The currency market is reversing course on Thursday with broad based USD gains finally stalling out in favor of a flight back into risk. The Euro is in the process of putting in a bullish reversal day following 7 consecutive negative closes. Momentum funds are on the bid in Eur/Jpy. Trade of the day recommendation is to sell Cable on a test of the 50-Day SMA.

Morning Slices

Fundys - The currency market is reversing course on Thursday with broad based USD gains finally stalling out in favor of a flight back into risk. The big story in the overnight session and primary driver of price action is said to have come from the reports that Germany has signaled that it would back any EU countries that are not able to refinance their own debt. On the data front, UK Public Finances were better than expected while Public Sector Net Borrowing was unimpressive after showing the smallest surplus since 1995. Meanwhile, the Swiss ZEW sentiment index showed an improvement coming in at -57.7 from a previous -66.7. Swissy had been initially hit overnight on talk that Swiss banking secrecy laws would be abolished, but the currency soon revcovered after the Swiss FinMin confirmed that the secrecy laws would be maintained. Germany's DIHK released their latest survey which said that the weaker Eur/Usd exchange rate was starting to be a positive for Eurozone exporters. Nevetheless, the survey described the 2009 economic outlook as being “very bleak.” On Monetary policy, DIHK said that there was no need for additional ECB rate cuts. In Japan, the BoJ has left rates unchanged at 0.10% as expected while the government has downgraded its assessment of the economy for the 5th straight month and sees things deteriorating more rapidly with the economy in a severe state. European equities are tracking slightly lower while US futures point to a higher open. Crude oil trades higher ahead of today's data, while gold is seen down nearly 1%. Looking ahead, there is plenty of data on the calendar in the North American session starting off with US PPI (-2.6% expected) and initial jobless claims (620k expected) at 13:30GMT. Philly Fed (-25 expected) is slated for 15:00GMT, while on the Fed circuit, Lockhart is scheduled to speak in Alabama at 18:15GMT.

Quant -


Techs - EUR/USD is in the process of putting in a bullish reversal day following 7 consecutive negative closes. There is scope for additional corrective activity over the coming days back towards the 20-Day SMA at 1.2895 but ultimately, we would expect to see the latter cap gains ahead of fresh downside through 1.2500. In the interim, additional intraday rallies are seen capped by the 1.2705-50 former support now turned resistance. The key level to watch below now comes in by 1.2500. USD/JPY trades relatively flat heading into the US session of trade but we would expect to see a minimum test on key resistance at 94.60 which represents the neckline of a major double bottom formation. The pair also now trades above the daily Ichimoku for the first time since early September and it will be interesting to see if the price can hold above the latter into the close. Key levels to watch over the coming session come in by 94.60 and 93.30. GBP/USD (See Below). USD/CHF has been slowly grinding out fresh highs with the market on the verge of a push to challenge the trend highs from 2008 at 1.2300. In the interim, key levels to watch over the coming session come in by 1.1830 and 1.1650.

Flows - CTA shorts stopped out of Eur/Jpy positions on momentum buying; Japanese exporter and French bank offers into 120.00. Swiss bank on the bid in Eur/Gbp. Asian accounts and model funds on the bid in Cable while Russian names on the offer. German bank cited as a large buyer of Aussie.

Trade of the Day - GBP/USD: With the USD showing so well bid over the past several days, it is no surprise that we have been seeing a bounce into Thursday to allow for some form of a relief rally. While Sterling has held up on a relative basis, the currency pair still remains locked in a very well defined downtrend and should continue to be sold into rallies. We will once again utilize the Average True Range (ATR) indicator to help target an ideal entry point for a short trade. The ATR in Cable comes in at 305 pips. Based off of the current daily low of 1.4205, this would project a daily high by 1.4510. However, there is no significant viable short-term resistance at 1.4510, and given the ability for this pair to often overshoot its ATR on reversal days, we will choose an entry point for our short trade a little higher up by 1.4585 which coincides with the 50-Day SMA. The 50-Day SMA has proved to be a formidable cap on rallies throughout much of the downtrend and we expect that it will continue to do so, particularly after seeing a 380 pip rally in the day. Strategy: SELL@ 1.4580 FOR A 1.4055 OBJECTIVE, STOP @1.4715. Recommendation to be Removed if Entry not Hit on Thursday.


Fundamental Catalyst - The USD rally has stalled out on Thursday with much of the price action being driven by talk of more efforts in Europe to stimulate the local economies. Reports have indicated that Germany will be prepared to support the broader Eurozone economy should any individual countries within the region find themselves in a position where they can not refinance their own debt. While this is certainly a welcome development and necessary step in attempting to ameliorate the dire economic situation, it should by no means be a signal for increased risk appetite and a flight from safety back into higher yielding and more risky assets. We therefore discount the current rebound and attribute the move as more of a necessary correction, most probably originating from profit-taking from shorter-term speculative accounts.



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