Events in the Middle-East Begin to Pressure FX Markets.

February 20 2011 by Spencer McKay in Forex Release |No Comments

In the Asian session, risk aversion has been gradually seeping into the general psyche of FX traders. The bombardment of graphic images from Bahrain and other Middle East nations combined with official confirmation that Iran is looking to send two naval vessels through the Suez canal has clearly weighed on risk correlated trades.

CHF has been the main beneficiary of early safe-haven flow with the USDCHF dropping sharply to 0.9450 and EURCHF falling to 1.2907. However, equity markets saw a modest rally and commodity prices failed to react, suggesting that the impact of Middle East events are still merely a marginal driver. While the official process for crossing the Suez Canal is slightly muddled, it’s most likely that international treaties state that the primary reason for denial by the Egyptian Defense Ministry would be in case of war, which suggests the Iranian request will be granted. Interestingly, Suez Canal administrators do not take Iran Rial, so we should hope they have some greenbacks in petty cash.

Traders will be watching events unfold cautiously, especially if Israel steps up the hawkish rhetoric. As expected, crude prices have also reacted to regional activity with Brent’s front end steadily increasing to $104.52 before retracing slightly. Given the unease heading into the weekend we suspect that FX trading will remain subdued and rallies in EURUSD will remained capped. US data yesterday followed the FOMC minutes with a slightly optimistic read as the Philadelphia Fed manufacturing survey jumped to 35.9 from 19.3. However, while the pundits celebrated the so-called sign of recovery (although we have very little faith in surveys right now), the Fed’s dovish Charles Evans stated that the speed of recovery remains “disappointing”. He pointed to the elevated unemployment data and benign inflation data (even though yesterday’s fresh CPI print was slightly higher than expected), suggesting that the Fed had missed both their policy objectives; adding that there was a “long road ahead before we return to full utilization”. Treasury yields dropped partially due to risk flow and partly to potential for further QE.

Today’s data calendar is light; G20 finance ministers and central bank Governors will meet in Paris, Canadian CPI and Geithner & Bernanke will be speaking .

As we expected, the sterling has had a volatile week which has been rounded off by much stronger than expected retail sales figures for January (1.9% MoM, 5.3% YoY vs. expectations of 0.5% and 4.0% respectively). We had suspected that the data would rebound strongly following the disappointing end of year data that was distorted by inclement weather, and believe that the UK growth data will continue to improve. After the punch sterling bulls received from BoE Governor King on Wednesday (King will be speaking today), the GBP has rallied back nicely. Ultra hawk Andrew Sentence sped up the process yesterday saying he sees “danger” that high inflation becomes ingrained and the BoE needs faster, bigger rate rise than markets expect. We agree wholeheartedly and continue to see short term corrections as an opportunity to build long GBP positions.

As for the G20 communiqué expected to be released Saturday, we suspect that policy officials will look to flex their muscles with a strongly worded statement against FX speculation.

00:00 GBP Finance Ministers and Central bank Governors (2 Days)
09:30 GBP Retail Sales Prior -0.8 M/M 0.0 Y/Y Exp 0.7 M/M 4.4 Y/Y
09:30 CAD Retail Sales Ex Autos Prior -0.3 M/M 1.1 Y/Y Exp 0.4 M/m 4.6 Y/Y
12:00 USD CPI prior 0.0 M/M 2.4 Y/Y Exp 0.3 M/M 2.4 Y/Y
13:00 USD Bernanke Speaking
13:00 USD King Speaking
14:45 GBP Geithner speaking
18:30 Tucker speaking

The Risk Today: EurUsd We’ve seen a steady grind higher for EURUSD since Monday afternoon, but after hitting a high of 1.3627 this morning, we find ourselves approaching the upper edge of the reigning 3-week downtrend channel (currently 1.3665) which means we will probably start feeling stronger headwinds slowing the ascent. Should the bulls manage to tackle that key trend line resistance at 1.3665, then the next level to target will be 1.3744 (9 Feb high). Further levels are eyed at 1.3861 (2 Feb high), and 1.3896 (61.8% fibonacci retracement of 1.5145 to 1.1876), but our short-to-medium term view (i.e. within the coming month) is there will be an eventual challenge on the psychologically important 1.4000 level. Should the trend line sellers instead force us back lower one more time, expect decent support to lurk around 1.3536 (100-day moving average), 1.3460 (15 & 16 Feb low), 1.3428 (14 Feb low), 1.3397 (20 Jan low), and 1.3245 (17 Jan low).

GbpUsd GBPUSD is powering back strongly from its mid-week lull, and has now cleared 1.6185 (7 Feb high) and reclaimed a foothold on 1.6200. Our bullish conviction was bolstered on Wednesday by the fact that the post-BoE minutes sell-off couldn’t reach the 11 Feb low 1.5965; a development which tells us that ultimately, the mood over the medium term is for this pair to go higher.Of course, the back and forth debate about the path of rates is likely to make the price action choppy for a while to come (perhaps until the GDP revision on 25 Feb), so our job will be to maintain discipline and keep our eyes open for opportunities to buy on dips (and not get stopped out by sharp swings lower from time to time). Buyers are anticipated to start appearing towards 1.6185 (where that former resistance now acts as support), then 1.6000, 1.5965 (11 Feb low), 1.5823 (31 Jan low), 1.5751 (which caught the sell-off after the first GDP release), and 1.5718 (13 Jan low). Resistance levels remain sparse on the topside; with 1.6185 out the way the nearest one is 1.6300 (4 Nov high), with another long gap until 1.6460 (19 Jan 2010 high) and 1.6515 (7 Dec high).

UsdJpy Now that the 2-week uptrend is no longer guiding USDJPY higher, the pair has started to meander sideways between 83.10 (14 Feb low) and 83.97 (16 Feb high); however the consolidation does look an awful lot like the beginning of a head & shoulders pattern, albeit lacking in one shoulder. Should our early projection become a reality –a scenario which would require us to finish carving out the second shoulder and then break below the 83.10 neckline –then we would be looking at getting short USDJPY and aiming for a target of approximately 82.20 (calculated as the height of the head subtracted from the neckline). This target is particularly elegant because it coincides almost precisely with the 9 Feb low, and there are no other clear-cut support levels in between that we can see that would hinder progress between 83.10 and 82.20. Should the bears manage to overshoot the target, next supports are noted at 81.77 (8 Feb low), 81.13 (4 Feb low), 80.94 (31 Dec and 2 Jan lows) Should the bulls recover and manage to resume an upward trajectory within a broader uptrend, then watch for resistance around 84.00 and 84.40. That latter level managed to contain numerous rallies back on 29 Nov, 1 Dec, 2 Dec, 8 Dec, 13 Dec and 16 Dec –so it’s likely to be a stubborn barrier on the first test. Next levels beyond come in at 85.40, 85.95 and 86.90.

UsdChf USDCHF plunged to fresh lows yesterday afternoon, hitting 0.9479 briefly before recovering today above 0.9500. Although we have not yet been able to connect the recent highs and lows into a meaningful downtrend channel, it’s clear that the bears are currently the dominant force at the moment and should be respected. First support is now 0.9465 (last seen on 4 Feb), followed by 0.9395 (3 Feb lows), 0.9331 (low water mark for this sell-off which was printed on the 2 Feb), and the all-time low of 0.9301. On the topside, sellers will probably start to precipitate around 0.9600 (yesterday’s high), 0.9740 (16 Feb high), while key resistance remains at 0.9784 (11 Jan high). Although it seems unlikely at this stage we go any higher, it’s worth noting that the levels noted above there have not been touched since late 2010. The first of these is 0.9850 (12-13 Dec highs), 0.9915 (8 Dec high) and 0.9950 (3 Dec high).

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