Gold Surges but FX Remains Range-Bound

March 3 2011 by Spencer McKay in Forex Release |No Comments

Regional Asian markets sold off today and oil prices moved sharply higher as markets remained focused the situation in the Middle East / North Africa. Risk sentiment dropped overnight as news on MENA tensions including speculation of all out civil war in Libya, growing tensions in Saudi Arabia and reports that Saudi tanks are rolling into Bahrain all carried over into the Asian session reversing the recent rally in stock. The situation remains highly uncertain. EURCHF fell down to 1.2760 while USDJPY moved back to 81.90. Gold traded up to a new record high at $1,434.38 as Brent crude climbed to $116.76. Interestingly, the S&P is now sitting on the 6 month bullish trend support, a break a lower could trigger further downside. With all eyes now focused on events in MENA, yesterday’s strong PMI data were ignored. But to briefly recap – the number showed that the global recover was broadly on track. Even the US Federal Reserve Chairman Ben Bernanke told Congress that Tuesday failed to illicit any real market response. He stated that a prolonged rise in oil prices would pose a danger to the economy. But he said a more likely outcome is a temporary and modest increase in consumer prices, not runaway inflation. Bernanke also defended the Fed’s $600 billion bond-purchase program which hints that should the economy head south, further easing could be in the cards. He did express confidence that economic growth would increase this year – though worried that it won’t be sturdy enough to hastily lower unemployment, now at 9.0%. Today’s ADP will provided the entertainment for the day and provides plenty of fodder for analysts to debate Friday’s upcoming payrolls figures. The characteristic of the EU crisis is that it will come and go as economic determination continues making debt serving hard and maybe impossible. But there will be periods where it will seem that the EU is in manageable position. That said, S&P stated that its rating on Greece and Portugal would remain on credit watch negative which is a start reminder that the problem hadn’t just floated away. For Greece’s rating, it would heave heavily on the terms of the new comprehensive European rescue mechanism and further compliance to existing EU/IMF terms. While Portugal is seeing further economic termination and might have to resort to EFSF and IMF funding, the terms would define any rating adjustment. This week’s economic data has been broadly supportive with PMIs coming in strong while CPI hit 2.4% (in line with expectations) but well above the ECB upper target band. There is growing expectations that at tomorrow ECB rate announcement Trichet will again sound hawkish which to equate to the EUR firming on interest rate expectations. In New Zealand an unexpected bout of transparency cause the NZD to aggressively sell off. Prime Minister Key stated that he would support a cut in the OCR, and that there is a high probability the nation slips into a recession in the first half of this year. AUDNZD rallied to a 19 year high surging through 1.3650 resistances. On the EM front yesterday Russia widened the RUB trading band from 32.95-36.95 to 32.45-37.45. In addition the central bank sounded very hawkish stating inflation is “extremely worrying” and that all monetary tools will be use to lower build pressure. Recently there has been more willingness to accept a strong currency since last year’s “Currency Wars”. Many EM have allowed some level of appreciation but nothing in the realm of offsetting the recent surge in commodity prices. As inflation continue to mount especially in the EM Asia it will be very interesting how much flexibility these nations allow their currencies. We still expect that there is excellent opportunity for further appreciation in EMs. That’s say we suspect that FX will remain range bound with event s in MENA, impending ECB rate meeting and then Friday US payrolls data keeping directional activity to a minimum.

09:30 GBP Construction PMI Prior 53.7 Exp 56.0
10:00 EUR PPI Prior 0.8 M/M 5.3 Y/Y Exp 1.4 M/M 5.8 Y/Y
13:00 PLN Polish Interest rate decision Prior 3.75 Exp 3.75
13:00 USD Hoenig (FOMC Non-Voter) Speaks on Foreign Relations
13:15 USD ADP Private Payrolls Prior 187K Exp 185K
15:00 USD Bernanke speaking before the House Financial services Committee
19:00 USD Beige Book released
19:15 USD Lockhart (FOMC Non-Voter) Speaking on the US Economic outlook and US Monetary policy ( incl Q&A)

The Risk Today: EurUsd After an unsuccessful attempt on the 1.3861 (2 Feb resistance level) yesterday, EURUSD had a rather subdued afternoon that has now led us back to lows of 1.3744 this morning. Overall however, our outlook has changed very little on this pair. With the 2-week uptrend channel still going strong there’s good reason to believe that we can challenge that 1.3861 level once again today, and potentially go on to the other nearby resistance 1.3896 (61.8% fibonacci retracement of 1.5145 to 1.1876). We remain confident in our medium term view that EURUSD has the support for an eventual challenge on the psychologically important 1.4000 level. First support is 1.3744 (today’s low), 1.3705 (24 Feb low which caught the sell-off on Monday), 1.3635 (last seen late on 22 Feb), 1.3528 (22 Feb low) and 1.3460 (15 & 16 Feb low). Indeed, we still feel that 1.3460 would be a decent area to add to longs, but would start to reconsider our bullish bias on a test of the neighbouring supports at 1.3428 (14 Feb low) and 1.3397 (20 Jan low).

GbpUsd At last, GBPUSD managed to break above 1.6299 resistance yesterday –a resistance level that blocked numerous rallies ever since it was first defined on 4 Nov last year. The subsequent follow-through however has been disappointing, with the pair only getting as far as 1.6329 before slumping back towards the lower end of 1.6200. We remain resolutely bullish over the medium-term, but in the short-term we are realistic that it could be a rocky ride –especially considering the shooting star candlestick printed on the daily chart yesterday which suggests a correction is coming. If we do manage to overcome 1.6299 once more (a scenario made all the more possible by yesterday’s achievement) then the route is cleared for a run at 1.6460 (19 Jan 2010 high) and 1.6515 (7 Dec high) –a very exciting prospect indeed for us bulls. Near term support is now eyed at 1.6216 (today’s lows), 1.6110 (lower edge of 2-month uptrend), 1.6070 (17 Feb low), 1.6031 (Friday’s low) and 1.6000. Only a break of that 1.6000 level would force us to reconsider our bullish bias from here.

UsdJpy Rather choppy, directionless trading in USDJPY yesterday, but we still believe that a short-term correction higher is on the cards. The reason for this mild bullish bias is that a double bottom pattern became activated on the hourly chart yesterday (by a break above the neckline 82.05), and the target stands at 82.50 (measured as the depth of the 2 lows from the neckline, added to the point of break out). The slump back below the neckline today is a little disappointing, but we feel it’s safe to now set a stop around yesterday’s sell-off low 81.80, and continue to look for resumption of the buying pressure until 82.50 is met. The only resistance levels ahead of our target is yesterday’s high 82.24, but beyond 82.50 we also note resistance lies at 82.85-90 (23 Feb rebound highs), 83.55 (18 & 21 Feb highs), and 84.00 (roughly the 16 Feb high). On the downside there are multiple technical support littering the downside; the first is now 81.80, then 81.62 (24 & 28 Feb lows), 81.13 (4 Feb low), 80.94 (31 Dec and 2 Jan lows), 80.54 (9 Nov low), 80.24 (31 Oct low) and then the all-time low of 79.75 from 1995.

UsdChf Very low volatility witnessed in USDCHF of late, with the pair barely covering more than a 60 pip range all week. As discussed yesterday the pair has broken above a 2-3 week downtrend channel around 0.9315 –but it’s worth noting that this proposed channel has only been touched on a couple of occasions so carries pretty low predictive value in our minds. On the topside, sellers will probably start to precipitate around 0.9320 (25 Feb & 1 Mar ceiling), 0.9390 (23 Feb high), 0.9505 (22 Feb high), 0.9540 (18 Feb high), and 0.9600 (17 Feb high). We are still hanging onto short positions for now, but would be forced to concede defeat if we get another push above 0.9320. Only resistance levels of note are 0.9260 (Monday’s low), 0.9234 (all-time low seen 24 Feb) before we once again are reliant on mere psychological levels at 0.9100, 0.9200 and 0.9000.

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