The overnight data on the whole was weaker, with the two stand out releases coming in the form of a higher than expected unemployment rate out of the Eurozone and an alarmingly bad Swiss KOF. Russia and China are apparently in the process of negotiating a deal in which Russian will borrow as much as $100B to be repaid with oil and gas supplies over the next 20 years. FX options price further Yen weakness. Euro trades to fresh weekly lows. Semi-official offers in Cable. Fresh Dollar/Cad long triggered.
Fundys - The Euro, Swissy and Sterling have all broken to fresh weekly lows against the USD on Friday, while the Yen is putting in a reversal day and finally showing a bid tone after selling off sharply this week. Global equities have come back under pressure and market price action is starting to revert to familiar risk aversion correlations that had been breaking down of late. The overnight data on the whole was weaker, with the two stand out releases coming in the form of a higher than expected unemployment rate out of the Eurozone and an alarmingly bad Swiss KOF. The much weaker KOF data was however mitigated with early pre-data rumors circulating. Eurozone CPI came in as expected, while German preliminary CPI was higher. Weaker Lloyds Bank results further contributed to Cable setbacks. ECB Gozalez-Paramo, Ordonez, and Weber were all on the wires expressing praise and support for the Euro system and its ability to provide stability during the crisis. EU Almunia was also heard echoing similar sentiment. Russia and China are apparently in the process of negotiating a deal in which Russian will borrow as much as $100B to be repaid with oil and gas supplies over the next 20 years. It has been speculated that Russia will use the loan to repay existing loans with European banks. This should be Euro supportive with the repayments to be made in Euros. On the commodity front gold is flat while oil trades nearly 3% lower on the day. Looking ahead, the North American calendar is stacked, with the key focus on US Q4 GDP (-5.4% expected) due at 13:30GMT (please refer to calendar for other releases). On the Fed circuit, Fed Yellen and Bullard are slated to speak at 15:00GMT on oil prices and policies, while Fed Plosser and Rosengren are in New York at 18:45 on monetary policy.
Techs - EUR/USD has broken down below the weekly consolidation lows to now potentially expose a retest of the recent trend lows at 1.2515 (18Feb low). The key level to watch above comes in by 1.2815 (26Feb high) and a break back above the latter will be required to take pressure off of the downside. USD/JPY putting in a bearish reversal day following 4 consecutive strong up-days to just shy of a key 50% fib retracement level at 98.90. With daily studies stretched, a healthy corrective pullback is now warranted and we look for a move back to retest the previous neckline at 94.60 before resumption of the broader up-move. Only back above 98.70 negates. GBP/USD has broken lower on Friday, also to fresh weekly lows, but the pair still remains well supported ahead of 1.4055-95 with the latter levels needing to be taken out before a fresh drop can be seen back towards 1.3500. Back above 1.4385 today will delay. USD/CHF remains locked in tight multi-day consolidation, with an eventual breakout favored to the upside given the bullish form of consolidation. Key levels to watch above and below over the coming session come in by 1.1800 and 1.1635 respectively.
Flows - German accounts on the offer in Aussie; option expiry at 0.6380; Aud/Jpy sales also noted from various accounts. Large bank on the offer in Usd/Jpy all night; option expiry at 97.50. Semi-official offers in Cable. Russian demand for Eur/Usd.
Trade of the Day - USD/CAD: There has been an ongoing contraction in volatility to the point where we have reached the apex of a very prominent triangle that has defined trade since late October. Falling triangle resistance now comes in the 1.2650 area and we will be looking for a daily close above the latter to confirm a breakout which will trigger a fresh upside extension exposing a direct retest of the 1.3020 October 28 trend highs. Ultimately, the upside break should project gains back towards 1.4005 (2004 Highs) over the coming months (measured move objective based off of widest point of triangle). Broader market price action has been USD supportive into the end of the week and this could help to finally trigger a breakout in the pair. We will look to establish a long position on a break to fresh weekly highs. Position: LONG @ 1.2620 FOR AN OPEN OBJECTIVE, STOP @1.2345. Stops to be trailed to cost on a break above 1.2675. Position to be closed out at end of day if 1.2675 not broken.
Fundamental Catalyst - Data out of Canada has been coming in on the softer side with the economy still showing signs of significant deterioration in the face of the global meltdown. In recent weeks, we have seen disturbing unemployment numbers, the first trade deficit since 1976, and doubly worse than expected retail sales data showing the biggest monthly decline since 1991, all clearly reflecting the dire state of the domestic economy. As such, the Bank of Canada has been extremely accommodative to offset the cooling within the economy and is expected to continue to do so which should help to narrow yield differentials back in favor of the US. We do not expect this morning’s data to offer any reprieve, with the more likely outcome, to open the door for more Cad selling (Usd/Cad buying)
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