FX stabilized this morning in Asia after yesterday’s aggressive selling in the EUR and commodities markets (spilling over most heavily into AUD). EURUSD traded down to 1.4510 while AUDUSD hit 1.0537. While risk appetite had been weak going into the ECB rate decision meeting, clearly the catalysis for the selloff in the EUR was Trichet’s comment after holding rates steady at 1.25%. Trichet disappointed the market that was already pricing a 100% probability of a rate hike by July in using less immediate verbal clues such as “closely monitoring” and that risk were “balanced.”
The ECB attempt at fine tuning spooked the market and traders rush to the EUR exits. “We continue to see upward pressure on overall inflation, mainly owing to energy and commodity prices” while “inflation rates are likely to stay clearly above 2% over the coming months.” While the overall tone of the comment was that ECB members would watch incoming data – it’s obvious that they will remain more hawkish relative to the FOMC and should be EUR supportive. When questioned about a possible restructuring of Greek debt, Trichet stated “we consider that it is not in the cards.” And when asked about considering peripheral situation when setting policy rates he stated “absolutely not. Our responsibility is for the price stability of the Euro area as a whole.” But what else would he really say?
This morning, the ECB’s Nowotny asserted that given the massive cuts in stretched EURUSD long positions, the market had definitely over-interpreted the ECB yesterday. We also agree with this statement and see rising prices pressure pushing the ECB to hike in July.
In Australia, the AUD and our bullish call on the AUD got some much needed support from a quarterly statement of monetary policy which took on a more hawkish tone, with the RBA stating that “further policy tightening is likely to be required at some point to restrain inflation.” Recently the AUD has been slammed by weaker than expected retail sales data, declined rate expectations, expectations that China will further put the brakes on monetary policy and collapsing commodity prices.
That said, we see this as more of a short term correction in asset prices since structurally, nothing has changed, except a slightly less hawkish view on inflation in the G10, and a buying opportunity for risk correlated FX trades (selling USD and JPY). We are still expecting the RBA to hike in July.
As for the JPY, this morning’s much anticipated open came and went with no sound from the BoJ or MoF regarding the strength of the Yen. Economy minister Yosano stated that the drop in USDJPY was largely based on USD weakness rather than JPY strength and suggests a reluctance for officials to intervene. The highlight of the day will be the payroll data from the US this afternoon. Expectations have been lowered slightly due to this week’s data including ADP.
NFP is payrolls are expected to hit 185k with 200k in private sector jobs creation. The unemployment rate is expected at 8.8%. These are big numbers and trading will be volatile especially considering that expectations are varied. With the ECB and FOMC divide slightly narrowed yesterday by Trichet’s comments, improvements in the US labor markets will narrow it further. A stronger than expected read will give the USD a new lease on life.
08:00 NOK Industrial Production sa (Mar)
08:30 GBP PPI Input nsa (Apr)
10:00 EUR GE Industrial Production (Mar)
11:00 CAD Unemployment Rate (Apr) % 7.70% exp
11:00 CAD Net Change in Employment (Apr) lvl 20.0K exp
11:30 USD Fed’s Yellen Speaks
12:30 USD Change in Nonfarm Payrolls (Apr) lvl 185K exp
12:30 USD Change in Private Payrolls (Apr) lvl 200K exp
12:30 USD Unemployment Rate (Apr) 8.80% exp
14:00 USD Fed’s Dudley Speaks
15:45 USD Fed’s Bullard Speaks
19:00 USD Consumer Credit (Mar) USD bn 5.000 exp
The Risk Today: EurUsd Huge turnaround in EURUSD’s fortunes since Trichet’s press conference kicked-off yesterday afternoon; with the pair brutally plunging from the morning’s mid-1.48 levels down to a low of 1.4510 overnight. Unfortunately, the move stopped us out of our longs at 1.4800; however, looking at where the pair eventually ended up, it’s a blessing the damage was not more extensive. Sentiment remains nervy with another key risk event due this afternoon (US non-farm payrolls), and clearly the bullish uptrend is blown out of the water – so from here the downside looks the more vulnerable. Next support on the horizon is 1.4485 (20 Apr NY session low), before a large void until 1.4205 (19 Apr lows) and 1.4152-7 (5 & 18 Apr lows). Rebounds should now face resistance back towards 1.4634 and 1.4765 (former supports that now act as resistance), but going into the weekend, we doubt that there will be enough bullish momentum to get much further than 1.4600.
GbpUsd The head and shoulders pattern in GBPUSD has become active in the past 24 hours, as the sell-off yesterday afternoon took us below the 1.6430 neckline and on to lows of 1.6359. We have therefore gone short just below the neckline at 1.6420, and are aiming for a target of 1.6125 (calculated as the height of the head subtracted from the neckline). Encouragingly, one rebound rally has already been rebuffed back at the neckline, so we fully anticipate that further downside will come this afternoon. Supports levels in between here and our target lie at 1.6359 (yesterday’s low), 1.6308 (20 Apr low) and 1.6167 (18 Apr low). We strongly feel that rebounds will struggle to get close to 1.6430 again, but if we are wrong, watch for further topside levels at 1.6574 (Wednesday’ high and peak of the second shoulder), 1.6661 (3 May high), and 1.6766 (25 Nov 2009 high).
UsdJpy With the BoJ and Japan were absent from the market for a public holiday yesterday, USDJPY plunged below the key 80.00 level; but despite managing to get as far as 79.57 with very few supports eyed below, the pair has since turned back around and recovered towards 80.50 levels. The bizarre turnaround has not been attributed to any formal central bank intervention, and may simply be a case of speculators wishing to get out of the way before the BoJ comes back in and does decide to start buying USDJPY down at these levels. Intriguingly there is now a hammer candlestick carved out on the daily chart, which does suggest a near-term reversal is on the cards, so we watch for the pressure today to be on the topside. First resistance is now 81.20 (Wednesday’s high), 81.69 (Monday’s high), 82.79 (27 Apr high), 83.26 (18 Apr high), and 83.79 (15 Apr high). Should this recovery be brief and a return to the lows ensue, watch for supports at 79.57 (yesterday’s low), 78.26 (17 Mar low), then the all-time low 76.40.
UsdChf Here comes the dollar! After taking a continual beating for the past few weeks, USDCHF has finally burst out from its bearish shackles and surged toward 0.8700 levels. Clearly the second failed attempt to push below 0.8555 on the downside led to a liquidation of quite a few excess short positions, and now we may be on course for a challenge to the broader downtrend channel. Currently, the top edge of the current downtrend channel comes in at 0.8715 (approximately today’s and yesterday’s highs), but given the morning star candlestick pattern on the daily chart (a very bullish omen), we feel that this ceiling may be broken today. Should we break higher, next topside levels are stacked at 0.8760 (28 Apr high), 0.8832 (27 Apr high), and 0.8878 (22 Apr high). Until the breakout occurs, a slump back within the channel is still possible (although in our view the morning star pattern makes it the less likely scenario), in which case the focus will return to the 0.8554 all-time low and then the 0.8500 psychological support.
Similar Posts:
- Inflation Still A Concern, But RBA Unlikely To Hike Until July
- Events in the Middle-East Begin to Pressure FX Markets.
- Markets Prepare to Measure Trichet’s Every Word
- Gold Surges but FX Remains Range-Bound
- German Growth Rejuvenates EURO
