Markets Confined to Choppy Directionless Trade Overnight (Morning Slices)

MORNING SLICES

Fundys – Some choppy price action overnight, but with the exception of the Yen, which continues to strengthen, all major currencies are pretty much confined to Tuesday’s ranges. On the data front, Eurozone Q2 GDP came in as expected, while PPI was slightly weaker. In the UK, PMI construction data was only a little below forecast. Meanwhile earlier in Asia, the impressive GDP release out from Australia undoubtedly factored into the relative strength of the single currency after coming in at 0.6% m/m versus an expectation of 0.2%. Treasurer Swan came out with a mixed bag of comments, saying that government stimulus would be withdrawn, unemployment would continue rising, the recovery would continue to be challenging, and rates were at emergency low levels and would need to be adjusted at some point. In Japan, the Yen benefitted on the back of comments from DPJ Otsuka who said that the party wouldn’t meddle in BOJ policy and market operations including JGB buying. The Nok was a big loser on the day after the shockingly weak and below 50 PMI reading. Of the major currencies, Aussie has been the outperformer on the day, while the Euro and Swissie are the only currencies to show losses against the buck. US equity futures point to a slightly lower open, while oil is bid and gold flat. US mortgage applications have come out at -2.2% versus +7.5% previous. Looking ahead, ADP employment (-250k) is due at 12:15GMT, followed by non-farm productivity (6.4% expected) at 12:30GMT and factory orders (1.8% expected) at 14:00GMT.

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For information on the above tables, please visit our Guide to Morning Slices Quant section

Techs - EUR/USD We continue to focus on the 50-Day SMA, with the moving average acting as a formidable support on a close basis for much of the rally from April 2009. As such, any close below would be taken as a medium-term bearish signal and open the door for a shift in the broader structure. However, price action remains quite choppy and we would not rule out the potential for a bounce on Tuesday back above 1.4300. But ultimately, rallies above 1.4300 should be sold today, in anticipation of a deeper setback below the 50-Day SMA which comes in by 1.4165. USD/JPY Continues to track lower with the market now eyeing a retest of the recent trend lows by 91.75 from mid-July. With the market now exceeding the 78.6% fib retracement off of the 91.75-97.80 move, we would now expect a full retracement and retest of 91.75 over the coming sessions. Any rallies should be well capped ahead of 94.00, with a break below 91.75 to expose the more significant multi-year matched trend lows at 87.15 further down. However, it is worth noting that the daily RSI is approaching oversold readings with any near-term test of 91.75 to likely force an RSI reading below 30. As such, we may look to buy on a dip over the coming sessions towards 91.75, in anticipation of a short-term corrective rally. GBP/USD Unfortunately, we missed the short trade yesterday with the market stalling by 1.6380 before reversing sharply to 1.6115 thus far. This has also triggered the talked about negative cross of the 20-Day SMA below the 50-Day SMA that last occurred in August of 2008. Next key support now comes in by the 100-Day SMA which currently resides at 1.6030. The market has not closed below the 100-Day SMA since April 2009 and a break below will reaffirm our bearish outlook. Any rallies intraday are expected to be well capped by 1.6300. USD/CHF Continues to chop around within a very well defined multi-week range with the price currently residing at the lower end of the range. We like the idea of looking to keep playing the multi-week range with any breaks to fresh 2009 lows seen as limited. Ultimately, only a close back below psychological barriers at 1.0500 would give reason for re-think. Back above 1.0715 should help to reaffirm constructive outlook and accelerate gains to next resistance by 1.0835.

Flows – Japanese bids in Usd/Jpy; large option barrier set to expire by 92.00 on Thursday. Real money offers in Usd/Cad. Asian and Middle East demand for Gbp/Usd. UK clearer selling Aud/Usd. Japanese investor bids in Aud/Jpy. Option expiry in Eur/Chf at 1.5180. Talk of central bank offers in Swissie. Middle East specs and Asian central bank interest in Eur/Usd.

Trade of the Day – Aud/Usd: We contend that the pair is in the process of carving out a medium-term top below 0.8500 with deeper setbacks projected well below 0.8000 over the coming days and weeks. Tuesday’s sharp bearish reversal confirms bias and a closer look at the daily chart shows the formation of what could be a double top pattern with a neckline at 0.8155. If broken, it would open a drop towards a measured move objective in the 0.7800 area. [B]STRATEGY: SELL @0.8365 FOR AN OPEN OBJECTIVE, STOP 0.8515. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY CLOSE (5PM NEW YORK) ON WEDNESDAY.

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Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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Quant section prepared by David Rodriguez, Quantitative Strategist for DailyFX.com
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