USD Falls Marginally in Asian Trading

May 17 2011 by Spencer McKay in Forex Release |No Comments

The lack of meaningful news flow for a second day gave risk-correlated FX trades the opportunity to drift higher while the USD weakened slightly. However, none of the overall moves were technically significant. EURUSD grinded higher to a meager 1.4287 Asian high, while USDJPY stayed within its micro-range of 80.80 to 81.55. US economic data failed to impress – building permits, housing starts and industrial production all missed expectations, keeping Wall Street in the red. Once again the soft data was not earth shattering or really surprising. Stocks declined and treasuries shifted further out onto the curves.

EU Council President Von Rompuy’s comments and an FT article provided similar headlines and helped the USD weaken marginally. Von Rompuy stated that Europe’s economic fundamentals remained sound and that the EUR was still a very strong currency. In addition he stated that the USD’s supremacy as the world’s reserve currency would end.

According to the FT article “World Bank expects the US dollar to lose its solitary dominance in the global economy by 2025.” Not to take away from the Financial Times, but we don’t think the article really means all that much. Remember, we were told that by 2000 we would be traveling in a flying cars. 2025 is far away in financial terms and a lot can happen in-between.

Tuesday’s EcoFin meeting ended with no final decision on Greece with the highlight of the meeting clearly being Juncker’s introduction of the word “Reprofiling” to capital markets. Juncker also implied that “soft restructuring” could be a possibility (the first time an official of this stature has mentioned the strategy), should reform measures move forward including very heavy-handed privatization. “A cross-party consensus and the endorsement of the EU/IMF program, its objectives and policies, is a necessary condition concerning the Greek program. It is indeed crucial that the Greek authorities will announce decisive measures to ensure that the path of fiscal consolidation is met and that the privatization program is now launched without any delay and then fully implemented”. While some officials are warming to the idea – the ECB and France are still very publicly opposed to the solution.

The final bit of news this morning was UK CPI numbers that rebounded to 4.5% vs. 4.1% expected. Core inflation climbed to 3.7%. Clearly the dip we saw last month was a one off rather than a start of a trend as we had expected. Today’s BoE policy meeting minutes are expected to be released without anything shocking. However, given the worrying inflation data we just saw – it will be interesting to see how the BoE is prepared to balance rising inflation with fragile growth data. The cable rallied on the inflation numbers to 1.6305 as the number slightly rekindled hope of a rate hike. We suspect that the stubborn inflation level will have the MPC members uncomfortable and we should begin hearing the doves begin to sing a different tone. However, there are rumors that BoE Weale has backed away from his rate hike vote in May, which would throw a wrench in the non-event BoE Minutes today.
The highlight later today will be tonight’s FOMC meeting minutes release. Overall we suspect that the FOMC to reiterate the need to continue its reinvestment policy into H2 and possibly some guidance on the timing and sequencing of an exit strategy.

09:30 GBP MPC Minutes Bank Rate Vote Prior 6-3 Exp 6-3
09:30 GBP MPC Minutes QE Vote Prior 8-1 Exp 8-1
09:30 GBP Average weekly earnings Prior 2.0 Exp 1.2
09:30 GBP Core Average weekly earnings Prior 2.2 Exp 2.2
09:30 GBP Claimant count Prior 0.7 Exp -4.0K
09:30 GBP Unemployment Rate Lst 7.8 Exp 7.8
10:00 EUR Construction output Prior -0.7 M/M 3.5 Y/Y
19:00 USD FOMC Minutes of the April 26/27 meeting

The Risk Today: EurUsd Interestingly, in spite of widespread skepticism about the nature of Greece’s debt “re-profiling”, EURUSD has pushed higher, breaking above the 2-week downtrend channel and hitting a high of 1.4287. With the downtrend channel negated, the risks are tilted towards further upside momentum in the coming sessions, and therefore we focus on next resistance levels at 1.4339 (last Friday’s high), 1.4441 (9 May high), and 1.4588 (6 May rebound high). If we see a re-test of the former downtrend channel (now seen at 1.4210), expect buyers to step in and provide some support, perhaps a rebound higher. Next key levels on the downside stand at 1.4121 (yesterday’s low), 1.4023 (25 Mar low), 1.4000 (psychologically important level), 1.3980 (17-18 Mar lows) and 1.3941 (100-day moving average).

GbpUsd Yesterday’s UK CPI number prompted a sharp spike higher for GBPUSD (high 1.6303), but the burst of buying proved to be very short lived, as the pair has now returned to the lower echelons of 1.6200. Overall, the relief rally has done nothing to sway our view that GBPUSD price action is still very much in a downtrend, so our expectation is that sellers will continue to create headwinds to a recovery. Supports are eyed at 1.6147 (last Friday’s low), 1.6136 (100-day moving average), 1.6092 (5 Apr low), 1.6000 (psychological support), 1.5973 (1 Apr low) and 1.5937 (28 Mar low). Resistance levels are seen at 1.6309 (last Friday’s high), 1.6380 (12 May high), 1.6517 (11 May high), 1.6574 (4 May high and peak of the second shoulder), 1.6661 (3 May high), and 1.6766 (25 Nov 2009 high).

UsdJpy Despite USDJPY paring back from its 81.78 highs over the past 24 hours, we still believe this pair is being guided by a short-term uptrend channel (defined by the 6 & 11 May highs), and therefore expect that good support should start to come into play soon to drive the pair back up. Key resistance levels on the topside are seen at 81.78 (yesterday’s high), 81.95 (upper edge of current uptrend channel), 82.78 (27 Apr high and 200-day moving average), 83.26 (18 Apr high), and 83.79 (15 Apr high). Expect buyers on dips to materialize around 80.98 (today’s lows), 80.16 (10 May low), 79.57 (5 May low), 78.26 (17 Mar low), and ahead of the all-time low 76.40.

UsdChf The potential head & shoulders pattern we highlighted in yesterday’s report has now become activated with the move through 0.8800 support (roughly where the 13 & 16 May lows are marked) , and so now we have gone short and are aiming for a target around 0.8860. Supports from here stand at 0.8784 (11 May low), 0.8708 (10 May low), and 0.8676 (6 May low). Below our 0.8660 target the only support remaining will be the all-time low 0.8554 (recorded on 4 May). On the topside, next resistance comes into play at 0.8883 (yesterday’s high), 0.8941 (16 May high), followed by 0.9011 (19 Apr high) and 0.9105 (11 Apr high).

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