Forex News and Events:
USD gained some ground amid a quiet Asian session after getting pounded on Friday following the weaker than NFP report and Bernanke’s comment which furthered USD selling. However, it’s clear that the sentiment toward the USD and the EUR have shifted drastically since last week’s “end of days” for the Euro.
Even the UK Guardian’s article which suggested that German Chancellors Markel’s preference was to leave the Euro “if this is the sort of club the Euro is becoming, perhaps Germany should leave.” The article was quickly denied by German officials and the Irish Times headline that “Ireland likely to leave the Euro” failed to gather any momentum in the FX market. Articles which would have had traders scrambling for the EUR exits only two weeks ago now have a much more muted reaction.
Seemingly the ECB’s aggressive sovereign bond purchasing program has put a stop on the downside and potentially headed off the worst case scenario. EU peripheral sovereign bond spreads continue to tighten and CDS prices have come down significantly since the ECB’s “speak softly but carry a big stick” bond purchasing strategy. We suspect that we are entering a period of EU sovereign stress hibernation which should benefit the Euro in the near term.
As a clear indication that the focus is now back on the US, Euro rates rallied, equities were firm and spot Gold approached its near all time high trading at $1418 (at the time of writing) as the fear of further QE from the Fed has reared its head again.
Over the weekend on CBS TV, Bernanke said that the potential direction significantly depends on the program's efficacy – the Fed will be keeping a close eye on forthcoming data, specifically those pertaining to inflation and general economy.
He also mentioned that the US economy is very close to becoming a self- sustaining recovery although could take 4-5 years before unemployment drops back to 5-6% and the weakened payroll data seem to illustrate how sticky the situation really is. On the subject of deflation, Bernanke asserted that the risk was low but would be more serious if the Fed hadn’t acted. The chairman went on to testify that fears over the Fed’s aggressively loose policy were overstated but in essence, he did confirm the idea of QE3 to many a viewer.
Remember that QE is still very much data dependent and so far the US recovery has been mixed at best. On a side note, Bernanke was direct in his criticism of China’s exchange rate mechanism and stated that the Chinese have modest control of their monetary policy but were being directly affected by US policy and in essence, were importing the US ultra-loose policy.
Otherwise, Fitch affirmed Australia's rating at AA+ - outlook stable, which bodes well for the AUD and should support risk appetite for the currency. Today’s light economic calendar will put the focus on market activity (equity markets, periphery spread widening/tightening etc). With the thin (and getting thinner) Forex market - moves will be exaggerated on breaks. Euro and risk-correlated FX trades will continue to be driven by European headlines but we suspect that baring a bombshell, traders will look fade any moves. Watch for Eurogroup / ECOFIN meetings today & tomorrow producing some
buzz.
Today's Key Issues (time in GMT):
08:00 GBP Nov Halifax house price index, -0.5% m/m exp; prior +1.8%, Nov qtr +1.2% y/y.
09:30 EUR Dec Sentix index, 11.0 exp; prior 14.0.
19:00 EUR ECB/Dutch CB Wellink speech in Amsterdam.
The Risk Today:
EurUsd EURUSD has powered higher since the break of the 4-week downtrend, knocking out resistance through 1.3305-15 (29 Nov high and back side of 6-month uptrend), and going on to hit at high of 1.3438. Given the strong surge we have seen and the extent of short positioning in the market that is likely to fuel it, we have to concede that our bearish bias is now stale, and instead look for buy-on-dip opportunities.
On the downside, the first support of note is 1.3193 (Friday’s lows), followed by 1.3060 (2 Nov low), 1.2972 (30 Nov & 1 Dec low), 1.2922 (pivot from early Sep), 1.2830 (14 Sep low), and 1.2645 (10 Sep low).
On the topside, first resistance is eyed at 1.3448 former pivot, then 1.3635 and 1.3785 (22 Nov high).
GbpUsd After a lot of false breaks and choppy trading around 1.5650 (29 Nov & 1 Dec highs), the inverse head and shoulders pattern we had been monitoring on the hourly chart finally became active on Friday, and made an emphatic burst to highs of 1.5788. Our target for this pattern was agonizinglyclose to being met at 1.5810, but as things are we have stayed long and watched as the pair has pared back gains towards 1.5700.
We are willing to stick with the long position for the time being, anticipating that the pair will get a second wind of buyers in the run up to Thursday’s BoE meeting.Supports are noted back at our 1.5650 neckline, with further pockets of demand staggered below at 1.5485 (30 Nov low), 1.5450 (15 Sep low), 1.5357 (200-day moving average), 1.5297 (7 Sep low) and 1.5122 (21 Jul low).
Aside from our 1.5810 target, first resistance on the topside is noted at 1.5840 (24 Nov high), with next levels of note 1.5950-5 (last seen 23 Nov), 1.6000 psychological resistance and 1.6095 (19 Nov peak).
UsdJpy The dreadfully disappointing non-farm payrolls on Friday were the catalyst for a spectacular plunge in USDJPY, busting through the former range floor 83.40, and taking the pair to lows of 82.50.
That 82.50 level has managed to repel two tests thus far, but should another sell-off manage to push lower, then it’s likely we see a quick return to 81.65 (12 Nov low). Next supports of note on the downside are 80.60 (strong support from the beginning of November), 80.24 (31 Oct low), then 79.75 –the all-time low from 1995.
Those players caught long on the sell-off through 83.40 will likely be clustered around that level looking to liquidate their positions should we get back up there, and further resistance levels remain at 84.40 (29 Nov high), 85.40 (24 Sep high), 85.90 (19 Aug, 30 Aug & 16-17 Sep highs) and 86.90 (2 Aug high).
UsdChf The break of USDCHF’s shallow 2-week uptrend followed by a bearish evening star candlestick on the daily chart last week sent a loud and clear signal that the pair was vulnerable to more downside, and by the start of this week we have seen that forecast become a reality.
With the former downside support at 0.9899 (24 Nov low) completely blown out of the water, the pair has quickly made its way to 0.9725 (12 Nov low and now 3 Dec low); should that support get worn down by the bears then expect another dip to 0.9670 (11 Nov low), and possibly 0.9540 (first established on 18 Oct and re-tested on 5 Nov).
On the topside we expect rallies to be extinguished back towards 0.9900, whilst above there, further resistance is noted at 1.0054 (26 Nov high) and 1.0185 (17 Sep high).
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