FOREX TRADING

HIGHLIGHTS OF THE WEEK

United States

• Foreign currency policy captured headlines this week as Japan intervened to devalue the Yen, and pressures mounted on China to accelerate its appreciation of the RMB.
• Currency interventions are limiting the potential impact of U.S. export growth during the recovery. This is a challenge for America, because a rapid improvement in the terms of trade would go along way to aiding the recovery, as indebtedness impedes consumer spending.
• The prospects for quantitative easing (QE) could create an interesting dynamic in currency markets, as foreign countries react to a possible decline in the USD.
• In the end, not every economy can rely on exports to support growth.

Canada

• The robust pace of Canadian economic growth recorded since the third quarter of 2009 is likely to moderate, reflecting a slow recovery in global demand and a combination of domestic risks.
• Most notably, record levels of household indebtedness, which drove high levels of consumer spending in the past nine months, will now put downward pressure on spending as households become more cautious.
• This will have a particularly adverse impact on the housing market, which recorded massive gains over the course of 2009, driven largely by this debt-fuelled spending spree.
• We expect the cooling in consumer spending to feed into the downturn in the housing market, which has already begun and will persist throughout the remainder of 2010 and a large part of 2011.

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Market Outlook

= USD: relief bounce on FOMC?

Intervention by the BoJ and a surprisingly brutal reaction to SNB forecast revisions caused trends to shift in G10 currency markets over the past week and threaten to compound volatility over the coming days as the FOMC meets to discuss monetary policy and in the UK the Sep MPC meeting minutes are published. The USD may be in a win/win position going into the FOMC. If the Fed are downbeat, the USD may benefit from a risk sell off, while if they are more positive, it may benefit from a back up in US yields as QE2 fears are put on the back burner. With the EUR suddenly back in favour and central bank intervention forcing investors to trim long JPY and CHF strategies, predicting flows under a ‘risk off’ scenario is not straightforward. Even though correlations with risk have rebounded, we are alert to retracements in EUR crosses as talk of debt restructuring flares up in the periphery and risk reversals signal a possible counter trend move.

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Market Movers ahead

• In the US, the FOMC meeting is expected to largely maintain the status quo. The economy has not worsened enough for additional quantitative easing (QE).
• In Europe, PMIs and the German Ifo are poised to disappoint, suggesting growth is now easing.
• In Asia, attention will be on possible further intervention from Japan. Japan could face criticism when global leaders gather for the UN meeting in New York.
• We expect Norges Bank to keep interest rates unchanged at this week’s meeting, but suspect the statement will be a bit more hawkish.

Global Update

• Japan intervened for the first time since 2004 and has so far been successful in stemming the appreciation of the yen.
• The Basel III proposal has eased fears that it forced banks to rush to raise capital and weigh on the global recovery.
• Encouraging data in the US and China ease fears of a double dip.
• However, data from Europe have been disappointing suggesting that growth is now slowing.

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HIGHLIGHTS OF THE WEEK

• This week provided fairly positive economic data, as U.S. Personal income and consumption rose in July, the ISM manufacturing index surprised on the upside, and non-farm private payrolls were also stronger than expected.
• These data support our view that the U.S. recovery will remain on track, and that growth will continue at a relatively slow pace.
• In order to experience a relapse in economic growth, U.S. aggregate demand components would have to register contractions of a magnitude difficult to justify outside of a scenario characterized by a renewed severe shock.
• Drama has been growing ahead of next week’s BOC meeting. Investors are split on the likelihood of a follow-up 25 basis point rate hike.
• Regardless of whether the Bank hikes rates, this is likely to be the last for a while, as economic growth is falling short of the central bank’s expectations.
• Real GDP for Q2 came in at 2%, below the 2.5% consensus estimate and falling short of the Bank’s 3% forecast.
• Q2 data reinforced some of the growing vulnerabilities to the Canadian expansion, including slowing consumer spending, housing activity and export growth.
• We expect real GDP growth to come in closer to the 2% mark than the Bank’s 3% forecast in the second half of 2010 and first half of 2011.

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Today’s US session was one for those who enjoy watching paint dry. But tomorrow is NFP day and may be yet another day for a USD inflection point.

Today’s session was hardly one for the history books, though we did see fairly strong moves in NOK (in support of the interest rate spreads favoring the currency as we have noted in recent days) and in SEK off the back of the Riksbank interest rate hike and guidance. EURUSD and the other major USD pairs failed to follow up on yesterday’s exuberant move higher in respect of the upcoming US employment report and ISM non-manufacturing report tomorrow.

Nonfarm payroll expectations and reactions

Some have lowered expectations for US nonfarm payrolls due to the weak ADP release (soon we’ll be dropping the "private payrolls" figure, which remains the focus, once the rest of these pesky census workers are fired). The Saxo call (see a great report on the release here: is for a virtually unchanged figure versus a slightly more positive consensus. The market is already very short the USD, but risk is made a sharp comeback yesterday, which pushed the dollar lower. It feels like we’re in need of direction here after so many days of aimless trading in EURUSD and whippy trading in the more risk-correlated AUDUSD, but will we get any kind of resolution in tomorrow’s trading? It’s tough to build any conviction in this environment. For now, risk appetite measures are generally very complacent.

It is perhaps worth noting the reactions to the last three US employment reports.

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Euro 1.3460

Initial support at 1.3385 (March 31 low) followed by 1.3268 (Mar 26 low). Initial resistance is now located at 1.3591 (April 1 high) followed by 1.3627 (Mar 19 high)

Yen 94.25

Initial support is located at 93.68 (Apr 2 low) followed by 93.28 (Apr 1 low). Initial resistance is now at 95.06 (Aug 24 high) followed by 95.29 (Aug 18 High). (more…)

Daily Technical Analysis

EURUSD Outlook

The EURUSD made another indecisive movement yesterday, trapped in a range area of 1.4450 – 1.4600 as you can see on my h4 below, indicating consolidation but the scenario is more to the upside unless we have a break below 1.4450. The bias is neutral in nearest term. We will have some important news from the Euro zone and US today. While ECB likely to keep rate at 1%, traders focus will be more on the ECB press conference. An optimistic tone should support the Euro further while a negative tone may diminish Euro rally. US retail sales data is expected to be weak. Unless we have a significant positive surprise on retail sales numbers, the Dollar should remains under pressure. Break above 1.4600 should continue the bullish scenario targeting 1.4800 area.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD made indecisive movement yesterday. The bullish momentum after breakout from the previous range of 1.4250 – 1.4450 seems limited so far and looks like price is trying to make another choppy market. However, as long as price stay above 1.4450 area, the bullish scenario targeting 1.4600 should remains intact. Break below 1.4450 should be seen as potential bullish failure re-testing 1.4250 area once again.

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Daily Technical Analysis

EURUSD Outlook

As I had expected, the EURUSD had a bullish momentum yesterday after breakout from the range area, topped at 1.4555 and closed at 1.4513. However earlier today in Asian session price retreated lower, traded around 1.4490 at the time I wrote this comment, indicating limited bullish momentum so far. The bias is neutral in nearest term but the bullish scenario targeting 1.4600 remains intact as long as price stay above 1.4450 area. CCI just cross the 100 line down on h4 chart suggesting potential further downside pressure testing 1.4450. Break below that area should be seen as bullish failure and could trigger further bearish momentum back towards 1.4250 again

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Daily Technical Analysis

EURUSD Outlook

The EURUSD made a significant movement this morning by break above range area. This fact should be seen as bullish confirmation at least targeting 1.4600 area before aim for 1.4800 area. Immediate support at 1.4450 area. Break below that area should lead us into no trading zone as direction would become unclear for me but could be considered as a false breakout and trigger further bearish momentum re-testing 1.4250 again. I think the situation is a little bit tricky now since I do not see convincing fundamental factors in Euro zone that can support the currency significantly at this phase. So make sure only use tight money management.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD attempted to push lower yesterday, bottomed at 1.4283 but closed higher at 1.4408. The pair still trapped in 1.4250 – 1.4450/80 area. Maybe we need a fundamental catalyst to lead us out from this choppy market and US NFP tomorrow is expected to do this job. While aggressive traders can continue to use range trading strategy to short around 1.4450/80 or to long around 1.4250 with tight stop loss, conservative traders wait until we have a clear break from the range area to make decision.

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EUR/USD closed higher on Wednesday as it consolidates above the 10-day moving average crossing. The high-range close sets the stage for a steady to higher opening on Thursday. Stochastics and the RSI remain bullish signalling that sideways to higher prices are possible near-term. Closes above the 20-day moving average crossing are needed to confirm that a short-term low has been posted. If it renews the decline off December’s high, the 38% retracement level of the 2008-2009-rally crossing is the next downside target.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD attempted to push higher yesterday, slipped above 1.4450, topped at 1.4483 but further bullish momentum was rejected as price whipsawed to the downside, bottomed at 1.4346 and closed at 1.4363. On h4 chart below we can see that this was a case of a false breakout which usually trigger bearish pressure testing 1.4250 area. We need the price to close below that area to confirm the bearish scenario testing 1.4127 – 1.4000 this week. Immediate resistance at 1.4400 – 1.4450 area.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD still trapped in range area of 1.4450 – 1.4250 yesterday. I think the best strategy remains to short around 1.4450 or to long around 1.4250 with tight stop loss. Bullish scenario will be confirmed by a close above 1.4450 today targeting 1.4600 – 1.4800 this week while bearish confirmation will be confirmed by a close below 1.4250 targeting 1.4127 – 1.4000 area this week.

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EUR/USD closed lower on Wednesday as it consolidated some of the rebound off last week’s low. A short covering rally tempered early session losses and the high-range close sets the stage for a steady to higher opening on Thursday. Stochastics and the RSI are turning bullish signalling that sideways to higher prices are possible near-term. Closes above the 20-day moving average crossing are needed to confirm that a short-term low has been posted. If its renews this month’s decline, the 38% retracement level of the 2008-2009-rally crossing is the next downside target.

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