FOREX TRADING

Overnight we saw equity indices lower with the Asian markets following Wall street’s lead. A general bout of risk aversion seems to be the play as we head into a quiet day ahead of the G20 summit this weekend in Canada.

In all likelihood little will come out of this meeting that will have any bearing on the FX markets as China has already made its pre-emptive strike last week and now the broader topic of conversation should centre around global banking levies and the need for fiscal controls to be reigned in… Not rocket science really as all participating nations have blown their budget deficits well wide of manageable levels in an attempt to pump some life into the post GFC world. Clearly talk and/or action on this front to the tune of genuine stimulus reduction will likely be even more risk negative and should send equity markets down to recent lows.

We also had the US House of Reps and Senate discussing amendments to the recent Volcker plan with far more stringent augmentations on the table. But either way this is still far off as a machine of that size takes quite some time to turn…. Snoredom….

On the day we really are quiet as data is muted and only the US GDP (3rd revision) is really out. So where does that leave us on the currency front? (more…)

EUR/USD

Current level – 1.2341

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.

The pair couldn’t break below 1.2260 support and advanced above 1.2350 resistance, peaking at 1.2389. Current bias is positive for 1.2409, but we feel, that the consolidation below 1.2469 is not over yet, so later today expect one more leg downwards, to 1.2150 support area.

Profit-taking affects gold curbing silver and platinum

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EURUSD

Reversal off 1.2468, 21 June high, cleared 1.2243/40 levels, and found support at 1.2208 yesterday, ahead of bounce. This so far attempted at 1.2353, though clear break here is required to sustain recovery for retest of 1.2468, otherwise, forming a lower top and fresh weakness would be likely scenario. Break below 1.2208 to expose 1.2162 next.

Res: 1.2353, 1.2398, 1.2415, 1.2468
Sup: 1.2270, 1.2243, 1.2208, 1.2162

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EUR/GBP

Current level – 0.8262

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

Intraday:  Slipped below 0.82 handle until 0.8180. Constructing a short term bullish structure in a attempt to reach 0.8300. Maintaining our bearish bias without ruling out a 200 pip range trade.

Profit-taking affects gold curbing silver and platinum

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Daily Technical Analysis

EURUSD Outlook

The EURUSD was indecisive yesterday. The bias is neutral in nearest term. On h1 chart below we can see that price still moving inside a minor bullish channel (white channel) indicating upside pressure in nearest term is still potential. Break below the minor bullish channel could trigger further bearish pressure towards 1.2240 support area before testing the major bullish channel (blue channel). On the upside, 1.2450 remains the nearest upside target especially if price able to move consistently above 1.2350 area.

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EURUSD

Reversal off 1.2468, 21 June high, cleared 1.2243/40 levels, and found support at 1.2208 yesterday, ahead of bounce. This so far attempted at 1.2353, though clear break here is required to sustain recovery for retest of 1.2468, otherwise, forming a lower top and fresh weakness would be likely scenario. Break below 1.2208 to expose 1.2162 next.

Res: 1.2353, 1.2398, 1.2415, 1.2468
Sup: 1.2270, 1.2243, 1.2208, 1.2162

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• Greek and Portuguese bonds under still more pressure. Bund gains slightly
  Yesterday, it was a moderately positive session for global core bond markets. In the intra-EMU bond market, there was generalized spread widening, but pressures were situated mostly in the morning session. Forced selling on the downgrading of Greece to junk continued, while negative news on the Portuguese banking sector hit the Portuguese market.
• Soft Fed statement weighs on the dollar
  Yesterday, the dollar ceded ground as the Fed turned more cautious on the pace of the recovery. So, the US currency won’t get interest support any time soon. The UK minutes showed that the BoE turned more concerned on inflation. Sterling rallied and EUR/GBP set a minor new low a few ticks north of the 0.8200 mark.

The Sunrise Headlines

• US Equities fell lower on Wednesday after a weak new home sales report, but reversed most of their losses after the Fed reiterated to keep rates exceptionally low for an extend period. The S&P ended 0.30% lower. This morning, Asian shares firm led by mining shares.
• The US Federal Reserve renewed its vow to hold benchmark rates exceptionally low for an extended period as they scaled back its assessment of the pace of recovery, taking note of pockets of weakness.
• According to a G20 draft document, world leaders will warn this week against taking the global economic recovery for granted while also noting that the huge costs of stimulus could hurt long-term growth.
• Borrowing by Portuguese banks from the ECB doubled in May to a record high, highlighting peripheral euro zone banks struggle for access to funds on wholesales markets.
• German Chancellor Merkel roundly rebuffed US President Obama’s call for Germans to aid the global recovery by spending more and relying less on exports, even as she warned that Europe’s own financial crisis is far from over.
• Japan’s annual export growth slowed for a third consecutive month in May a sign that its overall economic growth could start to slow as the pace of recovery in overseas demand moderates.
• Norway’s central bank held its main interest rate steady at 2.0% and signaled no upward move soon after its economic recovery stuttered and euro zone debt risks grew.
• Today, the eco calendar contains the euro zone industrial new orders, US durables and weekly claims

Currencies: Soft Fed Statement Weighs On The Dollar

EUR/USD

On Wednesday, EUR/USD had a calm start of the new trading session. The pair tried to regain the 1.23 mark, even as European equities opened lower on the back of a poor close in the US on Tuesday evening. In this respect, the euro also more or less ignored a renewed widening of the credit spreads on some peripheral European government bond markets. The European PMI’s declined slightly from the previous month, but there was not negative reaction on the (currency) market. At the start of US trading, it even looked as if sentiment would improve further. However, a very poor US new home sales report spoiled the game. Stocks nosedived and EUR/USD copied this move, reaching an intraday low at around 1.2210 after the publication of the release. Markets then started to look out for the Fed statement. The Fed was a bit more cautious in its assessment as it acknowledged that financial conditions had become less supportive of economic growth. The Fed also took notice of the ongoing low inflation data. So, even as Fed member Hoenig continued to dissent in favour a tightening of policy, the overall feeling was that the Fed was not moving any closer to a rate hike. The economic conditions are likely to warrant exceptionally low levels of the Federal fund rate for an extended period of time. So, the dollar won’t get interest rate support anytime soon. This caused some dollar losses across the board, even as the Fed message could have been considered as a source of concern on the pace of the global recovery (and a source of risk aversion). EUR/USD jumped north of the 1.23 mark and closed the session at 1.2311, compared to 1.2271 on Tuesday evening. At the same time, there was hardly any reaction on the US equity markets (more…)

Daily Technical Analysis

EURUSD Outlook

The EURUSD attempted to push lower yesterday, bottomed at 1.2209 but closed higher at 1.2309. The bias is bullish in nearest term especially if price able to break above the descending triangle to the upside, re-testing 1.2450 region. On the other hand, another movement below the triangle and 1.2240 could trigger further bearish pressure testing 1.2150 and the lower line of the bullish channel. We are still in upside correction phase targeting the major trendline resistance (red) area. A break above the trendline resistance confirms the bullish reversal scenario indicated first by the breakout above the falling wedge formation I showed you on my last weekly summary on Saturday. Only a violation to the bullish channel could be a serious threat to the bullish correction/reversal scenario.

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In the longer term in the $ index, been warning over the last few weeks of the increasing big picture negatives, and in turn raising the risk for at least a few months of correcting lower. The market reached a high at Jun 7th at 88.70 (testing the bearish trendline from Nov 2005), and has weakened since (see weekly chart below). At this point there are 2 potential, big picture scenarios: 1) the market is forming a large pennant/triangle since the March 2008 low at 70.70, with at least another few months of correcting lower toward 81.35/50 (50% retracement from the Nov low at 75.25), and even the base of the pattern/bullish trendline from 70.70 (currently at 75.30/45) ahead. 2) the market stabilizes over the next week or so before a final upleg back to the 88.70 high, the Mar 2009 high at 89.60 and even temporarily above, before completing a more major high. Note that the still evident longer term negatives including the seasonal chart which topped early in June (see 2nd chart below), an overbought market after the sharp gains since last Nov and the continued $ bullishness (or at least eur/$ pessimism), support the view that an important is in place (or at least nearly and would suggest that any new highs would be limited in the bigger picture, if they do indeed occur). At this point, the confidence is not yet very high in either scenario, so would maintain the longer term neutral bias (switched on June 14th at 83.60, and from the bullish bias that was put in place on Dec 5th at 75.95). Remember, one of the most difficult (yet valuable) things to do in the market is to have no position when the risk/reward just doesn’t justify participating. And as this point for the bigger picture in $ index, that appears to be the case.

Nearer term in the Jun 14th email, said that the likelihood that the upmove from at least the March 17th low at 79.50 was complete, had increased (5 waves up). The market has indeed continued lower from there, but recently finding support just above 85.00 (May 21st low, 38% retracement from 79.50). Though there is potential for a more significant decline (see longer term above), the market is short term oversold leaving open scope for at least another few days of ranging higher first. Note too may be forming a large head and shoulders pattern (see “ideal” scenario in red on daily chart/3rd chart below), fitting this view, but confidence level is not yet very high. So for now, would use a nearby bounce toward 86.80/90 (50% retracement from the Jun 7th high at 88.70, higher entry/lower risk), and initially stopping on a close above 87.65/75 (the neckline of the possible head and shoulders pattern is seen at 87.40/50, and want to leave just a bit of room above). Also, finally took profits on the April 30th buy at 81.65 on the Jun 14th break below the bullish trendline from May 21st (then at 87.00, closed at 86.50 for at 485 tick profit). (more…)

A negative turn in sentiment was confi rmed during the US session, the S&P500 currently down 1.6%, led by the energy sector and homebuilders. US existing home sales fell against expectations, providing a convenient catalyst for those in need. More likely, technical factors may have been at play, the previous day’s key reversal signals and last night’s break below the closely watched 200-day moving average line tipping some. Commodities were mixed, oil down 0.8%, but copper up 0.7%. US 10yr treasury yields fell 8bp on the negative risk sentiment, as well as Treasury comments that issue sizes of shorter maturity debt will be cut. The 2yr auction was well bid, awarded at 1bp better than market, with a 3.5 coverage ratio and foreign buyers taking 41%. Greek 10yr treasury yields rose 31bp, indicating continuing investor concern.

The US dollar index hovered around levels prevailing at the Sydney close. EUR nudged lower from 1.2310 to 1.2250. GBP was under pressure until the Budget, which rating agency Fitch said was a ‘strong statement of intent’, bouncing off a 1.4690 low to 1.4860. USD/JPY declined gradually from 91.00 to 90.50 in line with the risk averse mood.

AUD ranged around the Sydney close of 0.8770 but succumbed late NY to 0.8725. (more…)

The dollar traded mostly higher ahead of Wednesday’s Federal Open Market Committee interest-rate announcement. The FOMC is expected to maintain the fed funds target rate at a range of 0 to 0.25%. We do not think the FOMC will signal any monetary policy tightening. The Globicus LEI is declining; thus, pointing to weakening US economic growth. An unexpected decrease in US existing-home sales also made prospects of the economic recovery look a bit uncertain. The yen gained against all major currencies. The euro fell for a second day on continued worries about the European banking sector. The Canadian dollar declined. Canada’s consumer-price annual inflation was marginally higher than expected; however, remaining below the Bank of Canada’s 2.0% inflation target. The Australian dollar was pressured by lower commodity prices and speculation that the yuan appreciation will neither be dramatic nor a one-way bet.

The GBP/USD rose after Fitch said today’s UK budget could strengthen confidence in the country’s AAA status. The budget calls for tax hikes and deep government spending cuts. The pair hovered around the 1.48- area resistance for a sixth straight day without being able to penetrate it. If the 1.48-area resistance is broken, there is strong resistance from the long-run downtrend in the 1.50 area. We do not think the GBP/USD will be able to break this resistance in its somewhat overbought stage.

Financial and Economic News and Comments

US & Canada

• US existing-home sales unexpectedly declined 2.2% m/m to a seasonally adjusted 5.66 million annual rate in May after an upwardly revised 8.0% m/m gain to a 5.79 million annual pace in April; however, remaining at an elevated level on buyer response to the government tax credit, figures from the National Association of Realtors showed. May existing home sales rose 19.2% y/y. The May month-on-month decline was led by a sales drop in the Northeast. Sales were unchanged in the Midwest and up in the South and West. Sales fell for both single-family home sales and condos/coops. The median existing-home price increased to $179,600 in May, up 2.7% y/y. The existing-home inventory declined 3.4% m/m in May to 3.89 million available for sale, which represented an 8.3-month supply at the current sales pace, down from April’s 8.4-month supply. (more…)

A Tight Budget but Chancellor Falls Short of Balancing the Books

Overview

The Chancellor was true to his promise of ‘accelerated’ deficit reduction in today’s Budget, announcing an additional net fiscal tightening of £40bn (or 2% of GDP) over and above the £73bn pencilled in by Labour over the next five years. While this may be less than some had hoped for, we believe, it strikes a reasonable balance between fiscal austerity and economic recovery. The early response from rating agencies has been positive.

As widely flagged, the majority of the tightening will occur through public spending cuts rather than tax increases. The ratio between these two rises from 60:40 over the next couple of years to 80:20 by 2014/2015. Although the cuts in public spending will be difficult to implement, the government’s decision to focus the reductions in current spending rather than capital investment is, we believe, a sensible one.

Assisted by the newly-formed Office of Budget Responsibility (OBR), the projections of the fiscal finances are based on more conservative economic assumptions than those published in the March Budget. At 2.3%, however, the Treasury’s GDP forecast for 2011, looks to us a little strong, particularly given the potential weakening in consumer spending once the VAT increase and public sector job losses start to take hold. Nevertheless, given the challenge the Chancellor faced, today’s Budget is less damaging to growth than it could have been. (more…)

There have been further signs of improvement in financial markets over the past week and volatility continues to decline. That said, many markets continue to trade with pretty high risk premiums, elevated volatility and reduced liquidity.

Yesterday, BNP Paribas’ long-term issuer default rating was downgraded to AAfrom AA by Fitch. Standard & Poor’s yesterday published a review of the asset quality of the Spanish financial system, which included an upward revision of expected losses for the real estate sector.

Conditions in covered bond markets in Portugal, Ireland and Spain have been worsening lately, and the problems in the Spanish and Portuguese banking sectors remain an important theme. It is notable that there has been some stabilisation in the covered bank spreads in the past two days.

Over the past few week, most sovereign spreads have been relatively flat in PIIGS. Spanish spreads have narrowed substantially following a couple of strong Spanish bond auctions last Thursday. In core countries such as France, the Netherlands and Belgium, spreads have narrowed a little over the past week.

Money market tensions have eased further. In particular, the FRA/EOINIA spreads have tightened. The improvement is also evident in swap and credit markets, but corporate issuance remains very low.

The euro has advanced a little versus the dollar, but it is questionable how sustainable this move is. Implied volatility in majors FX crosses has declined sharply from recent weeks, but is still at elevated levels.

Global stock markets have had a good run during June. (more…)

Szechuan style fish and chips anyone?

That’s the theme of the week thus far and all that I’m hearing about after a few days off the desk.

What do I mean? Well simply put the news revolves around the China story (last Friday and comments about allowing the Yuan to strengthen) as well as the UK emergency budget to be released later today.

Having just come back from London I can tell you that the new budget will be all about the English version of austerity measures and the more severe the more likely they will be positively received by the market. Things are far from rosy over there and 3 days talking to the average man in the street means that people are indeed feeling the pinch in real terms. This picture will not improve for the average man as ultimately we’re looking at tax increases (unevenly distributed) and spending and subsidy cuts to an already struggling welfare system. While the UK government is left with little choice it will not be well received by the voting public and the Cable has only got small upside potential from here. More on the currency a little later.

In terms of the Chinese story, well they just wanted to get in ahead of the G20 summit in Canada this weekend and basically shut the Americans up. It’s a story of brinksmanship and for now the Chinese are one up on the Americans that have been moaning about the need to let the Yuan strengthen for the sake of international competitiveness. Now I’m sure a lot has already been written and said about this move, however in real terms nothing so far has been changed. The band in which the currency trades has not yet officially been widened and only the midpoint has risen a little at this stage. I’m sure there will be more to this story in the coming days but for now we just wait and see how it all plays out, I’m personally not looking for any real fireworks…. (more…)

Daily Technical Analysis

EURUSD Outlook

The EURUSD bullish correction was paused yesterday. On h4 chart below we can see that price violated the minor bullish channel indicating potential bearish in nearest term testing 1.2240 support area and the lower line of the major bullish channel. I think I will stand aside for now. I have conflicting bias between nearest term (bearish) and medium term (bullish). Note that we need a movement below the major bullish channel to end this upside correction phase. Break below 1.2240 could trigger further bearish momentum testing 1.2150 area. On the upside, another consistent movement above 1.2350 – 1.2400 should keep the upside correction scenario remains strong testing 1.2520 and 1.2645 area.

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