EURO Bulls Jump In With Both Feet

October 1 2010 by Spencer McKay in Forex Release |No Comments

There is clearly an optimistic feel to today’s market trading – which is nice – but it is giving us a eerie déjà vu feeling reminiscent of the day after the EU / IMF bailout. While participants were bracing themselves for a EU sovereign crisis Part Deux just 48 hours ago, it now seems like a distant possibility. The Anglo Irish recapitalization plan combined with stronger-than-expected Chinese PMI have caught the market’s ultra-short attention span. China’s PMI came in at 53.8 vs. a 52.0 expectation – this helped ease market anxiety of a global slowdown. Even though the fundamentals aren’t there, in trading it is always better to join the trend (herd) even if its illogical. For the rest of the trading week (today), we’ll join the Euro bulls. The long-term structural problems still remain for the EU and viable solutions are in short supply. Yesterday’s small USD recovery was due to a fall in Jobless claims compounded with a rise in Chicago’s PMI to 60.4. The revision of Q2 GDP growth to 1.7% y/y quickly wore off. Today it will be critical to see how yields react to a wealth of US data coming out: University of Michigan confidence, ISM Manufacturing, core PCE and deflator data. If we continue to see improvement, yield spreads should tighten and grant further relief to the beleaguered USD. In Japan, Noda and Kan continued to support the USDJPY with bullish comments – today Noda proclaimed that Japan “will take decisive action if necessary.” Prime Minister Kan further publicized that the BoJ will take all the necessary steps to beat deflation. Today’s verbal saber rattling was due to the recent JPY strength and Japanese CPI data which printed at -1.0%. Look for some market uncertainty going into next week’s BoJ policy meeting. Today’s highlight will be US ISM data – regional surveys have indicated that the report should show signs of stabilization which will be bullish news for the Greenback.

06:00 EUR GER Aug retail sales, +0.5% m/m, +3.5% y/y exp; prior -0.3%, +0.8%.
06:30 SEK Sep mfg PMI; prior 60.6.
07:00 NOK Sep mfg PMI.
07:15 CHF Aug retail sales; prior +4.8% y/y.
07:30 CHF Sep mfg PMI, 60.0 exp; prior 61.4.
07:43 EUR ITA Sep mfg PMI, 51.9 exp; prior 52.8.
07:48 EUR FRA Sep mfg PMI, 55.4 exp; prior 55.4.
07:53 EUR GER Sep mfg PMI, 55.3 exp; prior 55.3.
07:58 EUR Sep mfg PMI, 53.6 exp; prior 55.1.
08:00 EUR ITA Aug unemployment, 8.4% exp.
08:28 GBP Sep mfg PMI, 53.8 exp; prior 54.3.
09:00 EUR Aug unemployment, 10.0% exp; prior 10.0.
10:00 EUR Ireland central bank quarterly bulletin.
14:00 USD Sep ISM index, 54.5 exp; prior 56.3
16:30 EUR ECB/FSB Draghi, Chicago Fed Evans speak at BoI event in Rome.
16:30 EUR ECB VP Constancio speech in Lisbon.
18:30 USD TsySec Geithner hosts meeting in Washington, DC,

The Risk Today: EurUsd Althought the bullish pennant we highlighted on wednesday didnt pan out its clear the broader uptrend which is still in play. The uptrend line is seen around 1.3675 and resistance at 1.3692 (12 April high), was broken today. EUR bulls seem clearly in charge which puts the next resistance around 1.3800. First area of demand will be found at 1.3500 (where former resistance now turns support), then 1.3445 (lower edge of 3-week uptrend), 1.3380 (Wednesday). Should that uptrend channel be broken, there are still plenty of supports piling up below; they are eyed at 1.3287 (24 Sep low), 1.3191 (200-day moving average) and 1.3110 (21 Sep support). Whilst we still stick to the mantra that the trend is you friend (and this trend is undeiably upwards), the pair has rallied some 10 big figures in less than 3 weeks, so risk-reward looks attractive for scaling into shorts above 1.3750 as we approach that 4-month uptrend ceiling.

GbpUsd The Cable had started to find some direct heading towards our range ceiling in European session. For now we look to trade the range until a clear break-out ensues; the 10 Aug high at 1.5910 is the range ceiling and has already rebutted one attempted rally on Wednesday of this week, meanwhile the 1.5720 low from Wednesday acts as first support. Looking at possible break-out scenarios outside the range, the 3-week uptrend channel resistance has now crept up to 1.6000 so expect formidable supply up at that level (recall that this is not only key psychological resistance, but also a major peak from 6 Aug) –as such we would prefer cutting longs ahead of that level and waiting for a break above it before initiating fresh purchases. On the downside, the lower edge of a 3-week uptrend channel comes in now at 1.5705, followed by 1.5610-15 (22 & 23 Sep lows, as well as 50-day moving average).

UsdJpy Not much change in the technical picture for USDJPY today; the downward pressure on the USD has kept trading heavy, and we now see the pair firmly back within the territory of the former 3-month downtrend. With the BoJ nowhere in sight, it looks inevitable that we have another go at the 82.87 level (the low we touched back on the 15 Sep before the BoJ first stepped in to drive the pair higher). Some market chatter has speculated that the central bank may be lurking around 83.00 to protect the downside from further assault so perhaps expect a slowing of descent as we approach; however we feel that even if the BoJ does step in again, they are ultimately fighting a losing battle and that this sell-off will continue on towards 80.00 (approximately where the pair bottomed out back in 1995). For us traders that means having to accommodate unexpected volatility and wide stops, so small position sizes are a prudent choice. Rallies higher are now likely to meet supply at 84.10 (a level that acted as support over the past week), then 85.40 (24 Sep high), 85.90 (ceiling of supply since mid-August), 86.50 (5 Aug high), 86.90, and 88.07.

UsdChf USDCHF is still content to loiter around these historically low levels, but for the time being is looking confined to a tight range between 0.9735 (yesterday’s lows) and 0.9815 (yesterday’s high). We still feel that the risk-reward profile is skewed in favour of the bears, but for now choose to await a rebound rally before reloading short positions. Supply is likely to lurk around that 0.9815 pivot once more, then around 0.9920 (26 Nov 2009 low) before massive selling interest kicks in back towards parity. Indeed, that sweet spot approaching 1.0000 is exactly where we intend to jump in on the short bandwagon again (scaling in from 0.9960) as 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 (prior seen on 24 Aug). On the downside, the only two levels of note are yesterday’s lows 0.9735 and the 0.9639 low from 17 March 2008.

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