General Uncertainty & Impending FOMC Keeps FX In Check

September 21 2010 by Spencer McKay in Forex Release |No Comments

A holiday in Japan has kept trading subdued at the start of this trading week. USD had been able to rally back on Friday, as EU sovereign risk concerns re-emerged. A local Irish newspaper reported that Ireland was “perilously close” to calling on the IMF for assistance. While the government was quick to refute the story by saying that the journalist misinterpreted a research report, even the suggestion of such an action had investors rushing into safe-havens Forex trades. In addition there were unconfirmed reports that the ECB had intervened in the Irish bond market (which was confirmed over the weekend although the size was very small). And on a similar note, Reuters, citing a German newspaper, stated that German banks would need to raise roughly €50bn in order to comply with new Basel III requirements (yet today German Banking Association said the number is more like €100bn). As we have contended for quite a while, the EU problems are structural and will take a very long time to solve. That said there is some significant uncertainty as to meaning of the current information flow (are we worried about the potential of US easing or a risk event in Europe) highlighted by Gold’s rapid appreciation. We see risk rallies (especially ones as large as last weeks) as opportunities to rebuild short risk positions.

The EURCHF is a perfect example of this thinking. On the EUR side on of the equation, the concerns in the EU will continue to send inflows across the boarder, given the unstable nature of current events. While the SNB provided a smoke screen of dovish comments and soft economic forecasts at last weeks rate decision, the central bank today has quietly increased the 1-week repo rate to .14% from .13%.

The other key non-USD safe haven trade, the JPY, continues to trend lower after last week physical intervention. Even the persistent rumor that the BoJ will move to an official inflation targeting policy and further rhetoric, has failed to keep the USDJPY higher. We suspect that sovereign risk concerns, expectations of US QE2, and Japanese persistent trade surplus will all keep the JPY bulls on the right side of this trade.

Today we suspect most traders will be sidelined ahead of tomorrow’s critical FOMC meeting. Clearly we (and the market) have all recognized how eerily similar the conditions are between now and last August when the Fed announced their MBS reinvestment policy. A minority of pundits are calling for additional asset purchases of around $1trn. We still think that it’s too early for further QE2, as the economic data needs to eroded further before the Fed goes to this extreme. The language tomorrow should focus on the slow but steady improvement of some economic data yet balance the working with risk to the recovery in the near term (specifically the weak labor conditions & housing data). In addition, they will keep the “extended period” language as inflation continues to be a non-issue.

00:00 JPY Bank holiday
07:30 EUR Irish Central Bank Governor Honohan speaks
11:25 EUR ECB President Trichet speaks at the Euro Conference
12:30 CAD Canada: Int’l Securities Transactions
17:00 USD NAHB housing market index

The Risk Today: EurUsd Nice to be back after a long weekend in Berlin –looks like EURUSD got feisty on Friday! Fortunately we were positioned long from the break above 1.3000 which triggered a bullish flag pattern on the hourly chart; indeed the peak on Friday of 1.3162 came achingly close to hitting our target of 1.3180. The dip back lower at the start of this week has been held by support around 1.3020-30, so we now adjust our stop to 1.3000 to ensure this is a risk-free trade, and sit tight for another leg upwards to propel us towards our resting limit order. The only stumbling block before our target is the back side of a former 2-month uptrend at 1.3135, but that trendline has already been violated a few times at the end of last week so we feel that its potency as a resistance level is waning. Should the momentum pick up pace, next resistance levels above are eyed at 1.3227 (10 Aug highand 200-day moving average) and 1.3333 (6 Aug high). Should the layer of bids between 1.3000-30 be overwhelmed, next supports are eyed at 1.2930 (horizontal breakout level), then 1.2780. Key supports below there are eyed at 1.2625-44 (10 Sep & 31 Aug lows), 1.2588 (24 Aug low and range floor), and finally 1.2522 (13 Jul low).

GbpUsd GBPUSD has continued to carve out a steep 1-week uptrend since rebounding off 1.5345 support, with the pair hitting a short-lived high of 1.5730 on Friday. For the time being, sellers are blocking the route beyond (recall what a stubborn resistance level 1.5715 was during the middle of August), and the subsequent liquidation means there is now a risk of the 1-week uptrend breaking down around 1.5650. If it does, then expect another trip back down to 1.5490 key support, and in all probability a period of range trading between 1.5490 –1.5730. We feel that there will be decent buying interest down around 1.5490 (especially as it is buttressed by the back side of the former 3-week downtrend at 1.5460), so we would be buyers on dips there, expecting another test of 1.5715 and perhaps even a break higher to 1.5910 (10 Aug high). If we are wrong and 1.5490 collapses, next level on the downside is eyed at 1.5235, before major support kicks in at 1.5115-25 (50% fibonacci level and 21 Jul lows).

UsdJpy The hangover from last week’s BoJ intervention is still lingering in the market, and understandably the bears who got burnt have been wary about re-entering the market once again -meaning USDJPY has stayed buoyed above 85.20 support since the middle of last week. Notably, even with the bears wounded, we have not yet seen much appetite for a move higher from the bulls, as 85.90 (19 Aug & 30 Aug resistance)remains the glass ceiling on price action. Ahead of tomorrow’s FOMC meeting the price action is likely to be subdued and range-bound between 85.20-90, but in the coming week we feel there may be a few more shorts to be squeezed out before another dip lower can materialize. The 3-month downtrend channel is conclusively broken (the back side of that downtrend now seen at 84.70) and should we break above 85.90, the focus then turns to 86.50 (5 Aug high), 86.90, and 88.07. However, it’s worth emphasizing that in spite of our very short-term bias for a move higher, our medium-term forecast is for the pair to come under renewed downward pressure as US yields languish. On the downside the key landmarks are 82.87 (pre-intervention low), weak 2-month downtrend support at 81.90, but then nothing except psychological supports at 82.00 and 81.00.

UsdChf USDCHF still looks rather choppy as bulls and bears battle over this highly sensitive area around parity, but ultimately we think that deeper moves lower are on the way and our fundamental strategists eye a year-end target around 0.9800. An ugly squeeze post-SNB last week punched out 1.0065 resistance and was only halted by resistance at 1.0185; however we are now pointed back lower and after the usual sluggish Monday is out the way then expect the bears to get a grip once more. Last Tuesday’s sell-off already knocked out the 3 Dec 2009 low of 0.9960, meaning the only support level eyed below there is the 26 Nov 2009 low of 0.9920. Bulls should continue to struggle to drag the pair back up through 1.0185 and more distant resistance levels are still eyed at 1.0278 (10 Sep high) and 1.0350.

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