Forex - Portuguese Bond Auction Likely To Keep EURUSD Supported

Surprisingly the EUR has been able to overcome an excess of bad news and negative press to enjoy a decent rally so far this week. However most of the pressure has been generated by analysts with too much spare time on their Bloomberg terminals rather than actual events or decisions. Case in point was Harvard University’s Niall Ferguson stating that the EU sovereign crisis was in its “hangover” phase. What does that really mean? Yet it made headlines and for the most part more of the same has been pushing around FX. The reluctance of EUR traders to sell illustrates that the expectations for a Portugal bailout might gotten ahead of itself. In addition, the emphasis on today’s Portugal 4y and 9y bond auctions at 10:30 GMT is slightly over stated. We suspect that today’s auction will go off without a hitch. First off all, the size is relatively small at €2.25, second with the ECB successfully intervening in the secondary bond market, there is a clear backstop of support waiting in the wings. Aside from the EU debt sales today, the economic calendar is sparse, and things really only notch up a gear tomorrow with the first BoE and ECB rate decisions of the year. Although no change is expected from the BoE this month, inflationary pressures are grabbing more of the spotlight of late, and stoking discussion of potential tightening for the UK in the first half of 2011. At present, interest rates stand at 0.50% and the asset purchase target remains at GBP200bn. The lack of change in settings for either of these monetary policy tools is almost certain to ensure that no accompanying statement will be forthcoming. Instead, markets will need to wait for the minutes on 26 Jan to hear the more interesting breakdown of the vote. At the last meeting we once again saw the contrasting split within the MPC; as member Sentence continued to dissent in favour of a 25bps rate hike, while member Posen voted for a 50bn increase in the asset purchase target (effectively voting for easing). With UK inflation ticking back up to 3.3% YoY in November and Q3 GDP still pretty robust at 0.7% QoQ (final reading), we side with Sentence in calling for the next move from the central bank to be one of monetary tightening as opposed to easing. Shortly after the BoE announcement, the ECB will announce its own rate decision for January; but they too are expected to keep rates unchanged at 1.00% at this meeting. With peripheral countries, specifically Portugal, under pressure to accept an EU/IMF bailout, inflation beginning to trend higher, PMI data suggesting significant divergence in growth paths, and speculation that ECB debt purchases have increased meaningfully will most likely make for a contentious Q&A session during Trichet’s press conference. Although there is the risk that inflation data and recent comments from German officials may force Trichet to mention exit strategies, we suspect that threat is mute. Currently, EURUSD and EU bonds are directly correlated, but should the ECB tighten we believe EUR would strengthen (short squeeze and interest play) while bonds would languish, or worse, continue be sold off. Such action or simply strongly worded rhetoric could easily be the catalyst which exacerbates the Eurozone current problems.

Today's Key Issues (time in GMT):

08:00 EUR Germany: Budget (Maastricht), -3.0 exp
08:00 EUR Germany: GDP, % 3.7 exp,
09:30 GBP Visible trade balance, £bn -8.3 exp, -8.5 con
10:00 EUR Industrial production, % 0.5 (6.0) exp, 0.6 (6.8) prior
13:30 USD Import prices, % 1.2 (4.7) exp
18:00 CHF SNB Vice-Chairman Jordan speaks at new year's event of the FDP Graubünden in Reichenau
18:00 USD Dallas Fed President Fisher (FOMC voter) speaks on monetary policy
19:00 USD Fed Beige Book report released Jan
19:00 USD Treasury budget balance, $ bn -84.0 exp
23:50 JPY Core machine orders, 2.0 exp

EurUsd Recovery off the 1.2875 lows has continued overnight as the markets prepare themselves for the upcoming Portuguese debt auction. Overnight, the tentative downtrend channel we had in place was broken (rebutting a subsequent re-test), and early this morning we have started to nudge up against the 1.3020 resistance level (7 Jan highs). Although 1.3020 caps for the time being, we do not rule out a break higher should the Portuguese bond sale go well; nextresistance levels are eyed at 1.3071 (200-day moving average), 1.3085 (29 Dec support now turned resistance) and 1.3250 (former 3 Jan support). Nevertheless, the downside remains vulnerable (especially to headline risk regarding Portugal), so anticipate a break below 1.2875 to open up a move to 1.2830(14 Sep low). Should that level give way, it’s a long plunge until next support at 1.2645 (10 Sep low). GbpUsd GBPUSD continues to creep higher ahead of the BoE meeting on Thursday, and at present is looking to challenge the 1.5665 resistance level (31 Dec high) on the topside. There is already a sequence of higher lows on the hourly chart, but before we can assert any real confidence in a new uptrend, the bulls will need to print a fresh “higher high” above 1.5665. If they can, then pockets of supply are anticipated at 1.5770 (seen 15 Dec before the big sell-off), and 1.5910 (14 Dec high). If however, the 1.5665 level proves to be a stubborn ceiling to further upside progress, then we may simply have to concede that a period of range-trading is on the cards. On the downside, first support is eyed at 1.5421 (200-day moving average), 1.5405 (Friday’s low), 1.5345 (28 Dec low), 1.5297 (7 Sep low) and 1.5122 (21 Jul low). UsdJpy Not much change in our USDJPY outlook as the pair continues consolidate around 83 levels; capped thus far by resistance around 83.70 (Friday’s high), but also supported by the 10-11 Jan lows of 82.68. One potential development of note is that the rebound yesterday carved out a bullish engulfing candlestick on the daily chart –however there aren’t many other indicators as yet which support a bullish strategy, so we’re unwilling to act on this one omen alone. From here, we expect good support to come into play around 82.65 once more, then 81.70 (4 Jan European/US session low), and 80.95 (31 Dec low). Longstanding supports remain below at 80.24 (31 Oct low), and the all-time low from 1995 at 79.75. First resistance is Friday’s high 83.70, followed by the formidable old range ceiling of 84.40. This latter level managed to contain numerous rallies back on 29 Nov, 1 Dec, 2 Dec, 8 Dec, 13 Dec and 16 Dec –so it’s likely to be a stubborn barrier should we managed to get back up there. As such, selling on rallies above 84.00 is likely to be our preferred strategy, setting a stop just through 84.50. UsdChf Important developments in USDCHF yesterday, as the bulls managed to trigger stops on the topside, pushing us through the critical 0.9735 level (16 Dec high), and thereby activating a possible inverse head & shoulders pattern on the hourly chart. Regular readers may recall that the target of this head & shoulders pattern is around 1.0165 (measured as the height of the head added to the neckline), and now that we are long we have set our stops just below 0.9700. The high reached on yesterday’s initial burst was 0.9784, and even though we have pared back since then, the bears have thus far been unable to keep the pair submerged below the 0.9735 neckline. Resistance levels to watch on the topside now stand at 0.9784 (yesterday’s high), 0.9850 (12-13 Dec highs) and 1.0065 (1 Dec high). We still have a nagging conflict with our fundamental view that the CHF should be an outperformer against the USD, so we remain alert to any signs that the bullish pattern we are playing could break down prematurely. For now we eye key support at 0.9735 (the neckline), 0.9605 (7 Jan low), 0.9530 (former resistance now turned support), then the lower edge of an old downtrend at 0.9365.

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.3250 1.5910 84.40 1.0065 1.3085 1.5770 84.00 0.9850 1.3071 1.5665 83.70 0.9784 1.3029 1.5641 83.11 0.9729 1.2875 1.5421 82.65 0.9605 1.2830 1.5405 81.70 0.9530 1.2645 1.5345 80.95 0.9365 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot