Despite the weakness in equities on Monday, risk appetite has been quite impressive into Tuesday with talk of sidelined cash starting to now filter back into the markets. As a result, the Euro, which has been highly correlated to equities of late, has begun to rally and now threatens to close above the 20-Day SMA after trading below the moving average for the entire 2009.
MORNING SLICES
Fundys - Despite the weakness in equities on Monday, risk appetite has been quite impressive into Tuesday with talk of sidelined cash starting to now filter back into the markets. As a result, the Euro, which has been highly correlated to equities of late, has begun to rally and now threatens to close above the 20-Day SMA after trading below the moving average for the entire 2009. The USD has sold off across the board, even against the Yen, while risk gauging instruments like the Yen crosses and Eur/Chf trade higher on the day. On the data front, UK releases once again took center stage with the disappointment in the RICS and BRC being followed up by the more recent and important [B]industrial production [/B]which was much weaker than expected. Also in the UK, the Treasury warned Barclays Bank that its balance sheet would be subjected to close examination if the bank decided to join the government insurance scheme. In the Eurozone, [B]Germany inflation[/B] data was as expected, while the trade and current account surplus were weaker. ECB Bini-Smaghi was on the wires warning of excessive fluctuations in rates and the negative impacts of lowering and then raising again. The ECB policymaker also did not rule out the potential for zero rates if necessary, but did not see this happening. In an interview with a German newspaper, the head of the IMF offered some downbeat comments, saying that banks around the world could face additional losses and that there were still risks that had not been priced in. Commenting on the upcoming G20 meeting, a senior MoF official said that he did not see currencies as a major focus. Finally, oil continues to trade with a bid tone as more talk of production cuts and undervalued prices from OPEC are digested by market participants. Looking ahead to the [B]North American calendar[/B], key event risk comes in the form of Fed Chair Bernanke’s address on bank regulation in Washington at 12:30GMT. Also due are wholesale inventories (-1.0% expected) and economic optimism (43.0 expected) at 14:00GMT, followed by consumer confidence (-49 expected) later in the day at 21:00GMT.
[B]Quant -
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Techs - EUR/USD (See below). USD/JPY has been locked in some consolidation since rallying to 99.70 last Thursday. Overall the structure remains constructive with only a break back below 96.55 to negate. In the interim, we can not rule out the potential for more consolidation however, with a break back below 97.90 to likely open a deeper drop to the range lows by 97.00. Back above 99.20 should accelerate gains to 99.70. GBP/USD trades mildly higher on the day and consolidates just over yesterday’s intensely bearish close below 1.3800. Deeper setbacks are favored to retest 1.3500 over the coming days with any intraday rallies now seen well capped in the 1.4000-1.4100 area. The key level to watch below over the coming session comes in at 1.3740. USD/CHF trading with a heavier tone on Tuesday falling just shy of the recent range lows by 1.1465. We continue to favor playing the range, with dips below 1.1500 to be used as formidable entry spots for long trades. Only a close below 1.1465 would give reason for concern. Back above 1.1620 should generate additional bids.
Flows - US prime name and UK clearer on the bid in Sterling; French bank selling. Model funds on the offer in Usd/Chf. Asian central bank demand for Aussie; double-no-touch to roll off this month from Asian sovereign reported by 0.6280-0.6560. French bank, UK clearer and a central bank bidding Eur/Gbp. Model funds buying Eur/Usd.
Trade of the Day - Eur/Usd: The pair has been well capped on a close basis below the 20-Day SMA (1.2700) for the entire 2009 and until a close above can be established, intraday rallies towards and above the 20-Day should be used as opportunities to build on existing short positions. With the market already trading above the 20-Day ahead of the US session of trade, scope exists for additional upside over the coming hours. We will look to take advantage of an overdone rally today to look to get back into the overriding bear trend. Strategy: SELL @1.2920 FOR A 1.2580 OBJECTIVE, STOP @1.3020. Stops to be trailed to cost on a break back below 1.2870. If trade triggers and 1.2870 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 Euro has been well correlated with US equities of late and any sense of an increased risk appetite and bid back into equities should help to bolster the major currency. However, as has been the case throughout the global financial crisis, rallies in the equity markets should only be used as opportunities to build on existing shorts, with the renewed optimism more often than not, reliably shot down quickly and abruptly.
Written by Joel Kruger, Technical Currency Analyst for DailyFX.com
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[/B]Quant section prepared by David Rodriguez, Quantitative Analyst for DailyFX.com
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