FOREX TRADING

News and Events:

Risky assets continue to come under heavy selling pressure. During today’s Asian Session, the pressure was bought on largely by the EURUSD sinking down to 1.2234, from Friday’s 1.2672. While no single news event triggered the selloff in risky assets, the increased tension between North and South Korea sure didn’t help investor confidence. Asian stock indices are considerably lower with the Hang Seng down 3.41%. In the Eurozone, weekend news and events continue to wreak havoc on the EURUSD. The Spanish government announced it would take over CajaSur, one of Spain’s largest savings banks, and additional consolidate another 3 regional banks. In addition, the IMF stated that Spain required significant structural reforms and acutely identified Spain’s problems of ‘ a dysfunctional labor market, a deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness, anemic productivity growth, weak competitiveness and a banking sector spotted with pockets of weakness.’ Look for EURUSD weakness to continue. Onto GBPUSD, the 2nd estimate of UK Q1 GDP will be released today and the market is expecting a revision to +0.3% from +0.2%. Any positive adjustment will be good news for the GBP and for policy-makers. On the intellectual circuit, comments from MPC Posen alluding the current UK environment to early-90s Japan were a bit forbidding. However, what is encouraging is that Posen stated that the UK would learn from Japan’s policy errors and not precipitate a ‘lost decade’ by tightening prematurely. The combined worry across various markets has pushed LIBOR USD funding costs to rise about 50 basis points for the first time in 11 months. We don’t expect this trend to reverse in the near term and risk-correlated currencies should continue to lose relative value in the near-term. Something to take note of is that markets seem keen on reacting violently to poor news while remaining quite muted to any positive headlines. In the coming days, we’ll continue to watching market reactions to headlines in order to assess risk sentiment and confidence.

Today Key Issues:

• 08:30 GBP GDP Last 0.2% Q/Q -0.3% Y/Y Exp 0.3% Q/Q -0.2% YY
• 08:30 GBP BBA Mortgage Approvals
• 08:30 GBP BBA Net Mortgage Lending
• 08:30 GBP BBA Net Consumer Credit
• 09:00 EUR Industrial Orders Last
• 11:00 PLN Interest rate announcement, % May-31 3.5%
• 13:00 USD Geithner speaking
• 13:00 USD Case Shiller -0.1 (0.6) prior -0.4 (2.4) exp
• 13:00 USD Case Shiller Notional HPI
• 14:00 USD Consumer confidence index May 57.9 prior 59.0 exp
• 14:00 USD FHFA Home price index -0.2 prior
• 14:00 USD Feds Plosser speaking
• 15:15 USD Bollard (FOMC Voter ) Speaking
• 23:50 JPY BoJ Monetary Policy Meeting Minutes April

The Risk Today:

EurUsd EURUSD failed once again to produce any meaningful upside momentum, and as soon as the 1.2450 support gave way yesterday, there was really no looking back. Disappointingly, this development negated our inverse head and shoulders pattern on the hourly chart (though thankfully the 1.2400 stop has spared us living through this morning’s plunge through 1.2250!), and is perhaps a good reminder of the odds faced when trying to go against the overarching trend. Excuses aside, we now expect decent selling interest to be clustered around 1.2450 (the former neckline), and then another major resistance at 1.2685 (13 May highs). Down below, the first major area of support is eyed at 1.2145 (19 May lows), with the lower edge of the major downtrend just beyond at 1.2100. With the pair acutely sensitive to ongoing negative headlines, the bears do appear to have the advantage -and if the rest of the move is anything to go by then expect rallies to be short-lived.

GbpUsd It’s still all about range-trading in GBPUSD, as the 1.4240 -1.4520 tract continues to contain price action in the short term. As discussed previously, the bulls will want to see a resurgence back above 1.4520 to be confident of a reversal higher; and indeed this level takes on a dual significance today as both the upper limit of the current trading range, and also the top edge of the major 1 month downtrend channel. We would therefore look to go long on a break above 1.4520 (placing a stop just below 1.4475), and look for a first target around 1.4790. Given the repeated tests of 1.4240 support below which has managed to rebut a number of sell-offs, we would also be tempted by a low-risk long punt down towards those levels; our appetite whetted by entry levels closer to 1.4260-70 area (with a stop through 1.4240). In the meantime, if 1.4240 range lows are breached then next support is eyed at 1.4100 (30 March 2009 lows).

UsdJpy Everything is still on course in USDJPY (which we have been playing short for the past week), as the bearish flag pattern we highlighted on the hourly chart inches tantalizingly close to being activated. As discussed, toconfirm this formation we need to see a break below the lower edge of the flag (now up at 89.60); and if realized, we would be aiming for a target below around 86.95. For those keeping score, we are still short from the break out of the earlier symmetrical triangle (entry around 91.70), and patiently holding on for the realization of that triangle target of 88.40 -comfortably within the scope of the bearish flag strategy. The first level to watch on the downside comes in at Thursday’s 88.98 low, then the major 6 May low at 87.99. Expect major resistance to appear at 90.80-85, as that area coincides with former support (7 May lows) and 50.0% Fibonacci retracement of 87.99 -93.65.

UsdChf After a stellar run all the way up from 1.1130 levels, we can now finally decommission the first bullish flag pattern that has dominated most of May, as this morning’s rally has taken us to highs of 1.1644 -within 6 pips of our 1.1650 target. Recall that we had already taken half our profits off the table back down around 1.1550, and given the proximity to our goal we now liquidate the remainder of the position. There is however, still scope for the more determined USDCHF bulls to squeeze more out of this rally, as the 2nd bullish flag on the hourly chart (started on 13 May) is still left unresolved with a target up at 1.1710. Our decision not to shoot for this ourselves is that the risk reward profile is starting to skew against longs at this stage, with a number of major resistance levels overhead and very few interim supports to catch any corrections. Helpfully, the uptrend resistance has edged up to 1.1720 so some of the selling pressure is eased ahead of the flag target, but not far beyond lies the hugely significant resistance level at 1.1742 (not seen since April 2009). Next supports should be expected at 1.1419 (last Wednesday’s lows), then 1.1270 (18 May low).