Concern over Irelands Banking Sector Halts EUR Rally

September 26 2010 by Spencer McKay in Forex Release |No Comments

Another strangely quiet day in the FX markets so far. With not much to discuss, markets have been actively chattering about the WSJ article which claimed that the Fed will be pulling back on the “shock and awe” asset purchasing and instead will turn toward smaller, more targeted purchases. The overarching effect on the market will be a radical adjustment to quantitative easing (QE2) expectations and should give the USD a temporary boost to the upside.

Of course, any movement for the greenback depends heavily on economic data and a further erosion in fundamentals will rapidity have the Fed singing a much different tune. USD bulls were able to halt selling during the Asian session and USD-selling in European session is tentative at best.

The other central bank under the QE microscope due to a media report is the Bank of Japan (BoJ). Nikkei news reported that the BoJ is considering further policy actions ahead of next month’s meeting – something that if it happens, will be Yen negative.

Theories and rumors that the BoJ will increase government bond purchases were quickly refuted by Minister Noda, however we believe this will ultimately comes to pass as it’s the most logical avenue for the Japanese to choose. On Japanese economic data, exports rose by a less-than-expected +15.8% y/y vs. +19.0% expected – the data did provide a nice motive for earlier physical intervention as the strong Yen was blamed for the negative spillover into the real economy.

In the UK, Q2 GDP figures are due to be released, a figure which many will be watching as the preliminary release came in significantly higher than expected. Any revision down on this figure will only fuel speculation that further BoE quantitative easing may be around the corner.

Remember that the September BoE meeting noted that a few members foresaw that “the probability that further action would become necessary to stimulate the economy had increased” and members “stood ready to respond in either direction as the balance of risks evolved.” Yesterday, the IMF endorsed the UK’s fiscal tightening plans which helped reduce the likelihood of a sharp fall in confidence. For those of you trading the Pound, keep in mind that the market will likely remain jumpy ahead of the Oct. 20th government fiscal austerity measures announcement.

While the UK government rapidly attempts to avert a fiscal crisis, the environment should be positive for the sterling in the long term – however, the upcoming announcement and the looming possibility of further BoE easing will weigh on the GBP in the near term. For pound fans, we would avoid GBPUSD and instead look to trade it against a fiscally sound “Scandi” or “Swissy” in the near future.

With a light economic calendar today, the market will likely focus on EU sovereign risk. In the peripheral countries, yield spreads and credit-default swap (CDS) prices continue to climb higher led by Ireland and Portugal – Irish 2 yr yields rose to their highest level since 2003. Yesterday’s downgrade of Anglo Irish’s unguaranteed, senior-debt underscores market anxiety about that the Irish banking sector while rumors continue to swirl that Moody’s is preparing to downgrade Spain. We are not Euro positive today.

06:00 EUR GER Oct GfK sentiment index, 4.2 exp;
06:45 EUR FRA Jul consumer spending, +0.6% m/m exp;
06:45 EUR FRA Aug housing starts; prior +1.3%.
07:30 EUR ECB Stark in panel discussion at Istanbul symposium.
08:00 EUR ECB/Finland CB Liikanen latest economic outlook
07:30 EUR ITA Sep consumer confidence index, 104.0 exp;
07:30 SEK Aug retail sales, +0.3% m/m, +4.0% y/y exp
08:30 GBP Q2 c/a balance, GBP9.75 bln deficit exp;
08:30 GBP Q2 GDP – final q/q (y/y) 1.2 (1.7) exp / prior
09:30 GBP BoE MPC Posen speech in Hull and Humber
11:00 GBP Sep CBI distributive trades index,
13:00 USD S&P/Case-Shiller 20-city m/m 0.3 prior
14:00 EUR GER Sep CPI – prelim,
14:00 EUR GER Sep HICP – prelim,
14:00 USD Consumer confidence index 55.0 exp, 53.5 prior
19:00 USD TsySec Geither, others at Washington, DC conference.
21:30 USD Atlanta Fed President Lockhart (FOMC non-voter) speaks

The Risk Today: EurUsd The 1.3500 barrier has continued to repel EURUSD’s rallies in the past 24 hours, and now it seems the bulls are running out of energy keeping the pair at these elevated levels without the boost of any significant economic events scheduled until Thursday. Weak support between 1.3425-40 has already been neutralized this morning, which puts the focus on the lower edge of the current 3-week uptrend at 1.3330. Should that uptrend channel be broken through 1.3330, there are still plenty of levels of anticipated demand stacked below; the first of these will be the 24 Sep lows of 1.3287, followed by the 200-day moving average 1.3198 and then 1.3110 (21 Sep support). Whilst the uptrend remains intact however, our expectations are that once this correction has cleaned out the market a bit EURUSD will push back towards fresh highs. Again, expect resistance to come into play at 1.3466 (38.2% fibonacci retracement of EURUSD’s collapse from lifetime highs of 1.6038 to 1.1876), 1.3500 psychological resistance and 1.3560 (upper edge of uptrend channel). Above there we see clear skies until 1.3692 (12 Apr high).

GbpUsd Although the potential bullish flag pattern we pointed out yesterday was ruled out by a break lower (thankfully without first triggering our long entry), the lack of notable economic events at the start of this week has still kept GBPUSD confined to a mere 90 pip range thus far (between 1.5780 –1.5870). Bulls should be encouraged by last week’s close above the weekly cloud cover (which had contained GBPUSD for over 2 years), so we still expect any dips to be met with eager buyers. The 1.5745 pivot level acts as first support now, followed by 1.5600-15 (22 & 23 Sep lows as well as lower edge of current uptrend channel). Further supports clutter the downside at 1.5586 (50-day moving average), the major 1.5490 level which has acted as a reliable pivot since the end of August, and 1.5450 (the 15 Sep low). On the topside, the 10 Aug high at 1.5910 is buttressed by trendline resistance at 1.5940, but we believe that the key level of note is the 1.6000 barrier which should cap any rally on the first challenge.

UsdJpy It’s as if USDJPY’s price action is magnetically sticking to the path carved out by the former 3-month downtrend line, with the bears continuing to weigh down on anaemic rallies, keeping the pair close to the lows of 84.11. The back side of the former 3-month downtrend channel (challenged a couple of times over the past week) is now 84.20 –but as we previously stated in yesterday’s report, the unrelenting downward pressure on USDJPY makes us skeptical it will hold out much longer, and so we expect another collapse to 82.87 (2010 low) in due course. Even if we are wrong and some force (most likely the BoJ) manages to propel the pair higher, expect 85.20-40 to act as a decent first resistance level, followed by 85.90 (ceiling of supply since mid-August), 86.50 (5 Aug high), 86.90, and 88.07.

UsdChf Not much change in USDCHF over the past 24 hours. The bearish triangle we are playing is still on course for our 0.9730 target (after hitting a low of 0.9780 in Friday), but in the very short term it looks like the bears are taking a break which has allowed the pair to recover back towards 0.9870-75 resistance. There is still the opportunity for a small inverse head and shoulders pattern to become activated on the hourly chart if we see a break above the neckline at 0.9875; should it be triggered, we would estimate a squeeze on shorts taking us to 0.9960 levels (calculated as the height of the “head” applied to the neckline). Rallies are no doubt going to struggle against fierce selling ahead of parity and we still feel that the downside offers the path of least resistance, so we would add to shorts up towards 1.0000 where our position would then be protected by resistance at 1.0120 (20 Sep high), 1.0185 (17 Sep ceiling), then 1.0278 (10 Sep high) and 1.0340 (last seen on 24 Aug).

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