UK Data Shocks; Sterling Back Under Pressure (Morning Slices)


Fundys – The big development in European trade has come out of the UK with the industrial production data coming in devastatingly weak and much lower than forecast. This has forced some heavy selling of the pound across the board. Meanwhile, currencies remain well bid, led by Aussie which along with Kiwi, have surged to fresh 2009 highs against the greenback. The primary driver for the Aussie strength has come from the RBA decision to raise rates (+.25bps to 3.25%) for the first time since the onset of the financial markets crisis, which now potentially signals to the rest of the world that the global economy is recovering and we have shifted back into a monetary tightening cycle. Treasurer Swan has accompanied the monetary policy decision with some hawkish comments after saying that there may be more rate rises to come. This has put the USD back under pressure across the board, with the Aussie leading the way. There are some analysts however that contend the hike today is too aggressive and the Australian economy will suffer from a central bank that is betting too heavily on a near-term global recovery. There is the risk that the move by the RBA could backfire in a double dip type scenario, or if Australian data itself starts to deteriorate. While it is only one release, this morning’s trade data has come in nearly doubly worse than expectation, and could strike a nerve with some investors. Elsewhere, the USD has also come under pressure on the back of an article from the UK Independent entitled the Demise of the Dollar which talks of Iran’s intent to shift FX reserves into Euros, and the Gulf state’s secret plan with Russian, Japan, China and France to end dollar dealings for oil over the next several years. However, this has been somewhat mitigated this morning after both the Saudis and UAE came out in support of the USD. The buck hasn’t even been able to find bids against the Yen, with Japan’s Fujii saying that it was undesirable for governments to pursue weak currency policies. Elsewhere, the Latvian states are back in the headlines with some negative attention after an article in the Telegraph reported of secret meetings between Sweden’s finance minister with major Swedish banks on the unraveling of political order in the Eastern European economy. Other data released overnight included the better than expected UK Halifax HPI and softer Swiss CPI which hardly factored into price action. Looking ahead, the calendar in North America is light, with only Canada building permits and Ivey PMI due at 12:30GMT and 14:00 GMT respectively. US equity futures point to a higher open, while commodities are also bid.

Quant –

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Monthly Techs - EUR/USD The structure remains quite constructive on the monthly chart, with the market having put in 6 consecutive monthly higher lows and potentially now looking for a seventh. The price has also traded above the 61.8% fib retracement off of the major 2008-2009 high-lows, and next resistance in not seen until the 1.5200 area which represents the 78.6% fib retracement off of said move. For now, 1.4175 is critical longer-term support and needs to be broken to end a sequence of consecutive monthly lows and put the pressure back on the downside. Until then, buying dips should be the preferred long-term strategy. USD/JPY Remains locked in a very well defined downtrend from 2007 with the market putting in a series of lower highs and lower lows. A fresh lower top is now sought out by the 2009 yearly high at 101.45, to be confirmed on a break below the matched 2008/2009 trend lows at 87.15. As such, we look for a direct retest and break below 87.15 over the coming weeks. However, monthly studies are starting to look very stretched and we would not rule out the potential for a major shift in the structure over the coming months. Our recommendation would be to look for opportunities to buy into the next downside extension below 87.15, potentially in the 80.00-85.00 area. GBP/USD Difficult to determine whether we are in the process of attempting to carve a major lower top in the 1.7000 area ahead of the next drop below 1.3500 or are looking for a higher low ahead of a fresh upside extension beyond 1.7000 and back towards the 2 handle. For now however, at a minimum, it looks as though the market wants to trade lower with sighs set on the 1.5000 area over the coming weeks. This, after the triggered major h&s top by 1.6000 on the weekly chart. USD/CHF Has extended declines in 2009 to fresh lows by 1.0185 thus far ahead of the latest minor bounce. Despite the downtrend, we contend that the market is in the process of attempting to carve out a higher low above the multi-year lows below parity, ahead of some fresh upside back above 1.1000 over the medium to longer-term. Although the 78.6% fib retrace off of the major 2008-2009 move has been slightly breached, the 1.0200 area could be an ideal spot for the higher low to take form. In ability to hold above 1.0200 on a weekly close basis will however negate recovery prospects and expose a drop below parity.

P&L Update and Overview: Many of you have been asking for a way to better track trading results and open positions. In response to these requests and in an effort to be fully transparent, a simulated portfolio was created in June to track and mirror all recommendations and trades. Below is a return on equity curve since inception on June 1, 2009, along with an open and closed position tracker. I am hopeful that this will make things easier for you all.

Written by Joel Kruger, Technical Currency Strategist for
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