FX risk appetite corrected slightly in the Asian session – not due to any event but more so because of the lack thereof. The pullback should be shallow and short lived. EURUSD touched 1.4900 before trading down to 1.4772 while USDJPY slide further to 80.90 prompting speculation of a Japanese intervention (although we have heard no mention of official names disrupting orderly trading). Precious metals were able to rally of yesterday’s lows with silver recovering to $45.56 and Gold climbing to $1551. The key event this morning was the RBA’s decision to hold rates at 4.75%, as we predicted. Given the upward swing in inflation expectations, the RBA statement was slightly more hawkish than the market had anticipated. The growth side of the equations has been lagging with sharp weakening in the housing markets, low lending and stop & start domestic data which is expected to erode GDP expectations. Yet the bigger problem is clearly the inflationary environment. Headline CPI q/q was higher-than-expected climbing to 1.6% vs. 0.4% (prior reading) – which means core inflation should head above 3.0% in early 2012. The AUD at a 29-year high has done a good job of containing imported inflation yet the RBA still realizes the proximity of the inflation. Given the mixed bag of growth data, we suspect that next hike will be in July but we will be reading carefully for any shifts in tone. Interestingly RBA watcher Terry McCrann repeated his call for a RBA hike in June stating in the Sunday Herald that “interest rates in Australia are going up again and the RBA will make that very clear in its on Tuesday.” Whether the RBA goes in June or July, either way the AUD will keep its support as carry starved traders search for yield. From the EU, Juncker said that the Euro group would give its full opinion on Portugal by mid May and reiterated that restructuring/ the default of Greek debt was not an option. We also think that realistically – all EU peripherals are “to big to fail” and at this current juncture the union will take another direction rather than destroy what’s left of the market’s fragile opinion of the economic union. Despite this, we think Greek 2 yr yields will go to new record highs today, probably around of 25.6%, but follow through into the EUR shouldn’t be expected. As for today, the lack of news will keep trading range bound and we should see positive risk sentiment slowly come back to the markets. Watch for equity markets to pick up a bit and then FX to follow.
09:00 EUR PPI, % m/m (y/y); exp: 0.7 (6.6), prev: 0.8 ( 6.6)
14:00 USD Factory orders, % m/m; exp: 2.0, prev: -0.1
The Risk Today: EurUsd It was another very quiet day yesterday, which means EURUSD has remained within its consolidation range between 1.4764 (2 May low) and 1.4905 (7 Dec 2009 high). The data calendar remains light today but as we progress closer towards Thursday’s ECB meeting and Friday’s non-farm payrolls, look for a break of this range to dictate the ultimate direction for the pair over the coming week. Should the rally resume (as we strongly believe it will), then above 1.4905 there is a clear route to the significant 1.5000 level. Beyond 1.5000, the occurrence of historic resistance levels becomes much less common, and indeed the next one would be all the way up at 1.5144 (25 Nov 2009 high). In the meantime, expect buyers on dips to lurk around 1.4764 (this week’s low), 1.4634 (27 Apr low), and 1.4485 (20 Apr NY session low).
GbpUsd Profit takers have swept in over the past day, causing GBPUSD to drop below 1.6600 levels for the first time since the 27 Apr. As such, we have liquidated our GBPUSD longs, locking in 100 pips of profit, but disappointingly, failing to see the successful completion of our bullish flag pattern. For those traders who opted not to set a trailing stop on this bullish flag, the pattern is still very much in play, with the ultimate target still standing at 1.6935. However, we feel that the risk of a further sell-off ahead of Thursday’s BoE rate decision makes the strategy of taking profits off the table now a correct one. Resistance levels still stand at 1.6766 (25 Nov 2009 high) and 1.6878 (16 Nov 2009 high), followed by the 1.7000 psychological resistance and 1.7043 (5 Aug 2009 high). Expect buyers on dips to appear at 1.6587 (today’s low), 1.6501 (27 Apr NY session low), 1.6432 (26 Apr low), 1.6385 (21 Apr low), and 1.6308 (20 Apr low).
UsdJpy USDJPY still feels very heavy this morning, and has now dipped below the 81.00 level to lows of 80.90. As discussed yesterday, it is clear that last week’s break of the 3-week downtrend channel is certainly not giving way to any bullish conviction whatsoever, and instead, we have been forced to apply a new 2-week downtrend channel to the price action. From here, next supports below are noted at 80.51 (18 Mar low), 78.26 (17 Mar low) and then the all-time low 76.40. Clearly though, these supports are considerable distances apart, so the risk of a sharp tumble at any moment is very high. In the meantime, the key topside resistance is 81.69 (yesterday’s high), 82.79 (27 Apr high), 83.26 (18 Apr high), 83.79 (15 Apr high), 84.79 (12 Apr high) and 85.52 (6 Apr highs).
UsdChf USDCHF just keeps on falling this week; the downtrend is still very much in force, and this morning we have dipped to fresh all-time lows of 0.8619. As discussed last week, the nature of trading into uncharted downside territory means there are no previous support levels we can cite as potential pockets of demand, and instead we are reliant on purely psychological supports such as 0.8600, 0.8500 and 0.8400. In truth, the only psychological level that we’d put much weight on is 0.8500, so clearly it pays to be short on this move lower. On the topside, rebounds are likely to meet resistance around 0.8697 (yesterday’s highs), 0.8760 (28 Apr high), 0.8832 (27 Apr high), and 0.8878 (22 Apr high).
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