There is currently a dizzying array of risk in the system which is making focus complicated and anything but short term positioning difficult. USD came under heavy fire yesterday as Moody’s placed the US’s cherished AAA rating on review for a possible downgrade. Safe-haven trades and commodity traders were the biggest gainers, with the USDCHF dropping to 0.8183. The rating agency cited that the lack of progress in debt ceiling negotiations as a key rational for the review.
The greenback was already on back footing as Bernanke’s Congressional testimony emphasized the uncertain and cautious path of economic growth and markets took the comment as indication that further quantitative easing was still on the table. While these comments reiterated themes that were suggested in earlier speeches and FOMC minutes, well covered testimony added further punctuation. For us, the key takeaway is that until a clear direction for growth and inflation emerges – the Fed is not going to do anything. Our view is that while the threat will remain till Q1 2012, there is scant evidence (Fed research) that the two rounds of massive easing actually did anything, so why would the Fed move in for a 3rd shot. Unless their objective is to just debase the USD hoping for a give point when the recovery finally begins.
Asia was relatively quiet with the USDJPY taking out stops below 78.60 and regional Central Banks suspected of smoothing but it was limited in size. Finance minister Noda re-reiterated comments from yesterday that JPY moves have been one-sided and that they will watch FX price action carefully but didn’t mention actual FX intervention.
While FX traders were glued to events in the US, Europe continued to spiral into confusion. Fitch chopped Greece’s sovereign credit rating to CCC stating that the “absence of a new, fully-funded and credible EU-IMF economic program” has increased the likelihood of a default. In addition, Fitch stated that the private sector involvement could trigger a credit default event. While pressure continues to mount – European policymakers continue to argue whether the emergency sessions to discuss the EU crisis will actually take place on Friday. While numerous sources have confirmed the summit, the German Chancellor’s office has emphatically stated that no plans have been made.
In Switzerland, the SNB’s Jordon hit the market with some heavy handed comments yesterday stating that the Central Bank was “watching” EURCHF and was “neither powerless nor unable to act.” Jordon’s comment has markets speculating that a possible physical intervention is on the table. He did dismiss the concept of pegging the CHF to the EUR stating that this action would “mean loss in sovereignty”, which is absolutely correct. Realistically, this is merely the market “seeing shadows” after a brutal 2009 campaign to back traders off the EURCHF short position. The fact of the matter was that the physical intervention of 2009 cost the SNB and their true shareholders, the cantons of Switzerland dearly. In addition, the large EUR position on the SNB’s balance sheet is still a losing position.
Meanwhile the objective of halting the EURCHF was an absolutely failure. The SNB paid a heavy price in attempting to protect the “SNB Put” at the mid-1.4000 lvls and are unlikely to take the same risk. At the most, we envision continued old school verbal intervention. Currently, we are in a similar risk adverse environment and participants (traders and bankers) know, getting in between the market and it most valued safe-haven trade would also end in failure.
As for today, the market will be focused on Italian auctions and then US retail sales. With problems mounting on both sides of the Atlantic – traders will have a difficult choice picking to best of the worst between EUR and USD…perhaps today’s best bet would be just to short the USDCHF.
09:00 EUR ECB Monthly bulletin
10:00 EUR Prior 2.7 Exp -0.1 M/M 2.7 Y/Y
10:00 EUR HICP Ex Tobacco Index Prior 112.74 Exp 112.67
10:00 EUR Euro Stat Core HIP Prior 0.0 M/M 1.5 Y/Y Exp 0.0 M/M 1.5 Y/Y
10:10 EUR Italian auction result
13:30 USD PPI Prior 0.2 M/M 7.3 Y/Y Exp -0.2 M/M 7.4 Y/Y
13:30 USD Core PPI Prior 0.2 M/m 2.1 Y/Y Exp 0.2 M/M 2.2 Y/Y
13:30 USD Retail Sales Prior -0.2 Exp -0.1
13:30 USD Retail Sales Ex Autos Prior 0.3 M/M Exp 0.0 M/M
13:30 USD Initial Claims Prior 418K Exp 415K
15:00 USD Business Inventories Prior 0.8 Exp 0.8
15:00 USD Bernanke Speaking before the Senate banking committee
23:45 NZD New Zealand GDP Prior 0.2 Exp 0.3
The Risk Today: EurUsd The EURUSD impressive rally was given a boost by Moody’s putting the US sovereign rating on review for a possible downgrade. The pair is up over 4 big figures in three days since its low of 1.3837. We are holding on to our bearish view under 1.4475 (bearish trend ceiling) but it’s becoming more so with a close above 1.4298 (11th July high). First resistance comes in at 1.4298, then 1.4375 (7th July high) and 1.4475. Downside support is fleeting due to aggressive bulls moves. 1.4165 (intraday low) will provide the first base, 1.4105 (27th June low) then 1.3970 (23rd May low).
GbpUsd We are observing a shocking recovery in this pair which most considered a goner just Friday. The cable is fast approaching 1.6221/55 (bearish trend ceiling & 21st June high), which would negate the 3-month bearish trend. Momentum indicators re showing significant divergence indicating this bullish move could have further to go. Resistance stands at 1.6194 (intraday high), 1.6221, than plenty of room till 1.6442 (14th June high). We should see buyers stepping in around 1.6079 (8th July high) then not much noise till 1.5949 (12th July high).
UsdJpy Very aggressive selling has pushed the pair below the 79.70 range support. Falling yields in the US continues to put pressure on the JPY. We would be looking to sell rallies below 80.50 as the support is located at 78.45 (Intraday lows) then all time lows at 76.25 (17th March low). After that, the situation become difficult and we should have further saber rattling from Japanese policy makers. Resistance is located at 79.61 (Intraday reaction spike high), 80.38 (12th July high) 81.48 (8th July high)
UsdChf We were looking for further USDCHF weakness and we definitely got it. USDCHF made new all time lows at 0.8083 and SNBs displeasure was clear audible. With traders seeking safe-havens, CHF is still in the driving seat. Below 0.8550 (16th June high & bear downtrend ceiling) we remain bearish on the USDCHF and look for opportunity to sell on rallies. Initial support is now located at 0.8083 (Intraday & all time lows). After that…??? Minor resistance is located at 0.8331 (13th July high), 0.8521 (8th July high), stronger 0.8551/53 (15th & 16th June high) and 0.8680 (long term bearish downtrend ceiling).
Similar Posts:
- Focus Back on EU Debt Crisis & Policy Makers Approach
- Nervous Trading Ahead of Thursdays EU Summit
- USD Suffers as Politicians Fight
- Worries over Italy’s Commitment to Austerity Weighs on EUR
- Finally, a day packed with events and economic data!
