EURO Rallies in Post-NFP Trading

July 27 2011 by Spencer McKay in Forex Release |No Comments

We are seeing a mixed picture developing between FX sentiments and positioning with a backdrop of larger macro-elements also changing. With China, Taiwan, HK and Korea on holiday today, FX markets were range bound during the Asian session and should stay subdued as the economic calendar today is light.

As we creep closer to the imminent bailout, FX traders have increased their long risk-correlated positions. IMM data this week showed that USD shorts had increased while EUR, AUD and CAD longs also increased. EURUSD was able to close comfortably above 1.4600 on Friday on the news that the troika of EU / IMF / ECB had reached at least a staff level agreement with Greek policymakers. Fears over EU contagion have now subsided as participants realized that this phase of the EUR sovereign crisis has a temporary solution. Even Eurogroup Chairman Juncker, whom has had some of the most colorful statements on Greece’s future, sounded confident that the Eurogroup had found a solution.

USDCHF pushed through any and all supports to new all time lows at 0.8331. Commodity currencies lagged slightly as the risk on environment as tempered by the broader macro story of decline global growth prospects. US data seems to have run smack into a soft patch highlighted by weaker than expected payroll data and punctuated by unemployment that climbed to 9.1%. If traders had not been convinced of the futileness of two massive rounds of QE, the continued weakness in the US labor markets was hammered home Friday.

Clearly, US GDP forecasts now have to be revised down and the prospect of the FOMC even thinking about tightening is far, far away (Q2 2012) as the calls for QE3 are getting louder. Equity markets reacted by selling off with the S&P falling -1.0% and US 10yr yield pushed down below 3.00% again. The decline in US / JAP yields spreads have hurt the rate sensitive JPY and will keep the price appreciation side of our JPY-fueled carry trades contained.

As Europe walked in this morning, the result of Sunday’s Portuguese elections hit the wires. The results stated that the Opposition Social Democrats have pushed out the ruling Socialists with 37-42% majority of votes. The Democrats will now look to form a new coalition government with the smaller conservative Popular party. With the political environment in flux, pundits are concerned that the 3.5% spending cuts demanded by the EU/IMF bailout program will be compromised. It’s still way too early to predict any renegotiations as to the austerity cuts which must be outlined by end of July but we suspect that given the lack of options, Portugal will maintain its current commitments.

The highlight of the week will be the ECB rate decisions on Thursday. While the Forex market has been primary focused on the Greek situation, the inflation story has taken a back seat. However, the elevated current rate and expectations have continued to give Trichet restless nights. The ECB’s Smaghi recently stated that “current very low level of interest rates does not seem justified” while Draghi comment that that higher interest rate expectation could become “entrenched” and the central banks need to take action. With fears of a peripheral collapse subsiding and EU growth remaining buoyant, we suspect that Trichet will signal a July rate hike. We continued to see conditions of further EUR appreciations and are looking to the EURCHF as perhaps the most promising trade given the impending Greece stop-gap and potentially higher interest rates in Europe.

10:00 EUR PPI Prior 0.7 M/M 6.7 Y/Y Exp 0.8 M/M 6.6 Y/Y
15:00 CAD IVEY PMI Prior 57.7 Exp 60.0
18:15 USD Geithner speaking
20:00 EUR Juncker speaking
22:30 USD FOMCs Fisher Speaking
00:01 GBP BRC Total Sales Prior 6.9

The Risk Today: EurUsd EURUSD has recovered impressively from its retracement to 1.4309 lows, on Greek bailout program news flow, and this morning hit a new high of 1.4558. As such, the 2-week uptrend channel is looking very healthy, and we have now carved out a bullish engulfing candlestick pattern on the daily chart which suggests the momentum will remain with the bulls today. Next levels on the topside are eyed at 1.4588 (6 May rebound high), 1.4600-10 (upper edge of uptrend channel)and1.4764 (former support last seen in early May). Buyers on dips are expected to appear around 1.4404 (yesterday morning’s pullback low), 1.4309 (Wednesday’s low), 1.4258 (Monday’s low), 1.4184 (a brief sell-off low seen 27 May), 1.4068-70 (26 May low and 100-day moving average).

GbpUsd GBPUSD was able to reverse it sharp decline in a late Friday rally off 1.6300 support. As discussed in earlier reports, we feel that this is a healthy development for a rally that spanned around 5 big figures in just 1 week; and expect that once the excess longs have been cleared from the market there will be another leg higher towards 1.7000. Nearest supports now stand at 1.6286 (3 June low) than 1.6274 (26 May low), 1.6229 (100-day moving average), 1.6133 (25 May low) and then the critical 1.6060 support (24 May low). Once we resume the upward trend, pockets of supply are anticipated around 1.6498 (1 Jun high), and 1.6547 (31 May high); a break above which would open the path for a test of 1.6746 (28 Apr high).

UsdJpy USDJPY still feels heavy and any attempt to rally has found sellers eager to get in. USDJPY’s recovery rally fell short of challenging the 82.24 resistance level (19 May high); and now the pair has slumped all the way back down, posting fresh lows of 80.13 prior support. With a broad downtrend channel in play, we focus on the downside supports that may be challenged today; the nearest levels are seen at 80.00 (psychological support), 79.57 (5 May low), 78.26 and (17 Mar low), before the all-time low 76.40. Sellers are likely to drive the pair back down at 81.33 (2 June high), 81.78 (31 May high), 82.79 (27 Apr high), 83.27 (18 Apr high), and 83.79 (15 Apr high).

UsdChf There just doesn’t seem to be a support the USDCHF can’t break. The bearish flag pattern triggered on the on Fridays daily chart, should predicted deeper sell-offs. The lower edge of the flag was seen at 0.8415-20 levels, so on a break below there we would sell and aim for a target of 0.8260 (estimated as the length of the flag pole applied to the point of break out). Really the only things we are relying on for support below are the all-time low 0.8328, then purely psychological supports like 0.8300, 0.8200 etc. Levels on the topside stand at 0.8447 (Fridays high), 0.8547 (31 May high), 0.8595 (rebound highs seen last Friday), 0.8734 (26 May high), and 0.8814 (25 May high).

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