4-week range (2.63%). 3-mth Libor held steady at 0.73% for a 2nd successive week, causing the 3mth Libor/5y swaps curve to steepen up to 189bp. The 3mth Libor/Ois spread ended the week flat at 24bp. The 2y/10y swaps curve steepened to 204bp (+10bp), approaching resistance at 206bp. Strong auctions took place for the 2014 gilt (b/c 2.28). The 2017 IL mini-tender was covered 2.53 times. America Movil sold £650mln in 2030 paper (165bp over). G10 FX - GBP/USD at a Crossroads
GBP/USD has recently been flirting with a return to the 1.4784- 1.55 trading range observed between February and May. An improved technical picture and a rebound in correlations with equities and broader commodities from the early June lows suggest further upside may lie ahead in the short-term (1.54 topside) if the rally in risk asset remains intact and recent gains forces participants to cover short GBP positions. However, the downtrend in place since last November (see chart p2) still dominates and dictates a bearish profile for the medium-term, regardless of the Budget on June 22. A retracement below the 1.45 area cannot be ruled out if the cross fails to break through the 1.4900-50 resistance zone.
GBP/USD has been at a similar crossroads in mid to late April, only for the rally to fizzle out and reverse to the post-election May lows of 1.4231. The danger is that this scenario repeats itself if the rally up to the 1.4886 high on June 18 is not extended beyond trend line resistance situated in the 1.4950 area. The descending trendline in place since January 19 (1.6558 high) runs down to the April 24 high (1.5498). The trendline has not been tested since then and should dampen enthusiasm among those speculating that the cross can drift unchecked to 1.50-1.55, adding to the 1.9% gain in June. Though GBP is currently undervalued vs all its G10 peers (see table), PPP valuations have a very low predictive value when it comes to signalling short-term trend reversals. Speculative short GBP positioning vs the USD is still above historical norms and equally argues for a cautious set-up with tight stops.
The GBP/USD outlook depends on the following:
1/ Commodities, equities: the two asset classes have rallied off the Q2 lows and lifted GBP/USD to a one-month high due to a pickup in correlation (see chart). Short covering, equity buybacks and good EU peripheral auctions (at concessionary rates) may have contributed to a modest buying of risk, but equity benchmarks like the S&P remain 50% below the April high. US Q2 company earnings and guidance for the second half will be key in July for the direction in GBP/USD, provided that correlation with risk remains elevated. Also keep an eye on the CRB index. The index has to test and preferably break the May high (267) to confirm the rally from below 250 and underpin GBP/USD.
2/ Markets have been fairly agnostic to macro economic data recently. Is this about to change? A levelling off in US indicators could bring a second successive disappointing non-farm payrolls report on July 2. This would not go down well with risk assets (USD safe haven) and would add weight to talk that the Fed is discreetly discussing measures to counter a stagnating/ faltering recovery.
3/ Overseas investors have already been reassured that the Con/LD government is determined to cut the public deficit, so the upside for GBP/USD from an endorsement by the credit ratings agencies we think is likely to be minimal. By 2013/14, the OBR projects a reduction in the public deficit from £155bln in 2010/11 to below £100bln, and a fall in public debt from 10.5% in 2010/11 to 5% of GDP. Can the US administration and the USD continue to dodge market fixation with public deficits ahead of the November mid-term elections?
The Canadian dollar strengthened today, extending its rally against the U.S. dollar for a third day, as the equities rebounded, improving the risk sentiment and increasing the appeal of the currencies tied to growth.
The loonie’s moves are 89 percent correlated to the Standard & Poor’s 500 Index and 65 percent correlated to crude oil. The 100 percent correlation would mean that the Canadian currency would always move in tandem with the S&P 500 and crude. Russia plans to add and the Canadian dollar to its international reserves, concerned with the recent volatility of the U.S. dollar and the euro. According to the representative of Russia’s central bank, the bank “added the Canadian dollar but hasn’t yet begun operations”.
The European crisis still threatens to derail the global economy, taking away part of the loonie’s strength and making the central bank cautious in further increases of the interest rates. Mark Carney, the Governor of the Bank of Canada, said today:
Given the ongoing uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global developments.In light of the scale and volatility of these conflicting forces, it should be evident that no particular path for monetary policy is preordained.
He also remarked that “the current economic outlook is neither as robust as recent data indicate nor as dire as current headlines scream”.
USD/CAD traded near 1.0246 today as of 19:06 GMT after it opened at 1.0252. EUR/CAD declined to 1.2609 from its opening rate of 1.2642.
Yesterday’s UK CPI was broadly in line with expectations, with the m/m figures indicating a moderate slowing in price pressure. However, as any recent historical graph illustrates, we have seen pullbacks in inflation readings only to see inflation lurch higher weeks later. On one hand it’s possible that an extended and entrenched inflationary environment will force the BoE to tightened rates despite UK growth or EU contagion concerns. On the other hand, if the MPC is correct in his assertion that forthcoming EU austerity measures and weak growth will naturally put the brakes on UK inflation, the BoE may decide to resume their previously-shelved QE program. This topic is being hotly debated within ACM and currently we are taking a wait-and-see approach to the GBP and will be examining all forthcoming economic data from the UK.
On the continent, Moody’s downgrade of Greece’s long-term credit rating to “junk” status, although widely anticipated, produced divergent market reactions. Yields on troubled EU nations excluding Greece continued to tick upwards this month and the EUR is slowly gaining some strength. Although the correlation is there, we would have expected the two asset prices to be more in tandem. Based on their movements, it seems that FX traders may have shrugged off the rating chop, a serious error which the market may soon correct. The Greek demotion to non-investment grade means that all government bonds issued by Greece are now subject to an extra 5% haircut when used as ECB collateral. Furthermore, we must remember that the only reason the ECB has and will continue to accept these now “junk” bonds is due to the special exceptions made to help Greece in the near-term.
Spain’s short term debt auction was yesterday and went off fairly smoothly. EU auction results continue to be received as EUR positive news, although it’s hard to swallow that the good results aren’t directly due to market distortion by the ECB. The ECB’s aggressive bond purchasing under the Securities Market Program, up to €47 bn from €40.5 bn last week, is not grounded in strategy and has nothing to do with the nation-specific fundamentals and overall prices.
Investors continue to cover short EUR positions, encouraged by the global rally in equities (S&P above 200 day moving average & coming out of a double bottom formation) and the Euro’s ability to defy negative news (Germany’s dreadful ZEW). Even with this, a prudent investor must understand that the EU debt crisis is far from over and from a fundamental standpoint, we’ll continue to be looking for opportunities to short the EURUSD.
And on a final note, as we wait for US economic data and stock markets to open, Merkel’s German government took a public relations roundhouse as its being reported that 92% of business and government leader expressed disappointment in the coalition’s handling of the crisis as reported by Capital magazine. If she wants to survive the summer she better align herself with the German World Cup squad…ASAP.
Today's Key Issues (time in GMT): 08:30 GBP May claimant count, -20k exp; prior -27.1k. 08:30 GBP Apr avge weekly earnings, +4.5% m/m exp; prior +4.0%. 08:30 GBP Apr ILO unemployment, 8.0% exp; prior 8.0%. 09:00 CHF Jun ZEW sentiment index; prior 40.5. 09:00 EUR May HICP - final, +0.1% m/m, +1.6% y/y exp; prelim +0.5%,+1.6%. 09:00 EUR May HICP ex-f&e, +0.1% m/m, +0.8% y/y exp; prelim +0.2%, +0.7%. 09:00 EUR Q1 labor costs, wages; prior +2.2%, +2.0% y/y. 12:30 USD May housing starts/bldg permits, 615k AR exp in both; prior 672/606k. 12:30 USD May PPI, -0.5% m/m exp; prior -0.1% m/m, +5.5% y/y. 12:30 USD May PPI - core, +0.1% m/m exp; prior +0.2% m/m, +1.0% y/y. 13:15 USD May industrial production, +1.1% m/m exp; prior +0.9%. 13:15 USD May capacity utilization, 74.5% exp; prior 73.7%. 17:15 EUR ECB Bini-Smaghi speech at New York conference. 18:00 EUR ECB Luxembourg CB Mersch presents his bank"s annual report. 18:15 USD Philadelphia Fed President Plosser (FOMC non-voter) speaks 20:45 GBP BoE Governor Mervyn King speaks 21:45 USD Fed Chairman Bernanke gives keynotes address
EurUsd Bullish resolve has been rewarded in the past 24 hours as yesterday’s early dip back to 1.2170 levels quickly reversed; pushingabove Monday’s 1.2299 high, and this morning hitting a fresh peak of 1.2353 (identical to the 1 Jun high). For the time being the progress through the 3 Jun 1.2327 resistance has been extremely sticky, and markets may need to see another strong day from equity indices before taking another leg higher. The bullish cup and handle pattern on the hourly chart is now tantalizingly close to completion, with the target above set at 1.2415 (having started all the way back at 1.2145). We just missed out on adding to longs yesterday on the dip, but still hold our original break-out position until 1.2400 levels, and now trail our stop to 1.2280 (giving ourselves some cushion below the 14 Jun highs of 1.2299). For those with higher conviction/deeper pockets than us who wish to stay long, next support below there is due at 1.2210 (where the lower edge of our adjusted 1-2 week uptrend channel lies). Be aware of important resistance around 1.2450 (last seen 28 May) which will provide a decent area of resistance on the first visit.
GbpUsd Despite yesterday’s CPI release being a bit of a damp squib, GBPUSD has still looked very supported during the recent equity rally. Our bias is still bullish as long as the 1-week uptrend remains intact (lower edge of said channel seen at 1.4650), and in additon, there is a possible bullish flag pattern apparent on the hourly chart. Measuring the flagpole from the 11 Jun lows 1.4505, we would infer a target for this pattern at around 1.5100 –however there are a number of resistance levels expected before that; starting with the 50-day moving average at 1.4890, the 13 May high 1.4918 and the 15 April high at 1.5524. Supports below anticipated 1.4680, 1.4650, then around 1.4505 (which held the pair on 10 Jun and 11 Jun). Short-term support around 1.4505 (which held the pair on 10 Jun and 11 Jun) represents a decent first entry level for fresh longs, but also on a break above 1.4820 (12 May lows) we like the possibility of buying on the break-out, targeting next resistance at 1.4918 (13 May high).
UsdJpy The range-trading strategy between 90.85 –92.10 is working out very well for us at the moment with plenty of opportunity to pick up some cheap USDJPY around 91.10 yesterday morning and satisfying gains made overnight. We currently find ourselves back up towards the upper end of the range (91.80) so have taken yesterday’s longs off the table here and flipped round to a short position –anticipating that resistance will start kicking in at 92.10 range highs, backed up by further protection at 92.33 (50-day moving average). Our target is a little more conservative on this oscillation at 91.20 –a little way above the range floor and 8 Jun and 10 Jun lows 90.85 (also note the 200-day moving average at 90.91). There is further support anticipated at 90.50, but below that level a rather unwelcoming drop until 89.80.
UsdChf Contrary to our call yesterday that USDCHF was likely to remain range-bound between 1.1350 –1.1550, it seems the bears have taken control and pushed us ruthlessly lower to 1.1278. We can now draw a fresh 1-week downtrend channel on the hourly chart that suggests trendline support is due around 1.1270; a level that also coincides with the lows on 18 May. Given the confluence of these two supports (with further buying interest expected around 1.1250), there is a high likelihood of a rebound in the very short-term; but rather than attempt a long in this bearish backdrop, we instead wait for a re-test of 1.1350 former support to go short (leaving a sell order just ahead of there at 1.1330). Should the resistance at 1.1350 fail, watch for sellers to step in around 1.1400, 1.1470, then again at the 1.1550 (last Friday’s highs). On a resumption of the selling pressure, supports are eyed at 1.1270 and 1.1250 (as previously mentioned) and the 50-day moving average at 1.1144.
