Forex News and Events:

Any investors hoping for a smooth ride into year-end have been sorely disappointed; as fresh worries over sovereign debt have once again rattled market sentiment that is still fragile from the shake up two weeks ago when news of the Dubai debt crisis first broke. The latest (not altogether unpredictable) casualty is Greece; being downgraded by Fitch to a BBB+ rating and having their outlook demoted to negative. Understandably, EURUSD has suffered heavy unwinds in the face of this news, but the accompanying rout in gold, equities and USDJPY seem to characterize a more widespread feeling of risk aversion. This is hardly surprisingly. In the last few months, investors have enjoyed lazy profits from selling the USD on good headlines, bad headlines, and just on whim – it really hasn’t required much thought or analysis. But since the first details of Dubai World’s financial woes set off the sharp correction in risk at the end of November, the markets have never really been allowed to settle back into their previous stride without some news story or other prompting further unwinds in USD shorts. First we had the post-payroll panic that the Fed might bring forward their tightening schedule, followed by the whipsaw back on Bernanke’s speech on Monday, then yesterday’s Greece downgrade, and today the news that Dubai World’s property construction unit, Nakheel PJSC, posted a first half loss of $3.65bn. In our view, the arguments for structural USD weakness remain intact, but it is clear that the recent volatility in markets has given participants some arguments in favour of buying USDs, whereas before we had a market of ubiquitous USD-bears. It seems now that the extent of profit-taking going into year-end is slightly greater than we had initially predicted, but our conviction is still strong that for the USD the sustainably strengthen, there needs to be a compelling case for the Fed to shift to a more hawkish tack; and we are a long way off that stage. Perhaps one of the more interesting conundrums for us is the direction of USDJPY from this point. The steady appreciation of JPY in the past couple of days – in the face of risk aversion – hints at the historic reflex of markets to buy JPY on carry unwinds; but what is confounding to us is the ability of the JPY to look attractive in spite of its latest monster of a stimulus package, the sharp revision lower to Q3 GDP, and the threatening prospect of BoJ intervention. Government officials and BoJ members alike were unanimous in sounding the alarm bells when USDJPY plunged to 85 levels in November; and given the dismal state of the country’s economy, that seems unlikely to change very soon – meaning the potential upside for JPY is severely limited. The only rationale that makes sense to us is that Japanese investors repatriating funds may be the predominant drivers of JPY buying of late, which if true, could indicate that this current bout of profit taking keeps the JPY supported into year-end.

width=450

Today's Key Issues (time in GMT):

12:00 GBP UK Chancellor presents Pre-Budget Report to parliament
15:00 USD Wholesales inventories, % m/m Oct exp: -0.5 prev: -0.9
20:00 NZD RBNZ rate decision, % Dec exp: 22.50 prev: 2.50

The Risk Today:

EurUsd EURUSD continued its decline yesterday to close at 1.4703, and has since dropped to lows of 1.4668, just above the 1.4625 major support and where the 100 day moving average comes in (at 1.4629). The bearish trend in the very short term is still intact so we expect a test of 1.4625 key support in the coming sessions; a break below which would trigger further selling pressure towards 1.4480. Only a break above 1.4900 would neutralize this bearish tone, but expect offers to come in ahead of that level. 

GbpUsd GBPUSD made a significant bearish movement yesterday, breaking below the downside of the bearish channel and key support level at 1.6250; a level which looks to form the neckline of a major head-and-shoulders pattern that has been forming since mid-October. This morning's strong snap back in GBPJPY has dragged GBPUSD back above 1.6300, but if a break of this 1.6250 neckline is confirmed then it would look to target 1.5600 levels. 14 day RSI is still not in oversold territory (currently 40.30), so there is room for further downside, and immediate resistance lays at 1.6484 (previous support).

UsdJpy USDJPY continued selling off in the minor bearish channel yesterday, and after a brief consolidation around 88.50 levels (50% retracement level of the rally from 84.80 towards 90.76), we have continued on to touch lows of 87.37. The 61.8% fibonacci retracement level comes in at 87.10 so expect some bids to come in around there, with further support below at 86.55 and 85.85. 

UsdChf USDCHF had a bullish momentum yesterday, topping at 1.0285 and closing just slightly lower at 1.0268. The pair seems to be forming a bullish channel in the nearest term targeting 1.0337 (3rd Nov High). Momentum indicators are indicating that current levels are overbought, so a slight correction lower could test 1.0200. 

Resistance and Support

EURUSDGBPUSDUSDJPYUSDCHF
1.5000 1.6880 92.30 1.0400
1.4904 1.6744 91.30 1.0330
1.4850 1.6484 89.00 1.0300
1.4765 1.6325 88.95 1.0230
1.4668 1.6250 87.10 1.0140
1.4625 1.5990 86.55 0.9915
1.4480 1.5600 85.85 0.9880
S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot