Forex - No Rate Change in China Gives Stocks a Boost
Forex News and Events:  The start of a new week brought some solid sentiment-positive news which has helped risk-correlated trades rally. China inflation data came in broadly in-line with expectations as CPI printed at 5.1% and PPI at 6.1%. The RRR hike of 50 bp seems to have appeased Chinese policymakers for now and the much hyped rate increase never materialized. While we suspect that tightening will be in the cards for 2011, right now the market looks content with a PBoC on hold. Shanghai rallied up 2.88% and pulled the rest of Asia higher (Note: S&P 500 posted a 2010 high on Friday). On the flipside, the USD has been supported by emerging confidence in a bipartisan fiscal package, which has allowed the upgrading of growth prospects. The shift has given stocks a boost and 10yr US trsy yields climbed to 3.32% (highest since last june) as traders discounting further QE. Commodities are stronger with copper reaching $417.95 (new all time high) and silver breaking above last week’s range at $29.2850. US treasuries continue to trade aggressively to the upside with US 2yrs up to .6925% from 0.6281% - clearing it’s 200 day moving average. The move has now outpaced the corresponding price action in USDJPY and we suspect the pair to play catch-up with further JPY deprecation. It is surprisingly that we are not seeing more action in the commodity bloc (range consolidation) but expect these pairs to play catch-up in the New Year. If there was ever a week which could provide some breakout event - this week would be it, however given the erosion in volume and overall participation, price reactions may be muted. This week there is a slew of central bank rate decisions (including the FOMC), inflation data, Italian no-confidence vote, Ireland bailout vote and EU Summit from Brussels will increase event risk significantly. There continues to be lots of chatter from EU policymakers in the buildup to Brussels, however nothing that potentially clears the haze surrounding critical issues is likely in our collective mind. Currently the market consensus is that both Sarkozy and Merkel are opposed to the idea of a European bond as Sarkozy stated "we will defend the Euro, because the euro is Europe. Our determination, both German and French, is total." Interestingly, German Finance Minister Schaeuble aimed his plethora of comments to defend the political union asserting that "if even a smaller country were to drop out, the consequences would be incalculable." He went to assert that the EU was moving closer to a more complete framework: "in this crisis, Europe will find steps toward further unification." While the situation remains dynamic, the EU Summit in Brussels on the 16-17th should pass without a major decision and should keep the upside on the Euro capped. That said, the market is very sensitive to comments regarding the European Stabilization Mechanism (ESM) and should the idea of haircuts for bond holders gain traction, we’re betting the 1.3165 near-term support will be tested. |
Today's Key Issues (time in GMT): 09:00 EUR OECD Economic Survey of the Euro Area 09:00 SEK Unemployment rate Last 4.5 Exp 4.6 09:30 GBP Input prices Last 2.1 M/M 8.0 Y/Y Exp 1.0 M/M 8.9 Y/Y 11:30 GBP Bean speaking 13:00 EUR Ordonez speaking 18:30 EUR Trichet Speaking |
The Risk Today: GbpUsd Mediocre price action for us in GBPUSD, as the ascending triangle pattern we have been monitoring on the hourly chart has yet to activate (albeit with a false break around lunchtime on Friday). As a reminder, we are looking for a clear break above 1.5840 (24 Nov high) which would point to a target above of 1.6010 (calculated as the width of the triangle applied to the point of break-out). Standing in the path of this target however is the resistance level 1.5950-5 (last seen 23 Nov), and indeed the major psychological level 1.6000. Given this information, we would therefore opt to set our actual target at a slightly less ambitious 1.5980 to avoid the sellers almost certain to lurk up there. Should the bulls manage extend the run further, next resistance is eyed at 1.6095 (19 Nov peak). On the downside, first support is 1.5725 (lower edge of a 2-week uptrend), 1.5650 pivot (and neckline of our former inverse head and shoulders pattern), 1.5485 (30 Nov low), 1.5450 (15 Sep low), 1.5375 (200-day moving average), 1.5297 (7 Sep low) and 1.5122 (21 Jul low). UsdJpy Could the USDJPY range be about to experience a break-out to the topside? For now at least, the pair continues to respect its boundaries defined by the7 Dec low 82.35 and the 29 Nov high 84.40, but arguably the latest rally within the range has both carved out and activated a bullish flag pattern on the hourly chart. This shifts our focus to the topside, and given the height of the flag we are looking at a potential target of 85.50. What makes the bullish strategy all the more intriguing is that a break above 84.40 would also possibly activate an inverse head and shoulders pattern with an even more lofty target around 86.45. The 84.40 range ceiling therefore remains key, so we prefer to wait for a break above there before we jump aboard the long position. Nevertheless, it’s worth noting the next resistance levels eyed at 85.40 (24 Sep high), 85.90 (19 Aug, 30 Aug & 16-17 Sep highs) and 86.90 (2 Aug high). Should the 84.40 barrier block the route higher then expect a return to the lower end of the range toward 82.35. We also stay open to the possibility of a break to the downside, in which case the next supports lie at 81.65 (12 Nov low), 80.60 (strong support from the beginning of November), 80.24 (31 Oct low), then 79.75 –the all-time low from 1995. UsdChf Not much change on the USDCHF picture; in fact it’s barely ventured 50 pips either side of where it was when we last spoke on Friday. It is still tricky to discern the dominant trend from the hourly charts as the pair bounces between short-lived uptrend and downtrend channels. In fact, this morning’s open appears to have negated both the two leading candidates (the 2-week downtrend and 1-week uptrend), so we remain neutral on this pair for now. Should the bears manage to take control, watch for pockets of demand at 0.9795 (Friday’s low), 0.9755 (7 Dec lows), 0.9725 (12 Nov & 3 Dec low), 0.9670 (11 Nov low), and 0.9540 (first established on 18 Oct and re-tested on 5 Nov). If the bulls can turn this around and push higher, expect next resistance at 0.9915 (last Wednesday’s high) 0.9950 (3 Dec high), 0.9965 (upper edge of 1-week uptrend), 1.0054 (26 Nov high) and 1.0185 (17 Sep high). |
Resistance and Support:
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