Portugal Turns to the EU for a Bailout

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

In Asia, the BoJ kheld the policy rate unchanged at 0.1% as was universally expected. However, the bank has decided to launch a new loan facility with a ceiling size of JPY 1 trn, for banks located in the earthquake damaged region. Let’s just move right to the critical issue today. European traders walked into headlines that Portugal would finally (cause we all knew they would) seek bailout assistance from the EU.

Since everyone knew this was the eventual play, it was already priced into the market with EURUSD trading down slightly to 1.4286 from 1.4340 (contagion fears are just non-existent right now). Even now, downside pressures seem to be waning and we don’t expect much more downside. The trigger was a this week’s bill auction that showed borrowing costs continue to rise and essentially boxing the country out of the capital markets with residual funding needs. Peripheral yields spreads continue to tighten and CDS are unchanged. Overall details on the bailout are light but with the expected concession that capital will be eventually provided.

While the USD was the broad gainer, the lone exception in the G10 was the AUD. A better than expected employment provided 37.8k jobs and showed unemployment fall to 4.9% as the AUDUSD rallied sharply to 1.0482. The clear highlight of the trading day will be the ECB rate announcement and accompanying press conference. We expect a 25 bp rate hike putting the policy rate at 1.25%, deposit rate unchanged at 0.25% and marginal lending rate raised 50bp to 2.25%.

Judging from current pricing, this move is already fully priced in and it would be very un-ECB like to surprise the market (considering the Portuguese news). So the question on everyone’s mind is will Trichet us the term “vigilance” to signal a rate hike in May as well? We doubt the ECB president will go that far in anchoring the expected rate, however, he will retain a very hawkish tone which will clearly be interpreted at a sign that this hike will not just be a one off. We see the current long EURUSD position as overstretched but the selloff due to the Portugal news has provided a release in our mind and clears the way for a minor dip then further upside.

08:00 NOK Industrial Production sa (Feb)
10:00 EUR German Industrial Production sa (Feb)
11:00 GBP BOE Asset Purchase Target (Apr) GBP bn n/a 200
11:00 GBP BoE Announces Rates hold .50%
11:45 EUR ECB Announces Interest Rates 25bp to 1.25%
12:20 USD Fed’s Lacker Speaks
12:30 EUR ECB’s Press Conference
12:30 USD Initial Jobless Claims (Apr-2)

The Risk Today: EurUsd EURUSD’s upside progress has accelerated over the last 24 hours, and the momentum pushed us briefly through the ceiling of the current 2-week uptrend channel to highs of 1.4349. Our bullish bias remains firmly in place, but given our lofty location within the uptrend channel, we would not be surprised to see a little profit taking kick in today. Indeed, it would be healthy to see a dip towards at least the middle of the channel (1.4200-50) before more upside ensues. Above yesterday’s 1.4349 high, the next resistance level of note is 1.4415 (19 Jan 2010 high), before another long gap until 1.4580 (13 Jan 2010 high). Buyers on dips are expected towards Tuesday’s low 1.4152, followed by further pockets of demand at 1.4140-45 (lower edge of the uptrend channel), 1.4023 (28 Mar low), 1.4000 psychological support, 1.3980 (18 Mar low), and 1.3856 (15 Mar low).

GbpUsd After seeing the bullish engulfing candlestick pattern on the daily chart yesterday, we watched as the bulls took GBPUSD to fresh highs of 1.6364; but momentum was insufficient to launch an attack on the 1.6400 level. Since then we have consolidated lower, but still feel that the pair’s most likely direction from here is higher. As previously discussed, the key level overhead for the bulls to challenge will be 1.6400 where strong psychological resistance also coincides with the 22 Mar highs. Should we manage to break higher then next resistance is eyed at 1.6458 (19 Jan 2010 high), 1.6516 (7 Dec 2009 high) and 1.6746 (25 Nov 2009 high). Should we take another dip lower, then first support is seen at 1.6257 (yesterday’s low), followed by 1.6170 (where the lower edge of a new 1-week uptrend channel comes into play), 1.6092 (Tuesday’s lows), 1.5973 (Friday’s low), and 1.5937 (28 Mar low).

UsdJpy USDJPY has been in consolidation mode around 85.00-50 levels for the last couple of sessions, but despite the lack of new highs to speak of this morning, we are still respecting the reigning 2-week uptrend channel. The lower edge of that trend channel has crept up to 85.10 levels today, so it will be important to see what the reaction is around there. Ideally for the bulls, the uptrend support should attract buyers who will then send us on another leg higher; but it’s worth noting that this has already been a steep ascent of some 5 big figures with very few pullbacks, so there is a risk of exhaustion leading to a break of the uptrend. If that takes place, watch for buyers on dips to be clustered ahead of 83.85 (Monday’s low), 81.55 (last week’s low water mark), and 80.51 (18 Mar low). Should we resume our upward trajectory (either immediately, or after a correction lower), next level of resistance to tackle will be 85.93 (16-17 Sep highs), then 86.89 (2 Aug high), 88.12 (28 Jul high), and 89.16 (12 Jul high).

UsdChf All change for USDCHF today as we have not only witnessed a breakdown in the 3-week uptrend channel, but also a bearish engulfing candlestick on the daily chart – both of which are pretty good signs that further selling is on its way. Next vulnerable level on the downside is the highly significant 0.9125-0.9140 area where a couple of sell-offs were caught last week. Should we negate that pocket of demand then watch for a test of 0.9030 (24 Mar low), 0.8964 (17 Mar low) and the all-time low 0.8896. Resistance levels now stand at 0.9235 (back side of former uptrend), 0.9296 (yesterday’s high), 0.9340 (1 Apr high), 0.9369 (9 Mar high) and 0.9392 (23 Feb high).

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