Forex News And Events:
The buzz this morning is China’s sudden lack of interest in US debt and renewed concern over some EU economies. Looking at market behaviors in Forex, stocks and bonds verse the economic data and global events coming out, it is becoming increasingly difficult to identify a comprehensive trading theme. Perhaps it’s a function of news flow hitting the liquidity markets with exaggerated reactions distorting prices. Overall, we’re not really sure. Due to the uncertainty, traders should remain cautious of building large positions around any one asset pair or based upon a single theme. We are going to remain loose and reactive to market movements.
Recently released Chinese reserve data showed that their holding of US treasuries dropped by $24 bn in June to $844 bn. As China is the largest holder of US debt, the apparent new diversification strategy may have a direct effect on future US rates. We suspect that the trend will continue as China further drifts toward a more diversified portfolio. Fortunately for the US, Japanese and UK participants still have substantial appetite for US debt.
In the EU, credit-default swap rates are rising, although lower than in the Spring, as both aggregate growth and domestic banking concerns weigh on market confidence. Ireland is set to issue €1.5 bn worth of new 4 & 10 year bonds today at a cost which will not be debilitating to the island nation. As the EURUSD remains in a tight range, the Irish auction’s success or failure could easily give the pair a sustained direction. Strong German GDP could not offset worry surrounding the PIIGS and market gossip is that today’s German ZEW will print significantly higher than the expected 20.0 figure. The rumor mill surrounding the German figure has fomented a mid-summer-week anxiety not seen in some time. For those trading the EURUSD, keep an eye on the German ZEW and the Irish auction for fundamental signals.
In the UK, markets will be examining June CPI; consensus was correct in looking for the year-to-year figure to pare back to 3.1% from last month’s 3.2% print. This reading failed to deviate higher, but we are cautious moving forward. The BoE’s prediction that inflation will naturally easy has many, including ACM, guarded as we remember the historically sticky relationship between inflation and price pressures in the UK. BoE Governor King will once again have to write a letter (#7) to the Chancellor of the Exchequer explaining why inflation is at the high end of the BoE’s inflationary target.
Tomorrow will we get the release of the BoE’s minutes from its most recent meeting. Recall there were no changes to monetary policy but if it’s revealed that further members joined Sentence in voting for a rate hike, then expect the Pound to rally sharply. In fact, we feel that such a outcome would be a game changer for the GBP and that GBPUSD would shortly be testing (if not breaking) the 1.6000 barrier in the near-term.
Finally in Japan, markets are actively discussing what policy maker’s next move will be. Verbal intervention has had a limited effect in backing off the Yen bulls and there is growing chatter that policy makers may yield to market forces and begin to embrace a strong Yen. Recognizing that rhetoric is not moving the Yen, Japanese Economic Minister Arai confirmed that the JPY rise cannot be halted with verbal intervention alone. Strong comments from the Minister of Finance warned that intervention is nearer than the market currently anticipates and according to the Nikkei wire, Prime Minister Kan and BoJ Governor Shirakawa are going to meet on August 23rd to discuss the Yen’s strength and possibly coordinate retaliatory action.
Today's Key Issues (Time In GMT):
00:00 EUR Ireland to auction 1.5 BLN EUR of 4-year and 10-year debt 08:00 EUR C/A 08:00 EUR Invest Flow 08:30 GBP CPI 08:30 GBP RPI 09:00 EUR GER ZEW 21.2 prior 12:30 USD Building permits, thousJul 578 exp, 583 prior 12:30 USD Housing starts, thous 560 exp 549 prior 12:30 USD PPI % m/m (y/y) 0.2 (4.1) exp, -0.5 (2.8) prior 12:30 USD Core PPI, % m/m (y/y) 0.2 (1.3) exp, 0.1 (1.1) prior 13:15 USD Industrial production, 0.5 exp , 0.0 prior 13:15 USD Capacity utilization, 74.5 exp, 74.1 prior 16:30 USD Minneapolis Fed President Kocherlakota (FOMC non-voter) speaks
The Risk Today:
EurUsd EURUSD has certainly managed to stabilize at the beginning of this week, and after bouncing off the zone of support around 1.2730 (21 Jul low and 2-month uptrend support) the pair has actually managed to negate the very short-term downtrend channel we highlighted in yesterday’s report. Admittedly the move through the top of that downtrend (around 1.2845) has not been unequivocally bullish, but the bulls have done enough to clear a path to 1.2930 (12 Aug high) should the whim take them. We still believe that 1.2930 should hold as a firm ceiling of resistance, backed up by further resistance at 1.2990 (23.6% fibonacci retracement of 1.1876 –1.3333). As previously discussed, the resilience of the 2-month uptrend is critical to EURUSD’s fortunes, and should that 1.2730 level give way then stops are likely to be clustered behind. Next targets on the downside come in at 1.2683 (14 Jul low), 1.2605 (50% fibonacci level) and 1.2522 (13 Jul low). The resilience of that 2-month uptrend is critical to EURUSD’s fortunes, should that 1.2715 level give way then stops are likely to be clustered behind. Next targets on the downside come in at 1.2683 (14 Jul low), 1.2605 (50% fibonacci level) and 1.2522 (13 Jul low).
GbpUsd Much like the picture for EURUSD, GBPUSD’s rebound from it’s significant support (in this case the 1.5555 50% fibonacci retracement of 1.6878 –1.4229) has been the platform for a break above short term downtrend channel resistance. However GBPUSD is at a slight disadvantage to EURUSD in that it can no longer count on the broader support from its 2-month uptrend channel is that support was broken and negated at the start of last week. As such, it looks like a tough slog on the topside, with resistance at 1.5715 (12 Aug high), 1.5800 (psychological resistance), 1.5820 (11 Aug relief rally peak), 1.5835 (back side of former 2-month uptrend) and 1.5866 (61.8% fibonacci retracement of 1.6878 –1.4229). This is a big week for UK economic releases, with July CPI due today and BoE minutes tomorrow, so if the bulls do find enough momentum to break higher then next levels are eyed at 1.5909 (10 Aug high), and 1.6000. On a resumption of the downtrend, watch for buyers once again around 1.5555, 1.5498 (200-day moving average) and 1.5440 (27 Jul low).
UsdJpy The babble of intervention talk can only get us so far in USDJPY upside before the market will need to see more concrete evidence that the BoJ/MoF are more than just talk. That ceiling appears to be the significant resistance 86.50 (5 Aug high); a level that has held twice now and managed to repel the pair back lower. From a technical perspective it will take something special to bust up through there (a whopping great punch of physical USDJPY buying from the BoJ ought to do it), but even then, further rallies will be weighed by supply back towards 86.89 (2 Aug high) and 88.00-10 (psychological barrier, 50-day moving average and 28 Jul high). On the downside, the sticky patch between 84.73-85.00 is the only support area defined before 80.00 and 79.75 (historically significant 1995 low).
UsdChf We are still very much engaged with the double top pattern on the hourly chart after the break below 1.0460 activated the pattern yesterday. The low so far has been 1.0350, but our target (as defined by the distance from the tops to the neckline, subtracted from the neckline) is still just out of reach at 1.0300. Given the rather directionless range USDCHF has been marking out over the past few weeks, we are still wary that our target lies below the significant support and range floor of 1.0332 (6 Aug low), so it seems prudent to trail our stop to 1.0460 to ensure this is now a risk-free trade (best case scenario we take profit at 1.0300, worst case scenario we close out for no net profit or loss). Our gut feeling is still that a break below 1.0330 would open up even deeper moves to 1.0229 (19 Jan low) and 1.0131 (11 Jan low), so if anything, 1.0300 seems conservative. If we bounce higher from here then first resistance is eyed at 1.0460 (back of the neckline and great place to add to shorts or get in on the trade for those who missed it the firs time), 1.0550 (Friday’s high), and 1.0640-65 zone (27 Jul high and 200-day moving average). Should bullish momentum have the force to break through there then next levels are anticipated at 1.0700 (2 Jul high), 1.0790 (1 Jul high) and 1.0881 (100-day moving average).
Resistance And Support:
| 1.5866 | 88 | 1.064 |
| 1.58 | 86.9 | 1.055 |
| 1.5715 | 86.5 | 1.046 |
| 1.5656 | 85.28 | 1.0387 |
| 1.5555 | 84.75 | 1.0333 |
| 1.55 | 84 | 1.023 |
| 1.544 | 79.75 | 1.013 |
S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot
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