The currency rhetoric continues to come out hard and fast from policy makers. Yesterday, we heard for the European side of the equation, as Trichet stated that Bernanke’s recent “strong USD“ comments were correct and that he was fully aligned with Bernanke's analysis. Euro group Chairman Junker was kind enough to agree and stated that the EUR had not reached worrying levels. While the verbal intervention makes nice new fodder and provide plenty of FX volatility, we doubt there is any bite behind the bark. In yesterday's trading, we witnessed a breakdown in year long correlations, as risky assets were broadly weaker, however we don’t expect price action to be reflective of patterns moving forward. One of the defining trends in the market since March has been the strong parallel between equity indices, EURUSD and gold prices. However, recent price action suggests we are beginning to see a breakdown in this correlation. Since the brief correction in risk-asset trades around the turn of the month, gold has powered unwaveringly to new all-time highs, the S&P has recovered to levels not seen since October 2008, but EURUSD is struggling to maintain momentum above 1.5000 levels. From a technical standpoint, there are stark contrasts between the bullish outlook for gold and the prospects for EURUSD which just yesterday looked to threaten its 12 month uptrend. From here, it seems likely that unlike gold or equities, EURUSD will face considerable headwinds in rallying higher. Based on the trading in Asia and positive start to the European session, risk appetite will be well supported today and we believe traders should be long EM, commodities, volatility and high beta currencies. Look for EURUSD to retest 1.5000 and thereafter 1.5063 highs. A break above here will be a strongly bullish signal for continuation of the uptrend. The key event today will be the BoE MPC meeting minutes. A few near term events have made these Minutes particularly difficult to predict, an event which has already more than a few surprise in recent months. First was the upside surprise in UK CPI figures, which enabled GBP to be the only G10 currency to go unscathed in yesterday’s USD rally. Next was the speech from MPC’s Sentance that reaffirmed his ultra hawkish credentials. While GBPUSD’s bullish trend is still intact, the 1.6750 – 1.6885 range played out in the last 48 hours illustrates that traders are puzzled. Sentance’s comments mean we can safely count on him having voted to pause QE, but the other key issue will be if any members voted for larger extension of QE beyond £25bn. Recent gloomy comments by Governor King might signify such a view (possibly joined by David Miles or Adam Posen); an assessment that would have been supported by a dovish inflation report. We are therefore in the corner that the Minutes will reveal a 3-way split vote 6-2-1. This surprise outcome would clearly raise serious questions on the conventional wisdom that the BoE is putting its QE program on indefinite pause. The recent sterling enthusiasm created by the headline £25bn decision may be quickly negated by the actual vote details. In the EM space, the recent widening on dollar-denominated emerging market bonds is generally considered the “canaries in the coal mine” for risk watchers. Especially considering equity markets have continued to trade broadly higher (MSCI EM equity and S&P have been highly correlated since the beginning of the year). Our view is that the high level of correlation, which has brain-washed participants, are no longer a driving factor in pricing. A detailed examination shows that a large portion of the widening is due to Venezuela credit concerns, and most probably devaluation. Given that investors now understand the risk to the South American economy (heavy reliance on oil prices) we expect widening to be contained and not blossom into exaggerated 2008 levels. Combined with the global recovery, we should see spreads narrowing in due course.


Today's Key Issues (time in GMT):

08:40 EUR ECB President Trichet speaks
09:00 EUR Current account, € bn (sa)Sep -1.3 prior
09:30 GBP BoE MPC minutes, voteNov 7-2
11:00 GBP CBI industrial trends, total orders, net balanceNov -51 prior
13:30 USD CPI, % m/m (y/y)Oct 0.2 (-0.2) exp
13:30 USD CPI NSA, index Oct 215 prior
13:30 USD Housing starts, thousOct 599 exp, 590 prior
14:15 USD St. Louis Fed President Bullard (FOMC non-voter) speaks on the economic outlook

The Risk Today:

EurUsd EURUSD now seems to be consolidating in a channel between 1.4821-1.5062. Only a break above 1.5062 would confirm further bullish momentum towards 1.5200-1.5300 area. 

GbpUsd GBPUSD has continued it’s bullish momentum, breaking higher through the 1.6842 resistance level yesterday, but was unable to close above there. It has since regained that territory after the CPI figures, but stalled at 1.6845 just ahead of 1.6900 resistance. Todays BoE meeting will be the key event to watch for a catalyst to take GBPUSD to test 1.7014 key resistance levels, but for now, good support should keep it elevated above 1.6900. 

UsdJpy Resistance from the downtrend line around 90.20 should provide good supply to cap any rallies, however, we need a consistent move below 88.80 to continue the bearish scenario. Major support lies at 87.15 below. 

UsdChf The pair continues to trade in its 1.0030-1.0190 range and we expect this pattern to remain until a clear break either side is confirmed. For now, USD selling puts the bias of pressure on the downside, where a break of 1.0030 key support would inevitably take us through to parity and resumption of the longer term downtrend possibly indicating the next leg down to 0.9890 support. 

Resistance and Support

1.5100 1.7400 93.50 1.0290
1.5062 1.7041 91.50 1.0200
1.5046 1.6900 90.05 1.0190
1.4927 1.6823 89.12 1.0126
1.4880 1.6740 88.80 1.0034
1.4810 1.6515 88.00 1.0000
1.4626 1.6460 87.15 0.9890
S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot