FX Markets Steady Ahead of Bernankes Talk

October 14 2010 by Spencer McKay in Forex Release |No Comments

USD has been able to claw back some of its losses from yesterday’s rout, however the gain is more a function of the Forex market consolidating itself ahead of a very busy US session. In Japan, officials went on the offensive with rhetoric but it had minimal effect of JPY pricing since we’ve heard it all before. Finance Minister Noda stated that the USD drop was broad-based and not specifically weaker against the JPY. He once again cautioned that he is monitoring FX markets closely and would take decisive steps if necessary to curb unwarranted Forex price action.

In addition, Noda estimated that in the upcoming G20 meeting, he would like the subject of maintaining orderly global currency markets to be an important topic – followed by warning listeners that he would decide to intervene “regardless of the G7 or G20.” Not to bore our readers, but given the macro themes driving FX right now, price action will remain the same unless Japan actually physically steps in. The chances of that are a bit small for now as last month’s physical intervention was a spectacular flop. We will most likely not be seeing a higher USDJPY for some time.

China continues to allow CNY to appreciate with today’s fix set at 6.6497 from yesterday’s 6.6582 – the Shanghais composite rallied up 3.18% at time of writing.

Chinese policymakers point to the recent USD weakness as the core reason for the adjustment, however the US Treasury’s semi-annual currency report is due out today which may hurt Chinas case. We suspect that the Treasury will postpone the report since it has little to gain from their glaring inability to label China as a currency manipulator. That said, should they decide to release the report is very unlikely that it will classify China as a FX bandit.

Today, US retail sales and CPI will be important data but the main event will be Bernanke’s speech this afternoon.

Participants will be getting insight directly from the horse’s month regarding the Fed Chairman’s thoughts on QE2. The title for the talk is “Monetary Policy Objectives and Tools in a Low-Inflation Environment.” We recently witnessed Fed member comments and FOMC minutes implying that QE2 is not necessarily a done deal even though the global market has priced it in for the most part. Clearly, the market is nervous due to what we believe to be outstripped & overzealous expectations on the size, time and scope of additional easing. For this reason, it’s critical to hear if Bernanke completely supports the idea or leaning toward a more undecided, data-dependent “wait-and-see” policy.

We suspect that the Fed Chairman to reiterate his views that asset purchasing remains a go-to-tool for monetary policy in a low inflation environment and maybe even shed some light on the framework of how asset-purchasing works with the Fed. While the markets is not expected today’s talk to significantly shift macro views on QE2, we believe that Bernanke’s current level of conviction might be less than believed. Any revelation that Bernanke’s is not completely onboard for QE2 should give the USD significant support.

09:00 EUR Aug trade balance, E700 mln deficit exp; prior E6.7 bln surplus.
09:00 EUR Sep HICP – final, +0.2% m/m, +1.8% y/y exp; prelim +0.2%, +1.6%.
09:00 EUR Sep HICP – ex f/e, +0.3% m/m, +1.1% y/y exp; prelim +0.3%, +1.0%.
09:00 EUR ITA Sep HICP – final, +0.5% m/m, +1.6% y/y exp; prelim +0.5%, +1.6%.
12:10 EUR Rehn speech in Helsinki.
12:15 USD FOMC Chair Bernanke speech at Boston Fed conference
12:30 USD Sep CPI, +0.2% m/m, +1.2% y/y exp; prior +0.3%, +1.1%.
12:30 USD Sep CPI – core, +0.1% m/m, +0.9% y/y exp; prior unch, +0.9%.
12:30 USD Sep retail sales, +0.3% m/m exp; prior +0.4%.
12:30 USD Sep – ex-autos, +0.2% m/m exp; prior +0.6%.
12:30 USD Empire State manufacturing, index
13:55 USD U.Michigan sentiment index – prelim, 70.0 exp; prior 68.2.
14:00 USD Business inventories, % m/m
00:00 MXN Mexico: Interest rate announcement, % Oct 4.5

The Risk Today: EurUsd A very similar outlook for EURUSD today as yesterday. Since the break above 1.4025 resistance the pair has pushed to fresh highs of 1.4123, but is yet to launch an attempt on the 25 Jan highs of 1.4195. As we predicted, the only pullback towards 1.4000-25 area was met by plenty of bids, but before anyone gets carried away with the long entry, we also note that a shooting star candlestick was printed on the daily chart yesterday, suggesting that the prospects in the near term may be shifting to a more bearish bias. For now, we still anticipate 1.4000-1.4025 to slow any sell-offs, and eye further supports below at 1.3957 (50.0% fibonacci retracement of 1.6038 –1.1876), 1.3913 (Wednesday’s lows) and 1.3775 (12 Oct correction low). On the topside, the technical levels are far more sparse; above 1.4195 we have just the back side of the former 1-month uptrend (currently around 1.4290), 1.4414 (19 Jan high), 1.4500 psychological resistance, then the 13 Jan high 1.4580.

GbpUsd After the bulls punched through that long-standing 1.6000-20 zone of resistance yesterday (no mean feat considering it had capped the pair since early February), they made a beeline for the 3 Feb high 1.6070 and were only halted 4 pips away from it. The bulls may have failed on that attempt, but the pullback was caught by ample demand around 1.5970, and not it looks like we’re pushing for another test of 1.6070 this morning. As we outlined yesterday, once that 1.6070 level is negated, the area above there on the charts contains nothing but fresh air for another 200 pips. Eagle-eyed traders looking on the daily chart may note the 26 &28 Jan highs which both come in around 1.6275, backed up by the upper edge of our 1-month uptrend channel around 1.6330, but beyond there, focus turns to the 19 Jan high 1.6458. Expect plenty of buyers on dips should we get another look at 1.5970-1.6020. Admittedly, there is a pretty large gap below there until next major support, but 1.5750 (4, 5 & 12 Oct lows) should act as a formidable floor to any dips below. Should we be wrong, more supports are eyed at 1.5670 (30 Sep low) and 1.5649 (50-day moving average).

UsdJpy I feel like a broken record today as USDJPY has hit fresh 15 year lows of 80.89, and as discussed extensively during the week, the market’s attention is now solely focused on the 80.00 major psychological support and the 1995 low at 79.76. The only fresh argument worth bringing to the table is the appearance of a hammer candlestick on the hourly chart which may suggest a correction to this longstanding downtrend is on the way; but given we cut our last shorts back at 81.25 and are itching for a decent bounce to re-sell, that is no bad thing. Yesterday’s rebound high of 81.65 is the first overhead resistance level but that bounce was way too feeble to tempt us back into shorts just yet. Instead we’d prefer to see at least a return to 82.35-50 levels before we consider reloading. Ideally, if we did get nice entry levels around 82.35-50, we could then take advantage of the protection afforded by all the resistance levels just beyond; notably at 82.87 (old break-out level), 83.15 former support, then 84.00 (5 Oct high).

UsdChf Yep, you’ve guessed it; fresh lows in USDCHF over the past 24 hours (this time hitting a low of 0.9464), but on this occasion the rebound higher afterwards has actually managed to exceed the 0.9556 level which we had predicted might attract enough sellers to keep the pair capped. Our core view is that the trend remains unequivocally downwards so we’re watching the price developments with the view to selling on the next tasty rally. Above us is an ever growing stack of resistance levels; 0.9642 is the first one up (Wednesday’s brief correction high), then 0.9710 horizontal resistance . We feel that this pair is going to have massive difficulty in scaling above 0.9710 so would look to try some shorts around 0.9650-80. Although it’s pretty academic discussing resistance levels above there (because it’s looking so unlikely we ever return there!), the next levels are eyed around 0.9845 (1 Oct high), then 0.9920 (26 Nov 2009 low).

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