Forex News and Events:
The residual effect of Friday's US employment report upside surprise is still lingering on the market's psyche. There is a heavy tone surrounding sentiment and risk correlated trades have had a hard time gaining ground. After a brutal end of the year, the USD seems to be finding supporters in analysts and traders alike. Yesterday, the EURUSD collapsed below 9-month bullish trend support, while DXY climbed above a similar period bearish trend resistance. This activity is being driven by the strength of last week's US economic data and the newly revised expectations for the Fed's timeframe for raising rates. One of the core reasons, while difficult to measure, has been the trend of suing the USD to fuel carry trades. Interestingly, historical carry trades are bet against UIP (uncovered interest rate parity) and their sudden and volatile unwind is often triggered by a sudden shift in monetary policy or eternal event, which could be what we are witnessing now. However, yesterday's Bernake's rates expected to remain low for an extended period of time comments in our mind have put the kibosh on extended USD appreciation. The Fed Chairman took a cautious view on the US economy, despite the positive trend in labor markets, and noted significant headwinds remain” before the recovery could be considered “self sustaining.” We don’t expect the Fed to act before late 2010 and believe the markets have over reacted. With US rates remaining ultra loose for the foreseeable future, we don’t see why carry traders would be interested in borrowing EUR or CHF rather than the USD. Clearly, there are storm cloud buildings over the spectacular rally in risk appetite. And should we start seeing an unwind, specifically in precious metals, short USD positions will be promptly closed, exacerbating the current USD rally. But so far Gold is staying resiliently above $1150.00oz and rates continue to gain from Friday's sell off. We do believe in a bout of USD strength (for reasons broader than this report) but not until Q1 2010. On another note, in Japan the new government approved a Yen 7.2trn additional economic stimulus package as the market expected. However, more importantly to the market, the budget doesn’t include specific measures to fight JPY strength. The highlight of the trading day should be the BOC rate decisions. While markets are unanimously expecting it to leave rates on hold, the critical question will be if they stay committed to hold rates at their current level until mid 2010. The improving economic condition in Canada and slow movement away from rock bottom rates by G10 central banks suggest that the BoC will need to act. The CAD has followed the BoC very closely and should and when we see a shift expect the CAD to benefit.
Today's Key Issues (time in GMT):
09:30 GBP Industrial production, % m/m (y/y) Oct 0.5 (-7.7) exp, 1.6 (-10.3) prior
09:30 GBP Manufacturing output, % m/m (y/y) Oct 0.4 (-7.2) exp, 1.7 (-9.3) prior
11:00 EUR Germany: Industrial production, % m/m (y/y) Oct 1.0 exp, 2.7 (-12.8) prior
11:00 GBP CBI industrial trends survey, total orders, net bal Dec -45 prior
14:00 CAD BoC rate decision, % Dec 0.25 exp / prior
16:00 EUR ECB Executive Board Member Stark speaks on the subject of successful recovery from the crisis
23:50 JPY Revised real GDP, % q/q saar Q3 2.8 exp, 4.8 prior
The Risk Today:
EurUsd The EURUSD dropped to 1.4755 yesterday, the lowest level in a month, breaking key support at 1.4800 before rebounding to close at 1.4827. This leaves us with a neutral bias in the short term as we failed to get the close below 1.4800 that would have confirmed a reversal in the trend. Immediate resistance should be seen at 1.4904 (yesterday’s high). A break above could send back the pair to the 7 month bullish trend line.
GbpUsd The GBPUSD broke below its 10-day up trend line in an attempt to test the lower part of the bearish channel yesterday; however a further decline was rejected and the pair climbed again to close slightly below the opening price - creating a doji star on the daily chart (indecision formation). Momentum indicators are mixed with no signals of trend reversal in the near term, leaving us very little directional bias from here.
UsdJpy USDJPY is still correcting lower after the NFP spike higher; bottoming today at 88.76. The minor 2 week up trend line comes in around 89.00, and presents decent risk-reward for long entry. There should be support just below there at 88.50 which represents the 38.2% retracement from 84.80 to 90.77; however we remains cautious as the larger downtrend remains firmly intact.
UsdChf After breaking above the 50 day MA around 1.0170 on Friday, USDCHF continued its bullish momentum yesterday to top at 1.0243; however the pair currently is testing a critical point 40 day down trend line where a clear break could send the pair higher towards 1.0330 and 1.4000. Momentum indicators are currently mixed with no clear indications.
Resistance and Support
|S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot|