Wednesday, January 19, 2011

EUR Finds Support From Chinese Comments

!! News And Events: !!
With the US on holiday, Forex markets were left with little
directional assistance and drifted towards USD selling. A story from
Spanish newspaper El Pais suggested that Russia, which had suspended
Spanish sovereign debt purchases in 2010 due to credit rating
downgrades, would revise the policy. The paper quoted Russia's
finance minister Kudrin saying Russia has "reason to revise its
position" and illustrated the confidence nations had in Spain after
the successful debt issuances (10-year syndicated bond offer was
executed with plenty of demand and increased size of €6bn). However,
only a few hours later Bloomberg reported that Kudrin had denied the
assumption that Russia would revise its policy on purchasing Spanish
debt and was not ready to buy Spanish paper with oil wealth fund
money. He did say that Russia would be interested in EFSF debt,
although still non -committal. The denial failed to dent traders
appetite for EURUSD as the pair climb from 1.3260 to 1.3390 in a one
directional move.

The EUR also gained support form comments from China that the ratio of
USDs in FX reserves needs to be examined; more specifically, that the
ratios of EUR and JPY needed to be increased. It seems that despite no
solid results from yesterday's 17 finance minister Eurozone meeting,
that markets are still optimistic of a positive end result. Yesterday,
the market waited anxiously for any headlines from the meeting however
all we got were conflicting random comments.

While the Belgian FinMin Reynders stated that he was in favour of
doubling the EFSF and discussion on this issue could start
immediately, there were strongly worded comments from German and
Austrian ministers suggesting that in fact there was no urgency and an
increase in the rescue fund was premature. Cleary the solidarity in
thoughts around the EFSF that we heard last week from EU officials
which gave risk correlated FX trades a strong boost, is less cohesive
than believed. We found it interesting that the six AAA rated EU
countries had a separate meeting which directly involved expanding the
lending capacity, structure of the facility and ways of safeguarding
the fund's high rating (according to German newspaper Handelsblatt).

Today UK inflation data will take center-stage in the European
session. In a domestic UK newspaper MPC member Paul Fisher stated that
the rise in inflation is merely temporary and a policy response would
not be appropriate. He stated "We have to look through those
short-term things, despite whatever unpopularity comes our way." Not
really reassuring words considering we have been sitting above the MPC
comfort zone for over a year with little sign of relief. And today's
number is expected to trend higher to 3.7% y/y (and we expect to peak
in feb at 4.1%). We suspect that the market is underestimating the
stubbornness of UK inflation and the MPC's commitment to fighting
price pressure. Watch for a move higher in the sterling should we
print to the upside.

And on a final note we are in agreement with market consensus that the
BoC will hold rates at 1.00% this afternoon. Markets will be watching
the accompanying statement and any hints about the contents of
January's Monetary Policy Report release tomorrow. With 75bp of
hikes expected in 2011, watch for signals that downside risks from the
US economy have decreased, clearing the way for further tightening and
a CAD rally.

!! Today Key Issues: !!
* 00:00 EUR E27 Economic & Financial Affairs Council (ECOFIN)
Meeting-
* 09:30 GBP CPI (Dec
* 09:30 GBP Core CPI (Dec)
* 09:30 GBP RPI (Dec)
* 10:00 EUR ZEW Survey (Econ. Sentiment) (Jan) index
* 10:00 EUR German ZEW Survey (Current Situation) (Jan) index
* 10:00 EUR German ZEW Survey (Econ. Sentiment) (Jan) index 7.0 exp
* 13:30 USD Empire Manufacturing (Jan) index 12.00 exp, 10.57
* 14:00 CAD Bank of Canada Rate % 1.00%
* 14:00 USD Net Long-term TIC Flows (Nov) USD bn 27.6 exp
* 15:00 USD NAHB Housing Market Index (Jan) index 17 exp
* 22:00 USD ABC Consumer Confidence (Jan 16) index

!! The Risk Today: !!
*EurUsd* EURUSD continued to consolidate lower yesterday (1.3244 the
low), but notably, it met ample demand ahead of 1.3234 (38.2%
fibonacci retracement of the entire rally from 1.2874 to 1.3457) which
bodes well for the bulls. We now see a potential cup and handle
pattern forming on the hourly chart; one that has an impressive target
around 1.4035. There's two ways to play this pattern; we have chosen
the strategy which relies on a more bullish conviction and have gone
long on the break out from the handle's range (around 1.3340), but
the more cautious approach would be to wait until a break above the
cup's rim of 1.3457 –thereby ensuring the break-out is true and
the pattern genuinely active.Given the immense distance to the target
there's obviously plenty of levels noted on the topside before us;
Friday's high of 1.3457 (the rim of the cup) is the first, followed
by the hugely important 1.3500 level –significant not only for its
psychological effect, but also because it coincides with the 14 Dec
high. Going forward the next levels to watch above are seen at 1.3635
(23 Nov high), 1.3785 (22 Nov high), 1.3825 (10-11 Nov highs), and
1.3975 (9Nov high). Supports remain at 1.3234 (38.2% fibonacci
retracement), 1.3165 (50% fibonacci level) and 1.3145 (12 Jan high
former resistance).Below there we have a large gap before major
support at 1.3085 (the 29 Dec pivot and 13 Jan low).

*GbpUsd* GBPUSD is powering higher this morning as we await the
release of December's CPI figure from the UK. At the time of writing
the pair is on the highs around 1.5975, having effortlessly negated
prior resistance levels at 1.5910 (14 Dec high) and 1.5950 (last seen
23 Nov). As such, we now find ourselves staring down the barrel of an
assault on 1.6000. Should we manage to break through there with
today's CPI release, the next resistance is only noted at 1.6095 (19
Nov high), with another long gap before we hit 1.6185 (9, 10 & 12 Nov
triple high). Buyers on dips are likely to be everywhere, whilst
near-term support comes in at 1.5870 pullback area seen late
yesterday, 1.5810 (14 Jan low), 1.5785 (former resistance now turned
support), and 1.5718 (13 Jan low).

*UsdJpy* Looks like USDJPY's 3-week uptrend finally gave up the
fight overnight, as the heavy price action continued to dominate and
led us back below 82.50 once more. There are still a couple of
supports clustered in this area that could provide the platform for a
bounce (yesterday's low 82.35 and 2-week downtrend support at
82.25), but the break of the 3-week uptrend certainly does not help
the bull's cause. Should the momentum be sufficient to break lower,
further sellers are likely to be attracted and we would expect a
return to 81.70 (4 Jan European/US session low); with the possibility
of extending to 80.95 (31 Dec low), 80.24 (31 Oct low), and the
all-time low from 1995 at 79.75. From here, first resistance is
Friday's high 83.05, the upper edge of the 2-week downtrend channel
at 83.20, followed by 83.50 (11 Jan high), 83.70 (7 Jan high), and the
formidable old range ceiling from early December at 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 manage to get back up there.

*UsdChf* We may have been neutral yesterday, but after the
developments of the last 24 hours, we are now resolutely bearish on
USDCHF in the short term. Not only have we seen the activation of a
bearish flag pattern on the hourly chart (after the break below
0.9630), but also the activation of a head and shoulders pattern due
to the break below 0.9605 (7 Jan & 14 Jan low)! As a reminder, the
bearish flag pattern has a target around 0.9480 below (calculated by
measuring the length of the flag pole and applying it to the point of
break out). For those that missed this development, it's not too
late to jump aboard the larger head and shoulders pattern that's
also now in play; as this pattern has a neckline around 0.9605 and a
target at 0.9425. Selling on any rallies back up towards that 0.9600
handle will certainly be high on our agenda. Only support noted on the
horizon is 0.9530 (former resistance now turned support), while
resistance levels to watch on the topside now stand at 0.9687
(Friday's high), 0.9784 (11 Jan high), 0.9850 (12-13 Dec highs) and
1.0065 (1 Dec high).

Source: ActionForex.Com

No comments: