FX Markets Range Bound as Drivers Dry Up in the Summer Heat

Risk appetite started to improve in yesterday�s US markets (S&P 0.68%) and continued firm into Asia. The correlations between Shanghai and the EURUSD, USDJPY and Oil remain intact, providing us with some direction in this range bound market. The JPY made some small gains against the USD, trading down to 93.98, while the EUR was relatively unchanged, trading between 1.4200 and 1.4250. During writing, UK retails sales printed higher than expected at 3.3% y/y vs. 2.7% exp. The knee jerk reaction sent the cable higher to 1.6605, but the market quickly reversed its position trading the pair down to 1.6518. Currently risk appetite seems healthy, but in this light economic calendar day and thin volume, a rapid change in sentiment should be expected.

[B]News and Events:
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Risk appetite started to improve in yesterday�s US markets (S&P 0.68%) and continued firm into Asia. Asian regional indexes are broadly higher, with the critical and much watched Shanghai composite up 4.52%. The correlations between Shanghai and the EURUSD, USDJPY and Oil remain intact, providing us with some direction in this range bound market. The JPY made some small gains against the USD, trading down to 93.98, while the EUR was relatively unchanged, trading between 1.4200 and 1.4250. The big news yesterday was the BoE minute�s surprise, which showed a 6-3 vote regarding the level of asset purchases. The 3 dissenters included Governor King, along with Messrs Besley and Miles, who wanted a �75bn increase (to �200bn) instead of the passed �50bn. In addition, the minutes revealed “the potential adverse consequences of adding another large monetary stimulus might be less severe than the possible costs of acting too cautiously.” There seems to be a fear that provided insufficient economic stimulus might have severe economic consequences. Given the tone, we still believe that the door is open for additional asset purchasing in late 2009 and the potential for sterling weakness. During writing, UK retails sales printed higher than expected at 3.3% y/y vs. 2.7% exp. The knee jerk reaction sent the cable higher to 1.6605, but the market quickly reversed its position trading the pair down to 1.6518. And in Europe, ECB Governing Council member Weber said the surprise expansion of German Q2 GDP was mainly the product of stimulus measures and therefore might not be sustainable (similarly to ZEW president Franz comments). Currently risk appetite seems healthy, but in this light economic calendar day and thin volume, a rapid change in sentiment should be expected. Upcoming releases for today: we have Canada Wholesales from the month of June and the US will post its weekly jobless claims, the Philadelphia fed index and natural gas storage.

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Today’s Key Issues (time in GMT):[/B]

06:15 CHF Trade balance, CHF bn (nsa) Jul 1.57 prior
08:30 GBP Retail sales, % m/m (y/y) Jul 0.4 (2.8) exp
08:30 GBP PSNB, �bn Jul -0.3 exp
08:30 GBP PSNCR, �bn Jul 19.0 prior
08:30 GBP BoE provisional M4 growth % m/m (y/y) Jul -0.2 (13.8) prior
08:30 GBP BoE provisional M4 lending growth % m/m (y/y) Jul 0.2 (8.5) prior
08:30 GBP BoE publishes Trends In Lending report for August
12:30 USD Initial jobless claims, thous (4wk mvg avg) 15-Aug 553 (564) exp, 558 (565) prior
14:00 USD Leading indicators, % m/m (y/y) Jul 0.6 (0.1) exp, 0.7 (-1.2) prior
14:00 USD Philadelphia Fed manufacturing index Aug -3.5 exp, -7.5 prior
16:00 ECB Executive Board Member Bini Smaghi participates in a panel

[B]The Risk Today: [/B]

[B]EurUsd:[/B] The short term uptrend mentioned yesterday gained some serious power just before the US open and the pair skyrocketed through all resistance, including the 1.4240 level, stopping out a number of short players in the process. The 2 week downtrend players are still hanging around but the pair is making a flag formation on the 60 minute chart and edging into a tight triangle around the 1.4240 level, suggesting that the longs are there to meet the supply (and building short stops in the process). As with USD CHF yesterday, these formations can provide handsome returns in a very short time period by playing the direction of the breakout or breakdown, in this case watch very closely for a break of 1.4265 to the upside and 1.4208 to the downside with momentum players jumping on board in each case. 60 minute RSI is strong and the stochastics are printing higher highs and higher lows so the pair is skewed to breaking higher but either direction should be equally rewarding.

[B]GbpUsd:[/B] Lots of supply around 1.6587 as highlighted yesterday, particularly with the 60 minute RSI divergence no doubt attracting a raft of short sellers. Expect the pair to be choppy with an emphasis on the downside but support is not too far away at 1.6467 and 1.6381. Easy pickings for intraday range traders between those levels and medium term bulls will be waiting for a break above the 2 week downtrend and resistance at 1.6663 before getting involved.

[B]UsdJpy:[/B] 93.86 held well yesterday as the major support level but the bounce higher does not hold much conviction. 94.44 is the first resistance and the mid downtrend channel and the 60 minute stochastics have turned short term term bearish in early European trading. One good sign for the bulls is that the pair has tested the mid trend channel without ever having touched the lower end so some consolidation could push the pair to the next resistance at 94.78 and the 2 week downtrend stands at 95.16. The medium term bulls need to hold 93.86 to keep this picture intact but will still not have control of the trend until we se a 60 minute close above 95.42.

[B]UsdChf:[/B] Yesterdays triangle breakdown at 1.0739 has now demolished the 3 week uptrend that was being established and the pair is now confirming a new 10 day downtrend. Unfortunately for the trend players the pair is likely to return to range bound trading with a sideways move and support and resistance as the main hurdles. Short term and long term the trend is down with medium term back to sideways. Shorting sweet spot at 1.0755.

[B]Resistance and Support:

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