Financial markets have their eyes focused squarely on Libya and the spillover effect into crude prices. While there are side plots of inflation, safe haven trades and the BoE surprise lean towards tightening – the main story remains oil. While Brent has rallied nearly $10 since the Asian open to $119.79 high, activity in FX markets remains subdued with 1-month implied vols continuing to creep about very low levels. Perhaps the main reason for the lack of a legitimate reaction is that the political turmoil has been isolated to small oil producers and not one of the major production centers (Saudi alone has the ability to increase supply by 4 million barrels per day easily covering Libya’s 1.5 barrel/day drop). However, protests are schedule to take place in Saudi Arabia today and tomorrow which will likely drive further oil volatility today. Considering the Saudi’s willingness to temporarily step in with extra supply – it’s too early be discussing a 1970-like supply side shock and how inflation and growth would be affected. Interestingly, pre-emptive action was taken by King Abdullah in advance of these protests, with a 15% pay increase for government employees, amnesty for imprisoned debtors and additional benefits for the unemployed and students. Equity markets were weaker in Asia after a weak Wall Street session. We still believe these moves to be part of a logical short term correction in a period of significant stress. However we do suspect that the correction will be deeper and longer than most believe. The Swiss Franc has continued to demonstrate that it’s the go-to safe-haven of choice and will likely remain that way into the foreseeable future. Yesterday’s surprise BoE meeting minutes had the vote at 6-3 with three members voting for no rate hike. Dale joined Martin Weale and Andrew Sentance in voting for rate hikes (Dale and Martin voting for 25 bp and Sentence 50 bp). The tone of the minutes were resoundingly hawkish noting that even those members who had not voted for a hike had thought that the case for tightening has increased. The hawks now only need two more members to complete the shift into tightening mode. We suspect that by May growth will have firmed up and the inflation level will remain – prompting other votes to follow. With nearly 25 bps priced in by June, the sterling near term support will depend on increasing forward rate expectations. We expect support for the Pound which will further be reinforced as the market plays catch up. Look for the Forex market to price in one to two more rate hikes for 2011. In the US, Initial jobless claims are expected today with the market looking for a dip down to 405k while for Durable Goods, the general forecast is 3.0%.
10:00 EUR Final consumer confidence, index Feb -11.0 exp
10:00 EUR Industrial confidence, index Feb 6.5 exp
11:00 GBP CBI distributive trades Feb 25 exp
13:30 USD Durable goods orders, % m/m Jan 2.9 exp
13:30 USD Core capital goods orders, % m/m Jan -0.7 exp
13:30 USD Initial jobless claims, thous 19-Feb 410 prior
13:30 USD St. Louis Fed President Bullard (FOMC non-voter) speaks
15:00 USD New home sales, thous saar Jan 300 exp
15:00 USD FHFA home prices, %m/m (y/y)
The Risk Today: EurUsd EURUSD’s rally managed to clear the 1.3744resistance level (9 Feb high) yesterday, but repeated attempts to extend higher have been suppressed around 1.3785, causing a subsequent liquidation of speculative longs that has dragged us back down to the lower end of 1.3700. We still believe that buying on dips is the way to handle this pair, so anticipate support back towards 1.3635 back-side of the former downtrend channel, 1.3528 (22 Feb low) and 1.3460 (15 & 16 Feb low). Indeed, we still feel that 1.3460 would be a decent area to add to longs, but would start to reconsider our bullish bias on a test of the neighbouring supports at 1.3428 (14 Feb low) and 1.3397 (20 Jan low). On the topside, resistance levels are eyed at 1.3785 (today’s ceiling of supply), 1.3861 (2 Feb high) and 1.3896 (61.8% fibonacci retracement of 1.5145 to 1.1876). Overall, we remain confident in our medium term view that EURUSD has the momentum and support for an eventual challenge on the psychologically important 1.4000 level.
GbpUsd The broader slump in risk appetite is weighing on GBPUSD once again –in spite of yesterday’s surprisingly hawkish BoE minutes. As such, we are wary that there are likely to be some very frustrated bulls out there hanging onto longs entered above 1.6200, and that means a short term correction lower could very well be on the cards. At the moment the bears are threatening to break below the 1-2 week uptrend channel (currently eyed at 1.6150), but we expect buyers to start appearing towards 1.6102 (22 Feb low), 1.6075 (17 Feb low), and 1.6035 (lower edge of the broader 2-month uptrend channel). Our bullish bias may be reconsidered if that 2-month uptrend breaks, but it is still worth remembering further supports lie below at 1.6000 psychological support, 1.5965 (11 Feb low), 1.5823 (31 Jan low), 1.5751 (which caught the sell-off after the first GDP release), and 1.5718 (13 Jan low). On the topside, we are still yet to mount a credible challenge on 1.6300 resistance (4 Nov high), but if we can break higher then the route higher is cleared for a run at 1.6460 (19 Jan 2010 high) and 1.6515 (7 Dec high)
UsdJpy The head & shoulders pattern we have been playing on USDJPY’s hourly chart managed to hit its target of 82.20 in the early hours of this morning, going on to hit a low of 81.84 at the start of the European session. The pattern first became activated on 22 Feb around 83.00-10, and thus we have managed to lock in around 80-90 pips of profit on this pattern in less than 2 days. Nice not to be babysitting another long drawn-out trade strategy! From here it’s worth considering how far this sell-off may overshoot our target; next supports are noted at 81.77 (8 Feb low), 81.13 (4 Feb low) and 80.94 (31 Dec and 2 Jan lows). In the meantime, watch for resistance around 82.85-90 (yesterday’s rebound highs), 83.00-10 where our pattern first activated, then 83.55 (18 &21 Feb highs), 84.00 (roughly the 16 Feb high) and 84.40. That 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 on the first test.
UsdChf We’ve got a new all-time low for USDCHF! At the time of writing the low print stands at 0.9267, but this is under threat even now. With ongoing tensions in the Middle East & Africa ensuring the fundamental support for the CHF move and the technical perspective looking great for the bears, it’s now a case of seeing how deep we can go. We have gone short on the break below 0.9300 and now wait to see a test of 0.9200 and 0.9100 psychological supports. Really, there is not much discernible support under these conditions, but we hope to see a challenge on 0.9000 in the coming weeks. On the topside, sellers will probably start to precipitate around 0.9300 (former all-time low), 0.9390 (yesterday’s high), 0.9505 (22 Feb high), 0.9540 (Friday’s high), and 0.9600 (17 Feb high).
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