FOREX TRADING

News and Events:

With no new info coming out this morning, FX markets remain calm and prices in range. After yesterday’s rollercoaster day in equities, driven by strong US data, Asian markets are all in the green giving risky assets a boost. The major problem facing markets will continue to be the lack of liquidity, which especially on the downside, manifests itself rather severely. From the EU, more disagreement among members states and officials continues to plague the Euro – most likely capping any gains the Euro may make. Germany put forward a proposal for an EU levy on banks but it was quickly rejected by France, a motion Britain disagreed with months before. Spain’s parliament will vote today on the 1st round of austerity measures but with the Spanish Socialists just seven seats short of the majority, there is a genuine concern that the vote will fail. A piece from the Financial Times drew attention to the growing inclination among central bankers and large asset managers to diversify of out EUR assets. The article further stated that SAFE, the major Chinese regulatory organization, was discussing the prudency of holding Eurozone bonds although no indication was given that allocations to the Eurozone would be diminished. An unnamed Chinese official additional stated that China’s strategy of FX reserve diversification would not be modified in lieu of current events. Recent US TIC data shows that Chinese appetite for US treasury bills has recovered. Should large players deem the risk of holding EU assets too great, a fundamental shift to other assets would permanently weigh on Euro valuation. A slew of European bond auctions attracted some attention yesterday, but the ECB asset purchasing program possibly distorting the market, it’s hard to derive any useful information from this data. With US data gaining momentum, today’s Q1 GDP release is likely to surprise on the upside. Should the market feel the news is signaling the return of real US growth, combined with the its current safe-haven status, we should expect the see the USD surge on all fronts.

Today Key Issues:

• 07:00 EUR ESP Apr retail sales, -0.2% y/y eyed; last +12.3%.
• 07:15 CHF Q1 payrolls; last 3.96 mln.
• 07:30 EUR ITA May business confidence index, 85.8 eyed; last 85.5.
• 08:00 EUR ITA Apr wages.
• 08:00 EUR ECB/Buba Weber speech in Frankfurt.
• 10:30 GBP May CBI distributive trades order book balance, 12 eyed; last 13.0.
• 11:00 EUR E16: ECB Executive Board member Gonzales-Paramo speaks
• 12:30 USD Q1 GDP – second estimate, +3.6% AR eyed; first estimate +3.2%.
• 12:30 USD Q1 core PCE price index; flash +0.6% AR.
• 12:30 USD Initial jobless claims, thous (4wma)
• 14:00 EUR GER May CPI – prelim

The Risk Today:

EurUsd The heavy mood in financial markets pushed EURUSD back within 10 pips of its critical 1.2145 support late yesterday; but a strong recovery in equity markets overnight has prompted a rebound back up to the European session highs of 1.2343. The recovery is still fickle to say the least, so brace yourselves for erratic price action within the current range 1.2145 –1.2450; and expect much of the directional impetus to be guided by the performance of equity indices in the coming sessions. In the very short term, watch for resistance to come into play once more at 1.2343, then the previous night’s high of 1.2389. Beyond that level we expect sellers to step in around 1.2450 (recall this was the neckline of our failed inverse head & shoulders pattern).Key resistance remains at the 13 May highs of 1.2685, and should we somehow get the momentum to challenge that level, there is the possibility of a double bottom formation being confirmed on the hourly chart. Down below, the major area of support is still intact at 1.2145 (19 May lows), with the lower edge of the major downtrend just beyond at 1.2065.

GbpUsd Teasing price action this morning in GBPUSD as the pair looks to have breached the upper edge of its recent trading range at 1.4520, but thus far, has failed to hold onto an hourly close above that level. Since then, it has pared back within familiar territory just below 1.4500, but we remain alert of any further attempts to break above there that might yield the closing break higher we have long been waiting for. Indeed, our appetite for long GBPUSD trades has been buttressed by yesterday’s clear break above the 1-month downtrend channel –a development that suggests a correction or reversal higher is due. We are still geared to go long on a clear break above 1.4520 (placing a stop just below 1.4465), looking for a first target around 1.4790. For those with a larger risk tolerance (or who get some nicer entry levels on a re-test, very good bids are anticipated around 1.4440-50 (25 May and 26 May highs) and the back side of the 1-month downtrend around 1.4400-15. Further down, 1.4240 defines the range floor, and is really the last stop before 1.4100 (30 March 2009 lows).

UsdJpy USDJPY has really not made much headway since we last spoke; after a quick tickle of 90.67 yesterday afternoon followed by a subsequent collapse to 89.81 overnight, we are right back where we started. We are still predominantly focused on the potential bearish flag formation on the hourly chart, and are waiting for a closing break of the lower edge of the flag (around 89.65 today) as a cue to go short. Using the usual method of applying the length of the flag pole to the point of breakout, we can estimate a target below around 86.90. The earlier symmetrical triangle pattern on the hourly chart (which we entered around 91.70), remains incomplete until we reach the target of 88.40, but in the meantime watch for support around 89.81 (overnight low), 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, then the critical downtrend resistance eyed at 91.40. Now, the lower edge of the flag (taking on a shallower gradient) comes in around 89.45, so on an hourly close through there we once again would look to add to shorts, aiming for a target of 86.65. As repeated yesterday, we are still short from the earlier symmetrical triangle pattern on the hourly chart (entry around 91.70), and will continue to hold this until the downside target of 88.40 is met. The first level to watch on the downside comes in at last 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. Critical downtrend resistance eyed at 91.60.

UsdChf As discussed yesterday, the surge to highs of 1.1696 on Tuesday has really laid to rest the bullish flag pattern on the hourly chart in our minds (despite the fact the theoretical target remains unrealized at 1.1710). Since then, repeated slumps down to 1.1515 have only managed to produce increasingly sluggish rallies, and from a risk-reward perspective we are now meandering around the middle of the uptrend channel. There is still opportunity for bulls to take a quick intraday long on any dips to 1.1515 (though 1.1600 looks ready to cap most efforts), but ideally we would like to recharge longs a little lower down around 1.1450 levels where very strong bids held the pair supported during 20-21 May, and hopefully, we would expect some uptrend support to be coming into play.Next supports should be expected at 1.1419 (last Wednesday’s lows), then 1.1270 (18 May low). A hugely significant resistance level still lies at 1.1742 (not seen since April 2009), and uptrend resistance has now edged up to 1.1790 beyond.