Euro sees heavy selling ahead of US open on news of Fitch Russia downgrade. Overseas equities tracking higher. Flight to safety trade bid overnight. Euro setbacks still propped ahead of Tuesday's low. Heavy Japanese, corporate and French selling of AUD/JPY. Sterling/Yen could be poised for major upside correction. (NEWLY ADDED QUANT SECTION!!)
FUNDYS - We continue to see a divergence between price action in the currency market and price action in global equity prices in overnight trade with currency traders seemingly not as inclined to take on risk. Despite a stronger performance in the FTSE and DAX , the flight to safety trade has dominated with the USD and Yen as the prime beneficiaries. EUR/USD has given back nearly all of Tuesday's gains with setbacks accelerating on news of a Fitch downgrade on Russia , while the Yen crosses have all come back under intense pressure. Overnight data releases could not entirely justify FX movement with Eurozone data coming in slightly weaker than expected led by the y/y retail sales data, while UK services PMI and BRC retail sales exceeded expectations. The data out of the respective regions did however manage to prompt more selling in EUR/GBP to trigger some sell-stops below 0.8990. Sterling gains on the cross were somewhat limited by the gloomy projections from NIESR for the UK economy in 2009. Heavy offers in Aussie all night with the local stimulus package in doubt. Bank of England 2-day monetary policy meeting has kicked off today. There is little on the North American calendar today with key event risk coming in the form of ADP at 13:15GMT followed by I SM Non-Manufacturing data at 15:00GMT.
TECHS - EUR/USD is threatening to give back all of Tuesday's impressive gains with the pair trading just shy of Tuesday's low. However, our outlook remains constructive while above 1.2705 with only a break back below the latter to negate. Key levels to watch over coming session come in by 1.3070 and 1.2800. USD/JPY remains locked in some bearish sideways consolidation with the latest setbacks damaging prospects for major base and double bottom. The market seems intent on taking out the key matched trend lows by 87.15. Key levels to watch over the coming session come in by 90.00 and 88.60. GBP/USD is in the process of some consolidation following the recovery out from the 1.3500 multi-year lows. There is scope for additional corrective upside before trend resumption and we look for a break back above 1.4545 to confirm higher low by 1.4055 and open fresh upside. Key levels to watch in coming session come in by 1.4485 and 1.4155. USD/CHF has reversed sharply to nearly fully negate Tuesday's bearish reversal day. A break back above 1.1715 will open fresh upside towards 1.2000, while back under 1.1400 brings double top prospects back in play.
FLOWS - Japanese, corporate, leveraged funds and French sellers of AUD/JPY . Models and UK clearer on the offer in EUR/GBP . Russian accounts and Swiss bank selling EUR/USD today. Gold finding offers on talk of fund liquidation but still supported on safe haven flows and record bullion holdings at world's largest ETF. Russian government to inject RUB 200B into VTB.
TRADE OF THE DAY - GBP/JPY: The market has been confined to an intense downtrend over the past several months with the cross rate trading to fresh life-time lows by 118.85 on 23Jan ahead of the latest minor bounce. However, recent price action has been quite constructive with the market putting in a fresh higher low on each day in the preceding week and refusing to rollover after putting in a bearish reversal day on Monday of this week. Additionally, it is worth noting that the lifetime lows by 118.85 have directly coincided with former trend-line-resistance (30Oct high) now turned support. Although weekly studies remain in oversold territory, the weekly RSI looks to be on the verge of a positive cross for the first time since March 2008 where we saw a 20 big figure move to the upside. Positive crosses in the RSI on the weekly chart have been few and far between over the past 20 years and each time, the bullish signal has yielded a major shift in the trend. The one exception was March 2008 where we still saw significant upside (aprox. 20 big figures) before bear trend resumption. As such we recommend looking to buy the cross on a break above the previous weekly high. Strategy: BUY @ 131.00 FOR A 141.55 OBJECTIVE, STOP @124.90.