Economist Shayne Heffernan of takes a look at the day ahead in FX trading

Europe Market Snapshot

Positive news buoyed markets yesterday as U.K. jobless claims fell and the EU Summit begins today. Already reports are floating around that the worst case scenario from the Oliver Wyman stress tests of Spanish banks might be playing out as the real estate sector continues to sour.

The Bank of Spain is due to publish data about nonperforming loans today and the figure has risen for 16-straight months.

This could force Spanish banks to raise fresh capital to cover any shortfalls as a result of a decline in quality assets. Even still, equity markets extended their gains, with the Spanish IBEX climbing 2.37% followed by a 1.56% rise in the Italian MIB. The Euro Stoxx 50 gained 0.86% as EURUSD ticks back below the 1.31 handle to 1.3091.

Short term talking, and if headlines are complacent as to respect the latest technical readings, looks like the EUR/USD scrap through 1.3085 and subsequently 1.31 has led a large number of technicians to shift their gaze toward 1.3172 as minimum topside target.

The breakout of a descending trend line resistance coming from Sept 17 high adds weigh to the bullish case. Any downside break, sees hourly support at 1.3080/85, where demand should be strong, with break below targeting 1.3050/55

Trading the edges of 1.3080/1.3170 range is still the name of the game: “The big banks are reporting solid US corporate and asset manager offers starting at 1.3150 through 1.3175. I’d play this range in the short-term with a mild bullish bias in line with the recent bull trend.

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Asia Market Snapshot

Asian stocks continue to rally on positive economic news as indices trade near 1-month highs. Chinese GDP figures came in as expected at 7.40% while industrial production figures rose to 9.20% from 8.90% year over year.

Expansion is looked to as stabilizing in China after 7- straight quarters of contraction, further dwindling chances of another reserve ratio cut or stimulus announcement. Meanwhile Japan is not forecast to meet its 1% inflation target as Premier Noda faces a standoff over budgetary measures and implementing another round of stimulus.

The Nikkei has continued to rally, soaring 1.94% as the Australian ASX strengthens 1.03%.

The Hang Seng continues to under perform peers, adding 0.57%. The yen has continued to weaken with USDJPY breaking above the 79 handle and ticking to 79.110.

AUD/USD is losing 0.07% at 1.0375 with the next support at 1.0360 (hourly high Oct.17) followed by 1.0315 (MA21d) and 1.0291 (hourly low Oct.17).
On the upside, a break above 1.0388 (MA55d) would open the door to 1.0404 (high Oct.1) and then 1.0443 (61.8% of 1.0625-1.0149).

USD/JPY buyers having successfully worked thru 79.00 selling orders in thin market conditions, setting the new peak at 79.12.

Stop-loss buy orders start above 79.25/30, with targets probably eyed at June highs, 200-DMA circa 79.40. On the downside, 79.00 round number down to 78.80 should see plenty of buying interest, with next key support seen at 78.60 – OCt 17 low – .

US Market Snapshot

Economic data from the U.S. has continued to outperform and is showing a recovery is building in the housing market.

Yesterday’s jump in the housing starts figures to a 4-year high of 0.872 million coupled with higher building permits show that construction spending is improving. Although not out of the woods yet, housing has shown great strides forward ahead of Friday’s existing home sales data.

Eyes will be turned to today’s initial jobless claims figures to see if last week’s number was strictly a one-off fluke or if the trend is actually progressing. Stock indices were higher across the board led by the 0.41% gain in the S&P 500.

The Nasdaq and Dow Jones were moderately higher, rising 0.10% and 0.04% respectively. Gold continues to flirt with the $1750 handle, trading at $1749.60.

Today’s Key Economic Releases
Currency Time (GMT) Event
GBP 09:30 Retail Sales (MoM)
GBP 09:30 Retail Sales (YoY)
EUR 09:45 Spanish 10-Year Obligacion Auction
USD 13:30 Initial Jobless Claims
USD 13:30 Continuing Jobless Claims
USD 15:00 Philadelphia Fed Manufacturing Index

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