Bernanke is in No Rush to Tighten Rates & FX Markets Remain Rangebound

Caterpillar�s upside earnings surprise and China State Construction Engineering Corp. reporting that they are moving closer their IPO (potentially raising $7.34 billion) provided a temporary boost to optimism. Australia�s CPI came in slightly lower than expected with headline printing at 0.5% q/q , 1.5% y/y (while the RBAs weighted median measure surprised to the upside). Bernanke�s strategy of pre-empting Congress by releasing a WSJ article the night before, which contained the core themes, worked perfectly. Today, we expect the MPC minutes to weigh on the sterling and perhaps trigger an extend correction the GBP.

[B]News and Events:[/B]

We are now seeing a slightly pull back in risk appetite, after a stellar day for the risk trade yesterday. FX markets remain well within their pre-defined ranges. Caterpillar�s upside earnings surprise and China State Construction Engineering Corp. reporting that they are moving closer their IPO (potentially raising $7.34 billion) provided a temporary boost to optimism. However, at the start of European trading we have seen defensive trade reinstate themselves. Energy and metals prices have softened and US equity futures are pointing to a lower open. We see this as a short-term correction more than anything else. The USDJPY continued to pull away from Monday�s high at 94.80 and is looking to test the horizontal support at 93.20. The USDCAD saw strong buying yesterday, as markets speculated that the BoC would indicate a potential intervention to halt CAD appreciation, pushing the pair to 1.1150. Today, with the risk subsiding, the pair has fallen to 1.1050 and we expect further deprecation. Australia�s CPI came in slightly lower than expected with headline printing at 0.5% q/q , 1.5% y/y (while the RBAs weighted median measure surprised to the upside). Overall, with both the global and domestic conditions improving and inflation pressures mounting, we (and the market) doubt the RBA can stay on hold at 3.00% for much longer. We expect the next move by the RBA will be higher (perhaps first central bank in the G10) and this will keep the AUD supported. The AUDUSD break of 0.8270 will open the door for 0.8380 near term. Bernanke�s strategy of pre-empting Congress by releasing a WSJ article the night before, which contained the core themes, worked perfectly. There was hardly any market reaction to his testimony other than pushing the 10y yield down from 3.62% to 3.46%. Today, we expect the MPC minutes to weigh on the sterling and perhaps trigger an extend correction the GBP. The MPC will have been undivided in their want to wait until August�s Inflation Report before ruling on expanding their asset purchase program. However, we might get some insight into diversity of tactics. In addition, an article in today’s UK Telegraph, reported that many UK banks would need additional capital if they are to function under the new guidelines intended to protect against higher risks. Overall, we expect the BoE to expand their asset buying program and banking sector to come under renewed scrutiny, which will weigh on the GBP mid term.

[B]Today’s Key Issues (time in GMT):[/B]

08:30 GBP BoE MPC minutes, vote Jul 9-0 exp
09:00 EUR Industrial orders, % m/m May (-27.8) 1.8 exp
10:00 GBP CBI industrial trends, total orders, net bal Jul -45 exp
10:00 GBP CBI quarterly trends, business optimism, net bal Q3 -40 prior
12:30 CAD Retail sales less autos, % m/m May-0.5 prior
14:00 USD FHFA house price index, % m/m (y/y) May -0.2 (-6.6) exp, -0.1 (-6.8) prior
14:00 USD Fed Chairman Bernanke delivers semi-annual Monetary Policy Report to the Senate Banking Committee
23:50 JPY Trade balance, bn JPY Jun 610 exp, 298 prior

[B]The Risk Today: [/B]

[B]EurUsd:[/B] Any move higher looks like it could be met with short term RSI Divergence and the stochastics on the daily chart are at extremely overbought levels. Expect consolidation between 1.4150 and 1.4250 in the next 24 hours to work off these overbought conditions before making a fresh move.

[B]GbpUsd:[/B] The range traders “paradise” continues between 1.625 and 1.655. Although not quite as overbought as the Euro, Cable is seeing strong resistance at this 1.655 level and the long term downtrend at 1.66 is just above. Pullbacks to the lower end of the range support stands at 1.6230.

[B]UsdJpy:[/B] Short term the pair has established an uptrend from the July 12th low at 91.80 and hit major resistance at 94.60. There is a mid trend channel which coincides with horizantal support at 93.30. Expect a retest of the 94.60 level short term as sentiment has shifted.

[B]UsdChf:[/B] No great changes on USD CHF. Mondays break below key support at 1.0707 has been followed by a retest of the prior support and has so far acted as a new resistance. Intraday good support stands at 1.0630/50. Clearance of 1.0707 points towards 1.0764 where there is fairly hefty resistance so expect more range trading around these levels

[B]Resistance and Support:[/B]

By[B] Peter Rosenstreich [/B]- ACM Advanced Currency Markets, Geneva, Switzerland