Risk aversion continues to rise into Tuesday with the markets content on exiting higher yielding positions in favor of a flight to safer and lower yielding currencies. Massive liquidation of Yen cross positions has made the Yen the top performer on the day and the only currency to outperform the USD. Looking ahead, US economic optimism is due at 14:00GMT, followed by consumer credit at 19:00GMT and consumer confidence at 21:00GMT.
MORNING SLICES
Fundys – Risk aversion continues to rise into Tuesday with the markets content on exiting higher yielding positions in favor of a flight to safer and lower yielding currencies. Massive liquidation of Yen cross positions has made the Yen the top performer on the day and the only currency to outperform the USD. Meanwhile the New Zealand Dollar has been the standout loser down over 2% against the USD with an escalation in market uncertainty, weaker overnight data and narrowing yield differentials all weighing on the antipodean. The Euro is not far behind though with the major showing well offered on the back of similar global macro themes along with weaker than expected GDP. In Japan, the news that the BOJ has announced that they will accept a greater range of collateral in its money supply operations has also been generating some attention, with the implication that the economy is even worse off than analysts had expected. In the UK, data continued to exceed expectations with industrial production coming in better than consensus estimates despite still being negative. This has helped to weigh on the Eur/Gbp cross rate on Tuesday which now eyes a test of 0.9000 barriers. Finally, comments overnight from ECB Stark have also been weighing on sentiment after the official was rather skeptical about G20 plans and the impact of extra liquidity. Looking ahead, the calendar in North America is light with economic optimism due at 14:00GMT followed by consumer credit (-$3B expected) at 19:00GMT and consumer confidence (-49 expected) at 21:00GMT. US equity futures are tracking down well over 1.0% with oil prices, while gold is up over 1.0%. We continue to recommend watching the credit markets, with recent gains in equities having done very little to improve optimism in credit.
Quant –
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Techs - EUR/USD back under pressure on Tuesday with the market now looking for an initial retest of the 100-Day SMA by 1.3165 with a break below to expose the key short-term trend lows by 1.3115. Intraday rallies should now be capped by the 10-Day SMA at 1.3375. USD/JPY well off the Monday’s 2009 highs by 101.45 to trade back down towards 100.00 thus far. The market still remains confined to inside day price action with a break above 101.45 or below 99.35 now required for clearer short-term directional bias. GBP/USD rolling back over after recently failing by daily upper Bollinger and looks set to test the 100-day SMA at 1.4560. A break below the 100-Day will expose 1.3500 further down, while back above 1.4780 required to take pressure off of downside. USD/CHF very well supported by 200-Day SMA yet again with the market tracking higher and looking for a retest of the recent range highs by 1.1550. A break above 1.1550 should accelerate gains and open a fresh upside extension. Only a close below the 200-Day SMA at 1.1260 negates bullish bias.
Flows – Swiss bank and UK clearer selling Cable; Asian bids wiped out; talk of demand into the London fix. Large option expiries in Usd/Cad at 1.2400 today. Option expiries in Aussie today by 0.7170, 0.7150 and 0.7100. Hedge fund and semi-official offers in Euro; Russian spec on the bid.
Trade of the Day – Eur/Aud: The cross continues to trade with a heavy tone since breaking down from a multi-day consolidation in late March. Setbacks however have now extended back to a very well supported are, with the daily chart showing the cross now trading at the bottom of a longer-term range. With daily studies showing oversold, scope exists for yet another bounce out from current levels back into the middle of a very familiar range that has defined trade since October 2008. The daily “Average True Range” (ATR) comes in at 310 pips and with the current high by 1.8955, today’s projected low comes in by the 1.8650 area. As such, we will look to establish a long position on dips towards 1.8650. Strategy: BUY @1.8655 FOR A 1.9450 OBJECTIVE, STOP @1.8455. Stops to be trailed to cost on a break back above 1.8800. If trade triggers and 1.8800 not broken, position to be closed out at NY close (5pm EDT) on Tuesday. Recommendation to be removed if not triggered by NY close on Tuesday.
Fundamental Catalyst – Despite the weaker than expected GDP data out from the Eurozone, we like the idea of looking to buy the cross at current levels on the assumption that any escalation in risk aversion and broad based global equity selling will more heavily weigh on the higher yielding currencies. While Australia has been an outperformer of late on relatively stable economic fundamentals, we still see the commodity currency as highly exposed in the current market environment which does not favor currencies with higher interest rates. The RBA’s monetary policy decisions have been questionable over the past few months, with the central bank holding at the previous meeting (and signaling a potential end to accommodation) before once again deciding to cut on Tuesday. Meanwhile, other central banks continue to cut rates at every chance they get in an effort to get ahead of the curve and offset the cooling within the respective economies. We contend that the RBAs “wait and see” mentality will ultimately weigh on the Aussie as market participants start to price in the need for additional rate cuts over the coming weeks.
Written by Joel Kruger, Technical Currency Analyst for DailyFX.com
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Quant section prepared by David Rodriguez, Quantitative Analyst for DailyFX.com
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