FOREX TRADING

News and Events:

FX markets continue to languish with low volumes and less than convincing directional moves. The story today has been the stellar performance of both US & Asian equity markets which should give risky assets a temporary respite from selling. FX volatilities and the VIX together have dropped off which signifies a reduction in market disturbance. Overall we doubt there has been any real shift in risk appetite, so it’ll remain prudent to sell into rallies. We believe that the European debt crisis will remain the core driver and expect the EUR to downtrend – especially against the USD and JPY. Just to note, 10 yr bond spreads between Spanish/German and Italian/German have both peaked at 10 year highs, illustrating the market’s desire to punish any countries with loose fiscal policy.

The JPY took a hit as the FX market has been pricing in the selection of Yen ‘Perma-Bear’ Finance Minister Kan. Most suspect that the anti-deflation & economic growth policy of Kan will lead to a weaker JPY. We agree but at this point the Kan nomination has been fully priced in and traders should look for concrete action to contribute to any further JPY deprecation.

In Australia, trade balance for April was well above expectations, flipping to the positive side of A$0.13 bn after March’s deficit of -A$2.04 bn. Exports led the way hitting 10.7% y/y, as firm commodity prices more than negated the effect of a stronger AUD. While in New Zealand, S&P confirmed the nation’s AA+ sovereign rating and stated the outlook for the nation’s credit rating remained stable. The analyst went on to add ‘the implications for New Zealand due to the sovereign debt problems in Europe are fairly muted.’ Finally some good sovereign credit news.

Economic data out of the US continues to support the theory that recovery is progressing nicely even though the pending home sales index jump in April needs to be taken with a grain of salt. ADP numbers today will set the stage for what could be a whopper of a NFP on Friday (ISM non-manufacturing survey will take a back seat). The (pre-ADP) market is expecting NFP at 575k and unemployment at 9.8%. Even when you carve out the consensus, the figure will still be impressive and should be USD positive. There is still considerable debate whether positive US data will support the USD or risk appetite (which would cause USD selling).

Today Key Issues:

• 07:53 EUR GER May PMI services, 53.7 exp; prior 55.2.
• 07:58 EUR May PMI composite, 56.0 exp; prior 57.3.
• 07:58 EUR May PMI services, 56.2 exp; prior 55.6.
• 08:28 GBP May PMI services, 55.7 exp; prior 55.3.
• 09:00 EUR Apr retail sales, +0.1% m/m, +0.1% y/y exp; prior unch, -0.1%.
• 11:30 USD Atlanta Fed President Lockart (FOMC non-voter) speaks
• 12:15 USD May ADP employment, 85k exp; prior 32k.
• 12:30 USD Q1 productivity – final, +3.2% q/q exp; prelim +3.6%.
• 12:30 USD Q1 unit labor costs – final, -1.4% q/q; prelim -1.6%.
• 14:00 USD May ISM non-mfg PMI index, 55.3 exp; prior 55.4.
• 16:15 USD Boston Fed President Rosengren (FOMC voter) speaks
• 17:15 USD Kansas City Fed President Hoenig (FOMC voter) speaks

The Risk Today:

EurUsd Of the two scenarios we proposed yesterday, it seems EURUSD has chosen to go for the correction higher –breaking above the 7-week downtrend channel in overnight trading and thus far, managing to hold on a small re-test back down. Obviously our conviction will be hardened if we also get a daily close above this trendline tonight, but in the meantime we have enough bullish bias to go long around 1.2300 with a stop back below the trendline at 1.2270, and look for the pair to make another move above 1.2400. The next resistance level eyed is Monday’s high 1.2354, then the long-standing 1.2450 resistance last seen on 28 May. We feel this latter area is robust enough to hold on a first attack, so we would set a take profit on our long around 1.2425, then wait for price developments to give us our next cue. If the rally has enough momentum to break and hold above 1.2450, we would once again go long, with the view to re-testing the 1.2685 major barrier. In contrast, should the bears regain their grip and force us back inside the 7-week downtrend, we must readjust our expectations and be prepared for a period of further range-trading. Next supports below 1.2270 are seen at yesterday’s low 1.2175, then 1.2145 critical support.

GbpUsd There was a quick shake-out of weak longs during late European trade yesterday (sending us as far as 1.4550 support below) which thankfully gave us another chance to get long on this trade. Even more fortunately, this triggering of stops was quickly reversed in the subsequent sessions, sending GBPUSD back up once again to tease the upper edge of its 2-week uptrend above 1.4700. Our bias remains bullish, but immediate resistance at the top of the uptrend channel (1.4735 currently) and yesterday’s high 1.4770 means we would take half our risk off the table here, and only favour entering fresh longs either on a dip back down towards 1.4550, or on a clear break above 1.4770. If that break above 1.4770 does take place, it opens up a look at 1.4918 levels (13 May high) with very little standing in between. Really, 1.4550 is the nearest support from here (i.e. a long way away; hence our reluctance to enter longs at current levels), and below there the 2-week uptrend which comes in around 1.4435.

UsdJpy USDJPY is looking very bid right now, and anyone hoping to get in on the move has found dips to be shallow. The momentum has now pushed us up through the ceiling of the 2-week uptrend, and on to highs of 92.53. Next resistance above is anticipated around 92.95-93.10 which coincides with the 18 May highs and the top of the daily ichimoku cloud cover. This area should provide a decent supply of sellers, so contrary to our medium-term view on USDJPY we would be tempted to try a quick short up there; selling around 92.90 with stop 93.25 and a modest target below at 92.50. Small bids expected at the overnight low 92.05, then 91.85 former resistance before we once again look to the 2-week uptrend support around 91.00.

UsdChf Despite our hopes that the 7-week uptrend would be able to hold up for another leg higher, the buyers eventually gave way overnight, and the pair has since drifted sideways to lower. Our bias is now neutral on this one in the short-term until we get a more directional clue; so in the meantime we will look for range-trading opportunities. Sellers should be anticipated on any rallies back towards the former uptrend line (around 1.1580) so look to short there and use yesterday’s highs of 1.1605 to set the stop; Monday’s low of 1.1470 looks a good bet for the target. On the flipside, we would use a dip towards 1.1450 (critical support from mid-May) to be a platform to go long, with a tight stop at 1.1435 and target of 1.1550. Should this uptrend break gather more pace and lead to a reversal lower, the next support to watch will be the short-term downtrend at 1.1390, then the May pivot at 1.1250 beyond.