FOREX TRADING

The EUR/USD pair rose today following two session of declines. The reason here was some relief in terms of the funding problems that European banks are facing.

The ECB allotted EUR131.933 billion in three-month funds, which it conducted under a “fixed-rate, full allotment” procedure, essentially allowing banks to borrow as much as they wanted at 1.0%.

That was a positive signs in terms of the worries about bank funding as expectations had been for a much higher figure. Demand for the three-month cash today was a litmus test for the health of Europe’s banking system. If demand came in at the higher end of the range (250-300 billion euros) it would have indicated banks were still finding it hard to fund themselves. The smaller figure of 132 billion euros is an encouraging sign that European banks don’t need as much liquidity as previously thought.

We still have to carefully watch Thursday, when we see the expiration of over 442 billion Euros in one-year tenders. In other words banks have to repay that 442 billion euros to the ECB. This 1-year lending facility was set up as part of the financial crisis last year, but has been phased out and replaced with 3-month tenders. Therefore, the fact that banks did not have to dip into the 3-month tender as much as feared was positive. (more…)

You can hear the screams in the streets! Equities lower, lower, the sky is falling!

Well, not entirely, but equities are indeed lower and significantly so with the S&P breaking down and closing below what was seen by many (including myself) as significant support around the 1045/43 level. Needless to say that this gave the Asian indices a strong lead and from there we saw the Shanghai index fall another 4% for the second day running with other indices in the region down by similar amounts. None of this fairs well for the open today in Europe and local indices remain looking rather soft going into the month end.

From an objective point of view this is a less than positive development given that the whole move in risk aversion and equity declines has come in the absence of any real substantial news or events. There are many pundits including a lot of tier 1 named banks out there calling a further decline into 950 on the S&P and that this is the first step in a deeper correction. I’m cautious not to get too caught up in the herd mentality here but still can’t deny that I do believe a deeper setback is in the offing. Worth noting is that it is indeed month end today and with it will come a lot of book squaring and re balancing of currency exposures… Logically this should be USD positive overall for the following reasons; (more…)

European money markets have been nervous this week ahead of the expiry of the 1Y LTRO. Market conditions have worsened. The 3M EONIA has risen to the highest level since July 2009, and there has been elevated volatility in short dated EONIA on worries that weak European banks may have difficulties securing liquidity.

The ECB 12-month long-term refinancing operation (LTRO) conducted in June 2009 (EUR442bn) expires on Thursday, 1 July. The LTRO is planned to be financed by two new ECB operations: (1) a three-month LTRO, which is announced today; and (2) a six-day fine-tuning operation, which serves as a bridge facility between the 1Y LTRO and next week’s normal seven-day main refinancing operation (MRO). (See overview of operations in table on page two.) As the 1Y LTRO matures and with the ECB sticking to its weekly MROs and 1M and 3M LTRO, the average duration on liquidity should decline significantly. (more…)

EURUSD Outlook

The EURUSD continued its bearish momentum yesterday. On h4 chart below we can see that price not only break below the trendline support but also slipped below the major bullish channel indicating a serious threat to the bullish correction scenario and technically price is now ready to resume its major bearish scenario especially if able to break below 1.2150/40 region targeting 1.2000 area. The bias is bearish in nearest term but CCI in oversold area and heading up on h4 chart indicating potential upside rebound. Another upside pullback inside the bullish channel could lead us into neutral zone in nearest term and keep the bullish correction scenario intact. Immediate resistance at 1.2250 followed by 1.2300 region.

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EURUSD

Support at 1.2150 came under pressure yesterday as the euro continued to pullback after breaking below 1.2250 which provided support last week. Short-term sentiment remains slightly bullish as the median retracement of 1.1875-1.2465 is still intact – around 1.2170. Not far below 1.2150 comes 1.2100 which is the next support to watch – formed by the 61.8% of mentioned up leg. More downside action is likely – as long as upside will be capped by 1.2300. Above 1.2300 – uptrend resumes. Current quote is 1.2220 @05:55 GMT

Support: 1.2150, 1.2100 and 1.2000
Resistance: 1.2250, 1.2300, 1.2360 and 1.2400
Market sentiment: long term – bearish, medium term – bearish, short term – slightly bullish, intra-day – bearish

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EUR/USD closed lower on Tuesday and below the 20-day moving average crossing tempering the near-term friendly outlook. The mid-range close sets the stage for a steady opening on Wednesday. Stochastics and the RSI are overbought and are turning neutral to bearish hinting that the market is vulnerable to additional weakness near-term. If it renews this month rally, the reaction high crossing is the next upside target.

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Over the past week, global market sentiment has soured again. Equities have moved lower and volatility a bit higher, but still remain on better levels than a month ago. Conditions in US credit and money markets appear relatively stable, but there are signs of intensifying stress in PIIGS sovereign, covered bond markets.

The expiry of the ECB 12-month LTRO on Thursday is creating jitters in the European money markets, where conditions have worsened despite a tightening of the EONIA EURIBOR spread. The 3M EONIA has risen to the highest level since July 2009, as markets are worrying that weak European banks may have difficulties rolling over short-term funding, although the ECB has announced that it will continue to provide liquidity at 1% full allotment in a three-month LTRO. (more…)

EUR/USD

Current level – 1.2228

EUR/USD is in a downtrend, after peaking at 1.5146 (Nov.25,2009). Technical indicators are descending, and trading is situated below the 50- and 200-Day SMA, currently projected at 1.3458 and 1.4206.

Obviously the pair is still in the consolidation pattern below 1.2469 and we believe, that its third, final leg is underway, targeting 1.2150-1.2100 reversal area before advancing towards 1.2601. Initial resistance is seen at 1.2266, followed by the crucial 1.2292.

Profit-taking affects gold curbing silver and platinum

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EUR/GBP

Current level – 0.8122

Longer term bias switched to bearish now that the cross has breached key support in 0.8400 area.

Intraday:  break through 0.8200 level mainly due to sterlings rally leaves support in 0.8100 handle as a short covering spot. We are expecting some consolidation but having in mind the drop could extend until 0.8000 pycho level.

Profit-taking affects gold curbing silver and platinum

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EURUSD Outlook

The EURUSD failed to continued its bullish momentum yesterday. On h1 chart below we can see that price is now struggling around the trendline support area. Overall we are still in upside correction phase but a consistent move below the trendline support and 1.2240 could trigger further bearish pressure testing 1.2200 – 1.2150 area and could be a serious challenge to the bearish correction scenario. On the upside, we still need a break above 1.2465 resistance area to continue the bullish scenario at least testing 1.2645.

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The communiqué from the G-20 Summit in Toronto was largely a commitment to maintain progress on the policy framework laid out at the Pittsburgh meeting in September 2009, with the added dimension of a dedication to fiscal consolidation. We will have to wait until the Seoul Summit in November before new rules on capital requirements, liquidity and leverage ratios are defined in detail. The concluding theme of the Toronto G-20 meeting was that while countries agree on many major policy objectives, they also acknowledge that a one-size fit-all approach is not feasible. It remains to be seen if the same theme will be repeated on financial reform in Seoul. In the end, the Toronto Summit essentially laid out a broad range of issues where there was an agreement on assessments and principles.

Fiscal Consolidation

The substantive new development that came out of the Toronto Summit was that members outlined a specific framework for simultaneous fiscal adjustment. The communiqué noted that “advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016″. In recognition of Japan’s high deficit and debt levels, Japan was an exception to the commitment, but there was still a dedication to fiscal consolidation. However, while formally recognizing a specific timetable was a new development for the G20, the focus on deficit cutting was not. A number of G-20 countries had already pledged or introduced new budgets to reduce their fiscal deficits which are in line with “halving” by 2013. For instance, Germany’s current budget pledges to achieve its Constitutional limit of 0.3% of GDP deficit by 2016. The United Kingdom has just released a new budget which reflects a decline in public sector net borrowing of 9.9 percentage points of GDP, from 11% of GDP in fiscal year 2009-10 to 1.1% of GDP in fiscal year 2015/16. (more…)

Daily Technical Analysis

EURUSD Outlook

The EURUSD was able to maintain its bullish bias last week. We are now in a critical technical point, where a consistent move above 1.2465 resistance could be seen as bearish failure and a beginning of a medium bullish outlook targeting 1.2645 and 1.3120 region. Immediate support at 1.2240/80 region and the trendline support area, as you can see on my h1 chart below. Break below the trendline support should keep the major bearish scenario intact at least testing 1.2150 area.

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This week, the greenback started with a bang. However after the FOMC announcement, which puts a lid on interest hike prospects, dimmed the USD gains. By Friday, the USD has lost most of the gains from earlier in the week. The yen held its gains better. Commodity currencies such as CAD and AUD also started the week strong, but reversed these gains into losses by Friday. Let’s take a look.

EUR/USD Unconfirmed Bearish Engulfing

Daily and 1H: The daily chart shows this week’s move dominated by the first day, which created an engulfing pattern. However, the rest of the week has laboriously pared some of the initial loses in the EUR/USD.

The projection to 1.17 is still valid, with two negative reversals with the RSI in the Daily chart suggesting this target. (This is when the RSI makes a higher high from bottoming, but price action does not).

Basically there was no bearish confirmation after the signal offered at the start of the week

Looking at the 1H chart, we see the latest twist and turns develop a downswing and then a gartley retracement pattern yesterday. This suggests a swing towards 1.2150 sometime in the beginning of the next week.

We can see in the daily, that the 1.2150 area is an importan powerline, and may be tested as support when the decline reaches it.

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U.S. Review

Despite Disappointing Data, the Recovery Is Still On

• Both existing and new home sales posted disappointing figures this week. Declines in sales for both were likely due potentially to the expiring homebuyers’ tax credit.
• The third revision of first quarter GDP was also released this week with growth revised lower than the consensus had expected to a 2.7 percent annual pace. Final sales, which is a good gauge of underlying demand, was also revised lower to a 0.8 percent annual pace. While growth is slower than initially expected, it is growth, nonetheless.

Did Homebuyer Tax Incentives Build A House of Cards?

Housing market data released during the week were largely disappointing as figures were likely distorted due to the expiring homebuyers’ tax credit. Existing home sales posted a surprising 2.2 percent decline in May while consensus estimates were looking for a gain of 6.1 percent. Economic forecasts took into consideration increases in pending home sales and mortgage applications, which indicated a boost in sales well in excess of a 6.0 million unit pace. According to the National Association of Realtors, roughly 180,000 homebuyers who signed contracts will likely not be able to close by the end of June due to delays in mortgage processing. If this is indeed the case, home sales in June will likely be elevated.

New home sales also fell in May, but while the retracement was expected, the 32.7 percent drop to a 300,000 unit pace, its lowest level on record, was unexpected. The sharp decline is likely due to homebuyers rushing to meet the April 30 contract signing deadline for the tax credit. The seasonal adjustment process also likely exaggerated the extent of the slowdown. (more…)

Highlights

• Dark clouds gathering on the horizon
• Looking for another slide in risk assets
• Sterling reacts well to budget
• Banking sector fears set to keep the EUR nervous

Dark clouds gathering on the horizon

US housing data in the past week revealed the extent of the artificial and temporary support provided to the US housing market by the home buyer tax credits. The data had been expected to show decent gains on a final flurry of home closings before the end of June deadline to close, but the sharp declines showed that many home buyers were unable to secure financing. Housing data is only expected to deteriorate from here out as an extension of the tax incentive program seems highly unlikely in the current deficit reduction environment. Given the still high levels of foreclosures and underwater mortgages, as well as a large ‘shadow inventory’ (homes that would be on the market if conditions were better), it appears US housing is about to see a ‘double dip’ decline. The implications for household spending are quite ominous, as the wealth effect of deflated home values and still depressed stock market portfolios generate a negative feedback loop to consumption. Add in still high unemployment levels (and the failure to extend unemployment benefits due to deficit concerns), and we have another negative feedback loop undermining US consumption. Together, these threaten to see the US recovery falter sooner than we expected, which has also altered our view on the broader global recovery. (more…)