Comments Moving Markets

October 22 2010 by Spencer McKay in Forex Release |No Comments

Forex markets continue to trade in an uncertain and flippant pattern, grabbing on to whatever headlines hit the screens. As we have been saying for the last few days, perhaps the best trading strategy ahead of the G20 meeting would be to fade any comments regarding currencies. Comments by US Treasury Secretary Geithner in the Asian session were a perfect example. Headlines read “no need for USD to sink further against the EUR and JPY; these currencies are roughly in alignment”. The markets reacted sharply by aggressively buying USD and pushing G10 currencies lower. However, what he actually said in the WSJ, which was misinterpreted by Reuters, was “major currencies which are roughly in alignment now.” Despite the actually meaning of the statement being confused, the reality is that he probably won’t say anything else. The markets seem keen on staying one step ahead of the G20 meeting and are anticipating some overarching agreement on competitive currency devaluations.

While we are not ruling out a portion of the communiqué dedicated to that effect, we doubt it will have any real teeth or longevity.

In Asia, China’s much anticipated data was largely inline with expectations and could point to a policy driven slowdown however, general global trend can’t be ruled out. Q3 GDP came at 9.6% y/y, down from 10.3%, better than expectations of 9.5%, while September industrial production growth printed at 13.3% y/y vs. 14.0% exp. On the inflation front, CPI inflation inched up to 3.6% y/y vs. 3.6% from 3.5% y/y in August. Overall, we believe that the growth should continue to improve and decline in IP probably just the larger than anticipated effects of the local holidays. Inflation remains high and hard to subdue, however, the PBoC will not be slamming on the breaks just yet. Shanghai composite softens slightly but not enough to signal that markets were completely convinced that further monetary policy through RRR and rate hikes were just around the corner.

Currently our focus is on the sad recovery reported by the Fed’s Beige book, which spoke of a weak recovery which couldn’t produce new jobs. The market latched on to this news as evidence that QE2 was just around the corner. In a stark contrast Germany’s Merkel is already looking to develop ‘an internationally coordinated exit strategy.’ The views and objectives between G20 couldn’t be more divergent which will further sterilize any real progress. Europe out of the gate, has already been very choppy and we suspect, given the economic data due today and tomorrow, as well as the looming G20, volatile range-bound trading will be the theme of the day (don’t dig in too deep).

06:15 CHF Sep trade balance; prior CHF568 mln surplus.
07:00 CHF SNB monthly report.
07:28 EUR GER Oct PMI composite index; prior 54.7.
07:28 EUR GER Oct PMI mfg index, 54.6 exp; prior 55.1.
07:28 EUR GER Oct PMI services index, 54.8 exp; prior 54.7.
07:58 EUR Oct PMI composite index, 53.6 exp; prior 53.8.
07:58 EUR Oct PMI mfg index, 53.2 exp; prior 53.6.
07:58 EUR Oct PMI services index, 53.7 exp; prior 53.6.
08:30 GBP Sep retail trade, +0.4% m/m, +1.0% y/y exp; prior -0.5%, +0.4%.
09:00 CHF Oct ZEW sentiment index; prior -5.1 (down 14.2 pts).
09:15 GBP BoE MPC Posen speech in Vienna^
12:30 USD Initial jobless claims, thous (4wma)
14:00 EUR Oct consumer confidence index, -11.0 exp; prior -11.2.
14:00 USD Sep leading indicators, +0.2% m/m exp; prior +0.3%.
14:00 USD Oct Philly Fed survey business sentiment index 1.5; prior -0.7.

The Risk Today: EurUsd Yesterdays sharp reversal just highlights the uncertainly in the markets. Trading EURUSD continues to be a major headache with very volatile price action. With the pair unable to find a clean direction, there is considerable risk that this choppy corrective stage will continue through the week. A move lower will face a plethora of minor supports created during the Sept bullish rally. Demand should come into play at 1.3794 (21d-MA), 1.3640 (Oct 5th low) then 1.3350. Resistance at 1.4060 (weekly cloud top) then 1.4156 (Oct 15th high) should cap the upside.

GbpUsd The cable was able to rally back above 1.5706 trendline support which should be viewed as a marginally bullish sign. However, failure to register a weekly close above 1.5820 will give the pair a decidedly bearish tone. Supply has been building around 1.5840 then 1.5940 halt any upside bounces. While above major resistance at 1.6107 (Oct 15th high) contains nothing but fresh air for another 200 pips. Eagle-eyed traders looking on the daily chart may note the 26 &28 Jan highs which both come in around 1.6275, but beyond there, focus turns to the 19th Jan high 1.6458.

UsdJpy The pair is stuck in a range between 80.85 and 81.92 but bias is clearly downwards. USDJPY hit a fresh 15 year lows of 80.89 on Thursday/Friday, and as discussed extensively, given the bearish pressure market’s attention is now solely focused on the 80.00 major psychological support and the 1995 low at 79.76. Prior nights rebound high of 81.83 is now the first overhead resistance level. Geithners driven rally was way too feeble generate buying participation and would have made a great short. Ideally, if we do get back up there, we could then take advantage of the protection afforded by all the resistance levels just beyond; notably 82.57 (21d-MA) , 82.87 (old break-out level), 83.15 former support, then 84.00 (5 Oct high).

UsdChf Our view that the move starting Oct 14th was nothing more then a corrective bounce, seems to have been accurate. Currently the pair is consolidating between 0.9550 and 0.9723 as traders get comfy at these lower levels. Our core view is that the trend remains unequivocally downwards so we’re watching the price developments with the view to sell. Above us is an ever growing stack of resistance levels, although thinned slightly; 0.9723 (Oct 20th high) 0.9790 (Oct 14th high) then 0.9848 (bearish channel resistance) and 0.9880/00 (multi-day highs). Watch for minor support at 0.9602 /15 (5d-MA & short-term bullish trend support) then 0.9464 (Oct 14th low) were significant demand is waiting.

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