Risk Appetite Suppressed Ahead Of Key Data Events Due This Week
After ending last week in depressed fashion, risk sentiment took another knock this morning after reports that a magnitude 6.0 aftershock shook Christchurch in New Zealand causing unspecified damage to the city centre. Understandably, NZDUSD plunged from 0.8215 to low 0.8100 levels; with the price action exacerbated by the Australian public holiday and generally poor liquidity. The data calendar for the majors is incredibly light today, with most of Europe also out of the office this morning. Nevertheless, the remainder of the week promises both the BoJ and SNB’s latest interest rate decisions, as well as some key inflation data from the UK and Europe. First up, the BoJ is expected to maintain interest rates at ultra-low levels between 0.00% and 0.10%; but after the unexpected drop in factory orders, some analysts are predicting that the central bank will choose to initiate another bout of asset purchases – a move that will put further pressure on yields. What this means for the currency is altogether less clear, as the JPY has long defied conventional arguments for why such action should cause currency weakness; and indeed USDJPY remains at historically low levels around 80.00. Another highlight of the week will be the latest UK consumer price data for May which will also be released on Tuesday. Consensus is looking for the headline CPI figure to remain unchanged at 4.5% YoY; some 2.5% above the BoE’s target, and 1.5% above the upper threshold set by the Treasury. However, thus far the MPC has refused to budge UK interest rates in the face of searingly high inflation, instead choosing to focus on the current uncertainty surrounding growth, and the conviction that future CPI prints will start to fall. We still believe this is a dangerous strategy and that policymakers will soon begin to lose credibility if they do not act soon on inflation expectations. In the meantime, the UK’s May retail sales will be published on Thursday. On Thursday, markets will await the SNB’s latest interest rate decision; and whilst there are no expectations of a change in rates (which currently stand at 0.25%), it will be interesting to see how the central bank reacts to the recent strength of the CHF and the alarming dip in CPI to 0.0% last week. Clearly, policymakers will be keen to avoid deflationary scenarios, so the strength of the franc in recent months will not have been a welcome development. However, short of intervening in the currency markets (which, as we saw the last time, proved to be a costly and ultimately futile pursuit), there is very little that can be done to reverse the current trend of CHF strength. We do however believe that the SNB will want to be seen acting in some way, so expect some verbal intervention this week.
23:01 GBP RICS house price balance, % May; exp: -20, prev: -21
The Risk Today: EurUsd 10/06/11: Just as we had hoped for in yesterday’s report, EURUSD plunged through 1.4557 support (thereby activating a head & shoulders pattern on the hourly chart) and is now plummeting towards 1.4450 levels. As a reminder, the target of this head & shoulders is approximately 1.4425, and given the excellent progress of the pattern in the past day, we are confident about bringing our stop down to our 1.4555 entry – thereby ensuring a risk-free bet from here. The only support ahead of our target is 1.4453 (3 Jun low), but should we overshoot that mark, next levels stand at 1.4309 (1 Jun low), 1.4258 (30 May low) and 1.4128 (100-day moving average). Expect sellers above at 1.4557 (neckline of the H&S pattern), 1.4653 (yesterday’s high), and 1.4696 (7 Jun high).
GbpUsd 10/06/11: As EURUSD’s collapse got under way yesterday, GBPUSD also suffered a turn for the worse, and we have now seen the very short-term uptrend channel broken down and the pair plunge towards 1.6250. Nearest supports now stand at 1.6274 (26 May low), 1.6242 (100-day moving average), 1.6133 (25 May low) and then the critical 1.6060 support (24 May low). Key resistance in the meantime stands at 1.6383 (today’s high), 1.6472 (Tuesday’s high), closely followed by 1.6498 (1 Jun high), and 1.6574 (4 May high).
UsdJpy 10/06/11: USDJPY has managed to drift a little higher today as the USD has strengthened across the board; nudging to highs of 80.46 and managing to carve out a bullish engulfing candlestick on the daily chart. The presence of the bullish engulfing pattern does suggest that the bulls have regained dominance and therefore that further upside momentum may be on the way this session, however we feel that any rally will be merely a corrective move within the more significant downtrend. Next resistance levels above are seen at 80.46 (yesterday’s high), 81.01 (3 Jun high), 81.33 (2 Jun high), 81.78 (31 May high), 82.79 (27 Apr high), 83.27 (18 Apr high), and 83.79 (15 Apr high). Our base case scenario is that the pair ascends no further than 80.70-81.00 (so that would be a great area for short entry), and then we resume our focus on the downside. Nearest supports are seen at 79.57 (5 May low), 78.26 and (17 Mar low), before the all-time low 76.40.
UsdChf 10/06/11: The USD enjoyed a small resurgence against most of its peers yesterday, and the CHF was no exception; sweeping up to highs of 0.8443 and remaining elevated since. Up until yesterday afternoon we had been playing a bearish flag pattern on the hourly chart that began on the break below 0.8415, but in our view, this latest surge has now negated that pattern and we have exited the position for a negligible loss. Next levels on the topside stand 0.8453 (2 Jun high), 0.8547 (31 May high), and 0.8595 (rebound highs seen 27 May). Meanwhile supports are expected at 0.8397 (today’s low), 0.8328 (6-7 Jun lows), then purely psychological supports like 0.8300, 0.8200 etc.
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