Markets Cautions Ahead of FOMC Minutes

October 10 2010 by Spencer McKay in Forex Release |No Comments

The US QE debate continues to drive asset prices – specifically Gold up and USD down. While the recent discord has revolved around the size of the Fed’s potential stimulus spurred by the disappointing ADP figures, we are hearing more dissenting opinions which are bringing a level of sanity to earlier predictions. The Kansas City Fed President advanced that additional QE would be more negative than positive while the newly elected Fed-Dove Yellen sounded more cautions asserting that overly loose monetary policy would encourage excessive risk taking.

In addition, a slew of prominent investors, including Soros, Buffet and acclaimed analyst S.Roach, noted that monetary policy easing didn’t work the first time around and will fail again plus it may plant the seeds for further problems down the line. We agree heartily that the current situation demands fiscal stimulus rather than monetary stimulus as excess capital seems to be getting stuck within banks and not trickled down as hope.

Fiscal stimulus would immediately go right into addressing weak labor markets. We have a growing opinion that the possible US QE has been fully priced in (asset purchases quarterly of $100bn to $200bn) at this point and possibly overshot the actual event. And suspect that further USD firming is possible for the short term. However, for the longer term there seem little doubt that the US policy will remained at near zero for the foreseeable future and should encourage USD funded buying of risk correlated trades (i.e. Gold). This growing question will place additional focus on tonight’s FOMC minutes. While no surprises are expected, it will be critical to see exactly how close the committee is to QE2 and risk to reward trade off.

We suspect that ongoing concerns over the slowing recovery will overshadow any slight recovery. Further, the weak data released last week should erode the timeliness of the improvement argument.

In Japan we continue to hear rhetoric but no action yet. Noda and economic minister Kaieda both stated that they are watching FX markets with interest and would take decisive steps, including FX intervention, should they feel it necessary. With US yields under pressure and will remain so until Nov meeting and potential QE2 we don’t see any sustainable rally in the USDJPY. While Japanese policy makers might feel that can dominate the Forex market, historically including the most recent failed FX intervention clearly illustrates that they can’t. It would be foolish for Japan to unilaterally take on the markets and we rallies in USDJPY opportunities to build short USDPY positions.

Today’s UK CPI will be the European event of the day. It’s critical that inflation begins to come down in order for the BoE creditably take a easing stance.

However, so far inflation has remained stubbornly high and continued deviation from the MPC forecasted inflation path will further erode expectation of additional asset purchases (markets will not see latest MPC vote until Oct. 20th). A weaker then expect CPI reading will lead to a rapidly weaker Sterling (and vice versa). And what has become a foot note in the macro game the markets risk appetite for EU sovereign risk will be tested with Greece entering the capital markets with a short term auction (900 million 26-week T-bill auction, last 4.82% yield.) While we suspect plenty of demand it will come at a important price for those of us that are looking ahead a few chapters.

07:30 SEK Sep CPI, +0.6% m/m, +1.3% y/y exp; prior unch, +0.9%.
07:30 SEK Sep CPIF, +0.7% m/m, +1.7% y/y exp; prior unch, +1.4%.
08:30 GBP Sep CPI, +0.1% m/m, +3.1% y/y exp; prior +0.5%, +3.1%.
08:30 GBP Sep RPI, +0.1% m/m, +4.4% y/y exp; prior +0.4%, +4.7%.
08:30 GBP Sep RPIX, +0.1% m/m, +4.4% y/y exp; prior +0.4%, +4.7%.
08:30 GBP Aug trade balance, GBP8.1 bln deficit exp; prior GBP8.667 bln deficit.
08:30 GBP Aug – non-EU, GBP 4.5 bln deficit exp; prior GBP4.8 bln deficit.
15:45 USD Kansas City Fed President Hoenig (FOMC voter)
18:00 USD FOMC minutes released

The Risk Today: EurUsd As we outlined yesterday, there are ample arguments stacked up for a correction in EURUSD, and that short-term correction now appears to be underway. The 1-month uptrend is now well and truly broken to the downside (that trendline is running away at 1.4090 and climbing), and after the 2 failed attempts to challenge 1.4025 resistance, we now see a potential double top formation on the hourly chart. Should that pattern become activated by an hourly break below 1.3835 then the target below is estimated to be 1.3635; almost identical to the 5 Oct low we have marked on the chart as a potential area of support. Given that we already believe bids will clustered around that 1.3635 level, we would therefore chose to set a more conservative target around 1.3650-60 to ensure the bulls don’t beat us to the punch. Further levels of support are eyed below at and 1.3560 (30 Sep low), 1.3466 (38.2% fibonacci retracement of 1.6038 to 1.1876) and 1.3380 (28 Sep low). Should the bull trend resume after this correction, then the same notable resistance levels above still apply: 1.3957 (50.0% fibonacci retracement of 1.6038 –1.1876), 1.4025 (recent double-top highs) before the 25 Jan highs of 1.4195.

GbpUsd We’re geared up for an exciting morning in GBPUSD (and indeed other GBP-crosses) ahead of the crucial UK CPI release at 08:30 GMT. Like the picture for EURUSD, GBPUSD has broken down through its 1-month uptrend support, which leaves it vulnerable to a near-term correction –but with such a major risk event due imminently, this is anyone’s game. Should the CPI figure come out in line or below expectations then the scenario should play out as for EURUSD; i.e. a bearish correction to next supports at 1.5830 (7 & 8 Oct lows), with the possibility of an extended move to 1.5750 (4 & 5 Oct lows), 1.5670 (30 Sep low) and 1.5646 (50-day moving average). If we get an upside surprise in the CPI though, then it’ll be a mad race to go long; the 1.6000-20 zone has capped the pair since early February so that’ll be the key level to watch. If the bulls finally manage to break above there, then next levels above are anticipated at 1.6070 (3 Feb high), and the upper edge of the 1-month uptrend channel at 1.6245.

UsdJpy We’re still in a choppy consolidation period for USDJPY after the pair hit 15-year lows of 81.38, with the pair locked in a 50-60-pip range all session. As discussed in previous reports, we are short from the bearish flag pattern on the hourly chart, having sold around 82.10 and watched with relief as the correction yesterday to highs of 82.35 did not quite reach our stop of 82.40. We still feel that the prevailing downtrend is worth gambling on, so stick to our guns on this trade strategy, aiming for a target below of 81.25. Obviously, given that the new 15-year low of 81.38 lies just above our target, we will actively manage this one should the next plunge struggle to get through the bids there, and potentially take profit a little earlier if the bears don’t look like they’re able to push through that price floor. Should we break below 81.38, then next support expected is the 80.00 major psychological level, followed by 79.76 where the pair bottomed out in 1995 –the last time we were down at such depressed levels. Plenty of supply is still lurking up above us; first up will be around 82.87 (break-out level), 83.15 former support, then 84.00 (5 Oct high), 84.47 (50-day moving average), 85.40 (24 Sep high), 85.90 (ceiling of supply since mid-August), 86.50 (5 Aug high), 86.90, and 88.07.

UsdChf A slow grind higher in the past 24 hours for USDCHF, with 0.9710 former support continuing to act as strong resistance (having rebutted 2 previous attempted rallies). This does mean that the bears are likely to have built some decent stop loss orders up above there, and given the market’s growing mood for a correction, we watch diligently for a potential break higher. The 0.9710 horizontal resistance also coincides with a vibration trendline of the current downtrend channel which should bolster its effect, but if it capitulates, we would open the way for a move to 0.9845 (1 Oct high), then 0.9920 (26 Nov 2009 low). It still seems unlikely that we see levels anywhere close to parity in the near term, but if we do then it would be a fantastic level to sell into, protected by resistance at 1.0120 (20 Sep high), 1.0185 (17 Sep ceiling), then 1.0278 (10 Sep high) and 1.0340 (last seen on 24 Aug). Should the downtrend resume, the only landmarks on the downside are this week’s opening lows around 0.9590 and the 7 Oct all-time low at 0.9556. Our fundamental strategy view is still looking for a year-end target of 0.9500.

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