FX Markets Choppy as News Flow Thins
It seems that December malaise is in full swing with the Forex market trapped in arbitrary ranges and patterns.
As we had stated yesterday, we suspect the current divergence in market actions is misleading so we will stick with our mid-term view that risk correlate trades will appreciate. The price action in US yields took a breather yesterday but markets are still questioning how aggressive the Fed needs to be with the fiscal side of the playbook now engaged (i.e. extension of Bush era tax cuts). In China, markets are still concerned over an impending rate hike which pushed Shanghais down -1.32% while the rest of Asian regional indexes rallied.
ASX and the AUD were supported by stronger than expected employment data, +54.6 k vs. an expected +20 k – unemployment rate remained at 5.2% in line with expectations. AUDUSD rallied over 60 pips on the news since expectations for economic data and policy rate path have been scaled down significantly in recent weeks. In New Zealand, the RBA held rates at 3.00% as was expected however, sounded overly dovish in the accompanying statement. “While interest rates are likely to increase modestly over the next two years, for now it seems prudent to keep the OCR low until the recovery becomes more robust and underlying inflationary pressures show more obvious signs of increasing.” Markets now expect rates to remain the same until Sept 2011 for the Kiwi nation.
While peripheral yield spreads continue to narrow – the inter-EU squabbling has not. Eurogroup president Jean-Claude Juncker verbally reprimanded Germany for its refusal to discuss any Eurobond yesterday saying that they rejected the concept even before studying the idea and were dealing with the matter in a non-European fashion. German Chancellor Merkel was quick to fire back ‘finger-pointing is a sign of disaccord’ and “secondly, in our assessment it’s not at all compatible with current EU treaties.” Regardless of the verbal details, what is clear is that there is wide divide between EU nations on the question of a European bond scheme or any other Pan-Euro crisis mechanisms.
The ECB’s aggressive participation in the peripheral bond markets and keeping the emergency liquidity measures open “as long as necessary” should put a floor under the EUR and and ease concerns over sovereign debt – at least into the new year.
Today the highlight and non-event will be the BoE MPC meeting. We expect the asset purchasing target at 200 bn GBP. It is unlikely we will receive any accompanying statement and the general market will need to wait for the Dec 22 minutes to hear more about the vote breakdown. The minutes of the last meeting highlighted an interesting split within the MPC; as member Sentence continued to dissent in favor of a 25 bps rate hike. Interestingly, member Posen voted against the majority of others in favor of a 25 bn GBP increase in the asset purchasing target (effectively voting for easing). With UK inflation ticking back up to 3.2% y/y in October and Q3 GDP looking firm at 0.8% q/q, we side with Sentence in calling for the next move from the central bank to be one of monetary tightening as opposed to easing. For the time being though, not enough has changed in the outlook to warrant a move at this next meeting, so the release is likely to be another non-event.
07:00 EUR Germany: Final HICP,
07:00 EUR Germany: Final CPI
08:30 SEK CPI headline rate, % 0.1 exp
09:30 GBP Visible trade balance, £bn Oct
12:00 GBP MPC decision, Bank Rate, % Dec 0.50 prior/exp
12:00 GBP MPC decision, asset purchases, £bn Dec 200 prior/exp
13:30 USD Initial jobless claims, thous (4wma) 04-Dec 428 (429) exp
15:00 USD Wholesale inventories, % Oct 0.9 exp, 1.5 prior
23:50 JPY Corporate Goods Price Index, %
The Risk Today: EurUsd EURUSD has now pushed below last Friday’s lows of 1.3193, and in spite of an overnight rebound the pair only got as far as 1.3322 on this oscillation. As such, a series of lower lows and lower highs since we were at 1.3438 (seen on 3 Dec) looks to have carved out a 1-week downtrend channel. We therefore anticipate that the next cycle for EURUSD will involve a dip through yesterday’s 1.3180 lows to the lower edge of the downtrend which is currently seen at 1.3145. Should the bearish momentum overshoot that weak support, the next levels below are eyed at 1.3060 (2 Nov low), 1.2972 (30 Nov & 1 Dec low), 1.2922 (pivot from early Sep), 1.2830 (14 Sep low), and 1.2645 (10 Sep low). On the topside, first resistance is the upper edge of this 1-week downtrend at 1.3340, followed by Tuesday’s high 1.3400,the back edge of a former 1-week uptrend around 1.3425, 1.3448 former pivot (note that last Friday’s high comes in just before at 1.3438), 1.3635 and 1.3785 (22 Nov high).
GbpUsd GBPUSD has continued a choppy ascent higher this week, although progress to the topside has been slow –after finally overcoming a sticky patch of resistance through 1.5822, the pair is now bumping up against a further pocket of supply at 1.5840 (24 Nov high). Nevertheless, whilst 1.5650 support remains intact, we maintain a mildly bullish bias, and look for a break above 1.5840 to eventually lead to a challenge on 1.5950-5 (last seen 23 Nov), 1.6000 psychological resistance and 1.6095 (19 Nov peak). On the downside, first support is the 1.5650 former neckline, with further ledges of support staggered below at 1.5485 (30 Nov low), 1.5450 (15 Sep low), 1.5368 (200-day moving average), 1.5297 (7 Sep low) and 1.5122 (21 Jul low).
UsdJpy We continue to range trade in USDJPY, with the boundaries of price action seemingly defined by the 7 Dec low 82.35 and the 29 Nov high 84.40. The recent collapse in US Treasuries has pushed the pair towards the upper end of its range (coming within 10 pips of the ceiling in yesterday’s NY session), but until we see a break-out materialize, we continue to sell on rallies and buy on dips in this pair. Our core expectation is that the next move will be a return to the range floor 82.35, but if instead the bulls can force a break higher through 84.40 then next points of note aboveremain at 85.40 (24 Sep high), 85.90 (19 Aug, 30 Aug & 16-17 Sep highs) and 86.90 (2 Aug high). We also stay open to the possibility of a break to the downside, in which case the next supports lie at 81.65 (12 Nov low), 80.60 (strong support from the beginning of November), 80.24 (31 Oct low), then 79.75 –the all-time low from 1995.
UsdChf Very difficult to discern the dominant trend in USDCHF from the hourly charts at the moment as the pair bounces between short-lived uptrend and downtrend channels. For the time-being a 1-week uptrend appears to be in control, so we look for support to emerge around the lower edge at 0.9795 to confirm this theory. With the 0.9899 resistance (24 Nov low) negated already, the next levels on the topside are noted at 0.9940-50 (upper edge of 1-week uptrend & 3 Dec high),1.0054 (26 Nov high) and 1.0185 (17 Sep high). Should the uptrend fail to live up to expectations and we see a break below 0.9795, watch for pockets of demand at 0.9755 (7 Dec lows), 0.9725 (12 Nov & 3 Dec low), 0.9670 (11 Nov low), and 0.9540 (first established on 18 Oct and re-tested on 5 Nov).
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