The rally in global equity prices over the past several days has not been met with the same positive reaction in the FX market, with currency traders seemingly more skeptical than optimistic about the latest Treasury plan to rid US banks of toxic assets. Looking ahead, US house prices and Richmond Fed data are due at 14:00GMT followed by consumer confidence. All eyes will also be on the Bernanke and Geithner testimony at 14:00GMT.
MORNING SLICES
Fundys - The rally in global equity prices over the past several days and into the new week has not been met with the same positive reaction in the FX market, with currency traders seemingly more skeptical than optimistic about the latest Treasury plan to rid US banks of toxic assets. The Euro remains locked in some sideways chop after making highs by 1.3740 last Thursday, and analysts now cite 1.3740 and 1.3490 as the key levels to watch. Global equities have received an added boost on some positive developments out of the financial sector with Deutsche Bank expecting a return to profitability in 2009, and Credit Suisse joining the ranks of Citi and RBS after stating that it too was off to a good start in 2009. ECB governing council member Liikanen was on the wires stressing the potential for additional room for rate cuts, while also not ruling out non-standard measures. This follows dovish comments over the past 24 hours from Trichet, Weber and Orphanides who all admitted that there was potential for rates to be lowered some more. Fed Evans has been talking this morning and says that he expects current policy efforts to help stimulate the global economy, but also concedes that the weaker growth outlook calls for more accommodation from the Fed. Commodity currencies continue to hold up quite well despite the consolidation in the Euro, with Aussie, Kiwi and Cad all benefiting from a renewed interest in the commodity trade. A recent IMF report saying that hard commodity exporters may not be as badly hit by the global recession has also been attributed to the relative strength. The Aud/Nzd cross has been finding some bids in the early week and bolstered on Tuesday after NZ FinMin English said that their current account deficit was one of the worst. On the data front, [B]UK inflation[/B] has come in higher than expected catching some off guard, but had been weighed down somewhat after BoE King said that he expected that the sharp decline in inflation would likely resume. Meanwhile, Chancellor Darling has responded to King’s explanation letter of higher interest rates, saying that he welcomes the MPC’s intention to meet the 2.0% inflation target and that the government will continue to support the decisions of the MPC. Ex-BoE member Julius also offered some stabilizing comments after saying that the UK was not on the verge of entering into deflation and that the big drop in the currency did not amount to a crisis. In the Eurozone, [B]PMI[/B] was released and came in slightly better than consensus. Looking ahead to the North American session, US house price index (-0.9% expected) and Richmond Fed manufacturing (-51 expected) data are due at 14:00GMT followed by consumer confidence later in the day at 21:00GMT. On the official circuit, all eyes will be on the Bernanke and Geithner testimony at 14:00GMT in front of the House Financial Panel.
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Techs - EUR/USD caught in some sideways consolidation since rallying to 1.3740 last Thursday. Look for a break above 1.3740 or below 1.3490 for clearer directional bias. USD/JPY continues to rally since finding a medium-term higher low by 93.55 last week, with the pair trading to 98.60 thus far ahead of the latest minor pullback. There is plenty of room for additional gains and we look for a retest and break of 99.70 over the coming sessions. Dips are now seen supported ahead of 96.90. GBP/USD has broken above the 100-Day SMA and today’s close will be of critical importance. A close above the 10-Day SMA would indeed be viewed as bullish, while failure to do so opens the door for a resumption of the broader downtrend. Key level to watch over the coming session come in by 1.4800 and 1.4545. USD/CHF latest sharp pullbacks below 1.1315 have found some decent support in the form of the 50% fib retracement off of the 1.0370-1.1970 move (1.1170) and the 200-Day SMA. Look for a break back above 1.1345 today to confirm basing and open a move back towards 1.1500. Only back under 1.1160 concerns.
Flows - Asian central bank offers in Eur/Usd and Gbp/Usd. Spec accounts on the bid in Usd/Cad below 1.2200. German bank and UK clearer selling Eur/Gbp. Japanese real money names bidding Aussie while commercial accounts on the offer. Hedge funds selling Eur/Aud. Uk real money buying Eur/Jpy.
Trade of the Day - Eur/Jpy: The latest sharp rally is starting to look very stretched and the risks from here are for a decent sized corrective pullback at a minimum over the coming days. The daily RSI is above 75 and stochastics are by 95. As a measure of just how overbought the cross is, only 2 of the past 12 days have been down-days and even those days were only marginally lower at the close, with one of the two days managing to put in a daily higher high and higher low (see 19Mar). An intraday chart shows the formation of a head & shoulders top and we will look to sell the break of the neckline in anticipation of the onset of a decent pullback over the coming days. [B]Position: SHORT @133.20 FOR A 128.15 OBJECTIVE, STOP @135.20. [I]Stops to be trailed to cost (break-even) on a break back below 132.00. If 132.00 not broken, position to be closed out at NY close (5pm EDT) on Tuesday.
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Fundamental Catalyst - There is a positive correlation between the cross and equity prices and with the latest stock market rally looking slightly overdone, bears might once again re-emerge to look to use the rally in global equities to build on existing short positions. Risk sentiment is still shaky, and negative developments over the coming session should once again spark some fear trading. Yesterday’s Treasury plan was initially well received by the markets, but there is still plenty of room for skepticism and we can’t help but think that critics will be out in full force on Tuesday.
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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