The lightened calendar in the overnight session was certainly appreciated with the market still trying to digest the broader impact of the formal Fed introduction of a quantitative easing policy. Looking ahead, US initial jobless claims/continuing claims and Canada international securities transactions are due at 12:30GMT, followed by Phily Fed and leading indicators at 14:00GMT. On the Fed circuit, Fed Tarullo testifies on bank regulation at 14:30GMT.
MORNING SLICES
Fundys - The lightened calendar in the overnight session was certainly appreciated with the market still trying to digest the broader impact of the formal introduction by the Fed of a quantitative easing policy. While the markets had been anticipating such a move, it was quite clear that traders were caught off guard with the extent of Fed action. The Euro trades marginally higher on the day but is still consolidating ahead of the US session of trade. While the Euro has been a clear beneficiary of the latest developments, many are now speculating how long this will last and if in fact the ECB will be forced to adopt such a policy. The next key level to watch now comes in by 1.3580 which represents the 50% fib retracement off of the major 1.4720 (Dec 08) – 1.2455 (March 09) move. In the UK, data was slightly weaker with a record budget deficitand more than consensus CBI doing little to influence price action. In Australia, RBA Edey was on the wires saying that the country could not avoid further economic weakness in 2009, but these comments have had zero impact on the antipodean which is the second best performer on the day behind the Norwegian krone. The krone has been getting a lot of positive attention with a recent FT article considering the prospects of the Scandi as the new safe haven currency in the world. Swiss investor confidence was released coming in slighlty better than the previous month. In Canada, CPIdata came in higher than expected at 1.4% after analysts had been looking for a 1.0% y/y print, helping to pump additional bids into the loonie. Overseas equities are higher on the day while on the commodity front, oil is also well bid, up some 4.0% and now back above $50. Looking ahead, US initial jobless claims/continuing claims (655k/5323k expected) and Canada international securities transactions data (-2.0B expected) are due at 12:30GMT, followed by Phily Fed (-39.0 expected) and leading indicators (-0.6% expected)at 14:00GMT. On the Fed circuit, Fed Tarullo testifies on bank regulation at 14:30GMT.
[B]Quant -
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For information on the above tables, please visit our Guide to Morning Slices Quant section.
Techs - EUR/USD daily studies are overbought following the dramatic price action from Wednesday which saw a low of 1.2985 and high of 1.3500. We would expect to see some consolidation over the coming session with key levels to watch above and below at 1.3535 and 1.3415. USD/JPY bears have won out and the latest consolidation has come to an end with the head & shoulders top by 99.70 coming back into play and exposing deeper setbacks towards a measured move objective by the previous major double bottom neckline/2009 highs at 94.60. Back above 96.65 today will however delay. GBP/USD is once again testing the critical 50-Day SMA which has offered itself as formidable resistance since August 2008. Look for a close above the 50-Day at 1.4290 to potentially open more significant upside and signal a shift in the trend, while a failure to do so will once again put the 1.3500 lows back into focus. Intraday dips are now seen supported ahead of 1.4160. USD/CHF remains confined to the recent choppy range, despite the latest sharp setbacks on Wednesday to 1.1370. The key level to watch below comes in by 1.1315 (27Jan low), with only a sustained break of 1.1315 to shift bias. F
Flows - Swiss name buying large 1.4000 one-month Eur/Usd calls; large US investment bank on the bid as well. German corporates and Japanese life insurance co bidding Eur/Jpy; exporters on the offer. Aussie two-week 0.7000 options reported. Corporate bids in Usd/Cad. European investment house bidding Eur/Gbp. UK clearer heavy buyer of Cable.
Trade of the Day – Eur/Gbp: The cross continues to rally sharply trading just shy of 0.9500 on Wednesday ahead of the latest minor setbacks. Key topside resistance now comes in by 0.9520 which represents the medium-term lower top from January 26. Daily stochastics are now stretched however, and the daily RSI is nearly above the critical 70 level. As such, we see the risks for only a little more upside before the cross starts to roll back over. The 78.6% fib retracement off of the 0.9805, 2008 life-time highs to the 2009 0.8635 lows, comes in by 0.9550 and we will look to establish a short position by this level should the market continue to rally into Thursday. [B]Strategy: SELL @0.9550 FOR A 0.9320 OBJECTIVE, STOP @0.9660. [I]Stops to be trailed to cost on a break back below 0.9500. If trade triggers and 0.9500 not broken, position to be closed out at NY close (5pm EST) on Thursday. Recommendation to be removed if not triggered by NY close on Thursday.
[/I][/B]Fundamental Catalyst - Wednesday’s event risk in the form of the Fed formal introduction of quantitative easing has shaken the markets and acted as a catalyst for a massive wave of broad based USD selling, on the assumption that the policy will devalue the greenback tremendously. Similarly, Sterling has also been beaten down of late on the back of the news that the BoE had also introduced formal quantitative easing into their monetary policy. However, the view that these currencies should depreciate on the newly adopted central bank strategy, will only work if they are the only banks to introduce such a policy. We contend that much like at the start of the financial market crisis, those who attempt to get ahead of the curve the quickest will come out the mess the quickest. The Fed and BoE were the first to start cutting rates aggressively at the onset of the crisis, and they are now the first to introduce quantitative easing measures. Much of the rapid depreciation in the Euro off of its 1.6000 life-time highs occurred when the markets finally saw that the ECB would indeed have to change their tune and start to adopt a more accommodative policy. We see things no different now, and believe that the ECB (along with other central banks) will be forced into a quantitative easing mode over the next few months which should ultimately weigh on the Euro which Is highly overvalued on a relative value basis against Sterling.
Written by Joel Kruger, Technical Currency Analyst for DailyFX.com
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