Much of the price action in the overnight session was largely driven off of the surprising decision by the RBA to leave rates on hold. As a result, we saw an across the board rally led by Aussie, with a flow of funds back into higher yielding currencies. The USD has however found some renewed bids into the US open with many longer-term accounts using the USD selloff as a good opportunity to build on existing longs.
MORNING SLICES
Fundys - Much of the price action in the overnight session was largely driven off of the surprising decision by the [B]RBA[/B] to leave rates on hold at 3.25%, after analysts had been looking for a 25bps cut. In an environment where the dramatic slowdown within the global economy has directly coincided with broad based aggressively accommodative central bank policy, the latest decision by the RBA is indeed surprising. As a result, we saw an across the board rally led by Aussie, with a flow of funds back into higher yielding currencies. The Euro was bid up to take out Monday’s high, reaching as high as 1.2680. Also seen generating some fresh USD offers was the on the whole better than expected datareleased overnight. In Australia, retail sales was much stronger, while in Switzerland, GDP wasn’t close to as bad as analysts had been looking for. Meanwhile, in the Eurozone, German wholesale prices were better than expected. The only real disappointment was out of the UK after PMIwas much weaker than forecast. This has been reflected in the Eur/Gbp cross rate, with the market tracking higher on the day. The USD has however found some renewed bids into the US open with many longer-term accounts using the USD selloff as a good opportunity to build on existing longs. Also seen weighing on the Euro into the US open has been a recent Bloomberg article entitled “Orphanides Takes on Trichet Over ECB Go-Slow Rate-Cut Policies.” The governor of Cyprus’s central bank is clearly in the camp that believes the ECB has been far too restrictive in the face of the current market turmoil. Chancellor Darling has been on the wires admitting that there were some mistakes made on the economy, while the OECD chief economist has been exceptionally downbeat after saying that further BoE and ECB rate cuts are necessary. Finally, in its latest report on Russia, Moody’s has highlighted that the negative impact of the depreciation in the rouble will likely put pressure on the country’s corporate credit ratings. Looking ahead, the key event risk for the session will undoubtedly be the Bank of Canada rate decision due at 14:00GMT, with the event risk now taking on a whole new meaning following the unexpected RBA decision. The consensus is for a 50bps cut to 0.5%. Also in the North America session, US pending home sales (-3.0% expected) are due at 13:00GMT, with consumer confidence (-47 expected) later in the day at 22:00GMT. On the Fed circuit, markets will once again be paying close attention to Bernanke who testifies in front of the Senate Budget Committee at 15:00GMT. Fed Lockhart is scheduled to be on the wires a little earlier at 13:00GMT.
Techs - EUR/USD (See below). USD/JPY pullbacks off of the latest sharp rally have found support by 96.85 and the market is in the process of consolidating ahead of the next move. A break back above 98.70 or below 96.85 will ultimately be required for clear short term directional bias. GBP/USD has been unable to extend setbacks thus far today with the market seemingly content on some intraday consolidation above 1.4000. However, after finally breaking down below the 1.4055-95 support zone, we would expect to see additional declines over the coming days back towards 1.3500. Key levels to watch over the coming session come in by 1.4160 and 1.3990. USD/CHF remains locked in tight multi-day consolidation, with an eventual breakout favored to the upside given the bullish form of consolidation. Key levels to watch above and below over the coming session come in by 1.1795 and 1.1635 respectively.
Flows - Option expiries in Aussie at 0.6450 and 0.6460 today, Usd/Jpy at 98.00 and Eur/Jpy at 124.00. UK clearers on the offer in Cable. Asian central bank demand for Usd/Jpy.
Trade of the Day - Eur/Usd: The market has taken out Monday’s low to trade to 1.2540 ahead of the latest reversal back above Monday’s high to 1.2680. This sets up the potential (provided we get a positive close) for a bullish outside day. However, given the proximity to 1.2515 and likelihood that the level will indeed be taken out over the short-term, we do not see much room for follow through from any bullish reversal days. The 20-Day SMA now comes in by 1.2770 and this level has proved to be a formidable resistance point over the past several months with multiple attempts to close above failing. The last time the market closed above the 20-Day SMA was back on January 2, 2009. While we concede that potential now exists for some decent upside over the coming hours, ultimately, any sizeable intraday rallies should be used as good sell opportunities. As such, we will use a rally back to the 20-Day SMA today as an entry point for a short trade. Strategy: SELL @1.2770 FOR A 1.2420 OBJECTIVE, STOP @1.2910. Stops to be trailed to cost on a break back below 1.2700. If trade triggers and 1.2700 not broken, position to be closed out at NY close (5pm EST) on Tuesday. Recommendation to be removed if not triggered by NY close on Tuesday.
Fundamental Catalyst - The market has been showing some resiliency today but we do not expect this to last. We contend that the push higher has a lot to do with the surprising overnight rate decision from the RBA to leave rates on hold at 3.25% after expectations had been that the Australian central bank would cut by 25bps. The implication and suggestion to the broader global macro market is that the economy is not as exposed as perceived and that aggressive accommodative easing is no longer necessary. This has sparked some buying back into risk with all of the higher yielding currencies benefiting as a result. However, we question the central bank’s decision and hardly feel that this should be taken as any sign of a bottom in the Australian economy or the global economy for that matter. The Eurozone remains in significant trouble and more problems are arising out of the region on a daily basis. Additionally, the better than expected overnight wholesale price data out of Germany is hardly anything to get excited about, with the overwhelming data out of the region now consistently disappointing. Finally, at this point, there are some significant stops built up below 1.2515 and the markets are well known for their ability to seek out the pain and target those levels. The sub-1.2515 stops should be treated no differently and we look for these stops to be cleared in the very short-term.
Written by Joel Kruger, Technical Currency Analyst for DailyFX.com
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