FX Markets Just Drifting

February 8 2011 by Spencer McKay in Forex Release |No Comments

The lack of fear-generating news equates to USD bulls having too little to latch on to. Clearly the FX markets have shifted their focus from EU sovereign credit concerns and Egypt contagion worries to the global inflation story. Barring a safe-haven trigger event, we suspect that the USD, CHF and JPY will continue to be the funding currencies of choice and their central banks are expected to significantly lag those of more hawkish G10 banks.

In the Asian session, Asian banks returned from the Lunar New Year and the USD was on the back foot amid chatter/ speculation that reserve managers were rebalancing their books by selling USD.

After drifting lower, AUDUSD was able to reverse its losses, trading up to 1.0185 on comments from the RBA’s Corbett and S&P’s Curry. RBA member Corbett stated that the effect of Queensland’s floods would be “short lived” while S&P’s Curry stated that there would be little impact if Australia’s surplus “slips”. Traders have been speculating on the RBA’s rate path as a series of natural disasters has caused considerable uncertainty regarding growth and inflation. Despite bumps in the economic data, such as the modest rise in retail sales, we are siding with the recent MPS which contained minor positive adjustments in growth and no change in inflation expectations. In our mind the market is still positioned on the dovish side and will be caught short if the RBA hikes three times in 2011 to 5.50%.

In Asia, it’s been interesting how well the JPY has withstood higher US yields. Generally the correlation between yield differentials and the USDJPY has been very tight but recently US yields have ticked higher (10yrs above 3.66%) while USDJPY keeps getting stuck in daily cloud cover (currently around 82.40/50). There are a few potential reasons why this is the case including portfolio inflows and risk premium advantage provided by small external finance needs and consistent trade surplus, but we suspect the sudden jump in US yields have caught investors off-guard as the participation / expectation surrounding the Fed should keep rates constricted. We suspect that as participants become more comfortable with rising yields and adjust their rate path, USDJPY will hastily play catch up.

In Europe, ECB’s Mersch provided some supportive words for the EUR stating that the ECB would intervene if the secondary effects from commodity prices failed to ease. He also went on to say that the EFSF should be allowed to buy bonds directly. With four consecutive days of lower lows, the EUR definitely has a bearish feel, however from a fundamental standpoint we suspect that a hawkish ECB will propel the single currency higher as a single drop in US employment rate doesn’t signal a sustained recovery in labor markets. Part of the EUR fall could be attributed to the soft German factory orders which makes today’s German Industrial production even more important. Considering the weak growth prospects of peripheral EU countries, anchor countries such as Germany and France must be the economic engine. Without performance from these countries, not even a comprehensive agreement can hold the union together.

06:45 CHF Unemployment rate (sa) Jan
07:45 EUR France: Trade Balance sa (€ bn) Dec
11:00 EUR Germany: Industrial production, % m/m (y/y) Dec
13:45 USD Richmond Fed President Lacker (FOMC non-voter) speaks on the economic outlook
17:30 EUR France: FM Lagarde participates in debate at Institute Montaigne in Paris
18:00 USD Atlanta Fed President Lockhart speaks to the Calhoun County Chamber of Commerce
18:30 USD Dallas Fed President Fisher (FOMC voter) speaks on the US economy

The Risk Today: EurUsd Yesterday’s bearish mood saw EURUSD slip through 1.3540 (24 Jan low) support and briefly dip below the 100-day moving average (currently 1.3532). Nevertheless, rather than starting an avalanche of selling, the pair found good bids at 1.3510 (50% fibonacci retracement of 1.5145 to 1.1876) which has allowed it to rebound back to roughly the same levels we saw this time yesterday morning (1.3620). In spite of this bounce, we still believe that further liquidation of speculative longs may play out before a resumption of the broader uptrend continues. For now, next supports are 1.3510 (aforementioned fibonacci retracement), 1.3397 (20 Jan low), and 1.3245 (17 Jan low). In spite of our shift to a neutral-to-mildly bearish stance in the short-term, we still hold a very bullish bias over the medium-and long-term so would be looking to reload longs back towards 1.3400-50 area. Key levels to beat on the topside will be 1.3679 (spike high after the NFP release on Friday), 1.3735 (upper edge of a nascent 1-week downtrend), 1.3861 (2 Feb high), 1.3896 (61.8% fibonacci retracement of the entire sell-off from 1.5145 to 1.1876), 1.3975 (9 Nov high), and the psychologically important 1.4000 level.

GbpUsd Rather subdued price action from GBPUSD in the last 24 hours, so not much change in the technical picture from yesterday. The broader uptrend channel is still in force, so we remain upbeat about the bulls’ prospects; resistance levels remain sparse on the topside; the nearest one being 1.6185 (yesterday’s high), then 1.6300 (4 Nov high), with another long gap until 1.6460 (19 Jan 2010 high) and 1.6515 (7 Dec high). Much like EURUSD however, we feel thatexcess speculative long positioning may drag on the price action so would not be alarmed to see a deeper correction towards 1.6000 before the pair resumes its upward trajectory. Noted levels below us are Friday’s low 1.6037 and 1.6005-20 (sticky area of former resistance); we would be keen to re-load longs down towards there. Other supports are seen at 1.5823 (31 Jan low), 1.5751 (which caught the sell-off after the GDP release), and 1.5718 (13 Jan low).

UsdJpy USDJPY has been consolidating in a very tight range at the start of this week, unable to continue the stunningly bullish momentum seen on Friday. As we discussed yesterday, with the overarching 1-month downtrend still in play, 82.40 levels look very attractive for short entry; with trendline resistance just above at 82.70 which should act as protection. There’s definitely plenty of room on the downside for the bears to attack; only very weak resistance at 82.15 (yesterday’s lows) is eyed before Friday’s low 81.13. As that latter level still roughly coincides with the lower edge of the 1-month downtrend channel (81.05 to be more precise), we would expect a bounce higher on the first test. Should we break lower, next supports are 80.95 (31 Dec low), 80.53 (9 Nov low), 80.24 (31 Oct low), and the all-time low from 1995 at 79.75. Of course, if the bearish scenario does not come to fruition as we have outlined here, then watch for downtrend resistance to come into play at 82.70, then 83.00 (psychological resistance), 83.21 (27 Jan high), 83.50 (11 Jan high), 83.70 (7 Jan high), and the formidable old range ceiling from early December at 84.40. This 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.

UsdChf USDCHF managed to hit a high of 0.9598 yesterday (just a few pips higher than Friday’s high 0.9595), but the bulls were unable to keep the pair elevated up there for long and we have since slid back towards the 0.9525 pivot level. We expect good bidders to keep the pair buoyed around 0.9525, but should we slump lower then watch for next levels at 0.9500 (lower edge of a proposed 1-week uptrend channel), 0.9455 (old break-out level), 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. Next resistance levels are now eyed at 0.9598, 0.9625 (24 Jan high), 0.9687 (14, 20 & 21 Jan highs), 0.9692 (100-day moving average), 0.9784 (11 Jan high), and 0.9850 (12-13 Dec highs).

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