Familiar themes and correlations dominate into the early week and early month, with more problems arising out of the financial sector, this time at HSBC. The Euro now eyes a retest of 1.2515. Model funds and CTAs have been bidding Dollar/Cad. We are looking to sell Dollar/Yen @96.85.
MORNING SLICES
Fundys - Familiar themes and correlations dominate into the early week and early month, with more problems arising out of the financial sector, this time at HSBC, after the bank reported pre-tax profit slumped by 18%. The bank will now need to shore up its balance sheet which has sent the markets back into a panic and opened the latest bout of carry liquidation, broad based USD buying and fall in global equity prices. News that the US Treasury has announced a new $30B equity capital facility for AIG has proved to have little positive impact on sentiment. On the commodity front, gold is seen higher by nearly 1%, while oil tracks lower with equities. Key data out from the Eurozone overnight saw a higher than expected flash CPI estimate and lower manufacturing PMI. The higher inflation indicator was however not as well received, after inflation readings out from Germany in the previous week had suggested that we would indeed see a higher print today. In the UK, mortgage approvals and manufacturing PMI were softer while Hometrack housing data was also weak. Perhaps weighing more significantly on Sterling was the news that the UK government “business lending guarantee scheme” was running behind schedule, to raise doubt over the government’s ability to effectively deal with the severe recession. In Switzerland, data continued to disappoint with PMI coming in weaker than expected and hitting an all-time low. Officials on the wires included EU Almunia who expressed concerns over the latest developments in the EMU, and stressed that protectionism must be fought, while EC President Barroso was out earlier saying that the crisis was “the biggest in living memory.” Looking ahead, the North American calendar is stacked, but key event risk comes in the form of Canada GDP (-3.5% expected) due at 13:30GMT followed by US ISM manufacturing data (33.9 expected) at 15:00GMT. The Loonie has come under pressure of late, following a slew of awful data including the first deficit since 1999. Dollar/Cad rallied sharply late Friday as rumors swirled of yet another terrible number today.
Techs - EUR/USD has come back under pressure in the early week with the market breaking lower and now looking to retest the key short-term trend lows by 1.2515 (18Feb low). A break below 1.2515 will confirm lower top by 1.2995 (23Feb high) and open the next downside extension back towards the critical lows at 1.2330 over the coming days. Key levels to watch over the coming session come in by 1.2670 and 1.2515. USD/JPY (See below). GBP/USD continues to consolidate above the 1.4055-95 area (2/18Feb lows) but trades with a heavy tone on Monday, suggesting the latter levels could finally be taken out. Look for a break below 1.0455 to accelerate the decline back towards the 1.3500 trend lows. Key levels to watch over the coming session come in by 1.4365 and 1.4095. USD/CHF remains locked in tight multi-day consolidation, with an eventual breakout favored to the upside given the bullish form of consolidation. Monday’s price action looks constructive with the market easily clearing and holding above the previous weekly highs. Key levels to watch above and below over the coming session come in by 1.1830 and 1.1635 respectively.
Flows - US prime name on the offer in Usd/Chf. Commercial Japanese accounts on the offer in Usd/Jpy on rallies. Model funds and CTAs on the bid in Usd/Cad. Large US based buy-side shop offering Eur/Usd. More fund liquidation of long oil positions. [B]
Trade of the Day - USD/JPY:[/B] Price action is starting to look bearish and could be warning of a short-term top. After rallying sharply for four consecutive days, the market finally stalled out on Friday, unable to post a fresh higher high above Thursday’s high, and subsequently breaking back below Thursday’s low. This sets up a bearish reversal day that could open the door to a more significant drop over the coming days. The overbought daily RSI is also just rolling back over in favor of a much needed and healthy correction. Look for a break below Friday’s low to confirm and open deeper setbacks towards the former resistance now turned support at 94.60. Strategy: SELL @96.85 FOR A 94.60 OBJECTIVE, STOP @98.05. Stops to be trailed to cost on a break back below 96.35. Recommendation to be removed if not triggered by NY close (5pm EST) on Monday.
Fundamental Catalyst - After breaking away for much of last week, familiar risk aversion correlations fell back in line on Friday and have continued into Monday thus far, with the Yen rallying in the face of an escalation in fear on more troubles within the banking sector. HSBC has now come under pressure on news of significant losses and a need to shore up their balance sheet. The resulting price action has seen broad based liquidation on the yen crosses as money once again flows from the higher yielders back into the lower yielders. We would expect to see this pattern continue into the US session and will look to take advantage of what we believe to be an undervalued Yen at current levels (at least in the short-term).
Written by Joel Kruger, Technical Currency Analyst for DailyFX.com
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