FOREX TRADING

Increasing Arguments To Cut USD Shorts

News and Events:

The USD remains buoyant as the tide of news and data seems to be shifting favour away from high beta currencies into year end. The last few weeks have seen a melee of separate factors jolt markets out of their habitual USD-selling mindset. Dubai’s debt worries initially sent investors fleeing for the reassurance of the USD safe-haven, subsequent Greece downgrades weighed heavy on the EUR, and then the massive shock improvements in US payrolls and retail sales led to a reassessment of whether the USD was a still a reliable candidate for funding carry trades. Adding to the appeal of cutting USD shorts, we can see that while US banks are making headlines for their eagerness to repay TARP funding by year end (thus demonstrating their ability to stand alone without government aid), in contrast, sentiment about the health of European financial institutions is still being dogged by news that Austria has had to nationalize its sixth largest bank, and put another on its watch-list. We are confident that tonight’s FOMC meeting will not change the projected rate path for the US, but certainly the volatility that has surrounded USD trades over the past few weeks has eroded investor confidence in shorting the currency with such aplomb. Given these developments, we prefer to avoid pure risk appetite correlated trades in favour of interest rate differential trades, and to that end our favourite core position right now is short-JPY. Overnight comments from Japan’s Banking Minister Kamei noted that deflation in Japan was worsening; and with the government still pumping trillions of JPY of stimulus into the economy, it is clear the BoJ is a long way off normalizing monetary policy. Another opportunity we have exploited is short AUD against both NZD and NOK. The rationale is that the recent less hawkish RBA minutes (echoed this morning by Assistant Governor Battelino’s remarks) indicates that Australian rate hikes will probably come at a slower pace and to a lesser degree than markets have exuberantly priced in, while in contrast, the New Zealand and Norwegian economies have significant room to bring forward the timing of future monetary tightening. Norwegian data in particular has been outstanding in the past month, which leaves decent scope for a surprise at the Norges Bank meeting later today (market expecting no change to deposit rates at 1.50%). Taken further, we might also extend this preference to long CAD positions; as the central bank has remained very guarded about prematurely acknowledging the need for tighter monetary policy despite encouraging advances in domestic data. Yet, with every passing day, we are inevitably drawing closer to a point where a shift in stance is warranted, and thus far we believe that this has not been adequately reflected in the currency.

Today Key Issues:

• 13:00 NOK Norges Bank interest rate announcement, % Dec exp: 1.50, prev: 1.50
• 13:30 USD Consumer price index, % m/m (y/y) Nov exp: 0.4 (1.8) prev: 0.3 (-0.2)
• 19:15 USD FOMC interest rate announcement, % Dec exp: 0.25, prev: 0.25

The Risk Today:

EurUsd EURUSD moved into a trading range yesterday between 1.4507-1.4575. This lower trading range, reaffirms the bearish bias on the pair for the medium term. We still maintain our bearish view in the near term (with Friday’s 1.4586 lows providing a cap for any rallies from here), looking for a revisit of 1.4480.

GbpUsd GBPUSD continued its sideways movement in the one month bearish channel and has done little to test either of the upper or lower levels between 1.6166 – 1.6375. Our medium term bearish view on the pair with 1.6166 support remains unchanged.

UsdJpy USDJPY continued its bullish nature from yesterday, but not before a pullback which held support at 89.38 levels. We expect to see continued upsides in the pair today with the next target at 90.00

UsdChf USDCHF had a significant bullish move yesterday which was capped at 1.0429. Since bouncing off this upper resistance, the pair has found support just above where the 2-week uptrend comes in at 1.0380, so we remain bullish on the pair from here. Good bids provide support just above 1.0200, and we would need to see a larger reversal 1.0175 to send us back into the old ranges.

1.4845 1.6355 88.83

ACM FOREX

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