USD Recovers Overnight; Can the Gains Hold Up? Closer Look at Rand (Morning Slices)

The ECB has left rates unchanged at 1.00% as expected. There has been some broad based USD buying overnight and we suspect that the price action can be attributed to a number of factors including weaker overseas data, profit taking ahead of the ECB and NFP risk, along with profit taking ahead of the US long holiday weekend.


Fundys – The ECB has left rates unchanged at 1.00% as expected. There has been some broad based USD buying overnight and we suspect that the price action can be attributed to a number of factors including weaker overseas data, profit taking ahead of the ECB and NFP risk, along with profit taking ahead of the US long holiday weekend. Eurozone economic releases were far from encouraging overnight with unemployment coming in above expectation and at a 10 year high at 9.5%, while producer prices out of the region were also a disappointment. Meanwhile in the UK, PMI was released and was also below expectation. Sterling was also seen weighed down following some concerning comments from BOE Miles who said that there was a real issue about the availability of credit and it was unrealistic to expect bank lending to increase dramatically. BOE Besley didn’t help to prop the Pound after adding that an exit from the recently implemented quantitative easing policy was not at the forefront of central banker’s minds. Also seen attracting some fresh broad based USD bids overnight were comments out from [B]China’s vice foreign minister[/B] that China still sees the USD as the main global reserve currency. In Switzerland, SNB Jordan was on the wires echoing familiar central bank rhetoric, reiterating that the SNB was prepared to act to prevent any unwelcome appreciation in the Franc. Finally, it is worth noting that the Riksbank surprisingly cut rates by 25bps to 0.25% after it was widely expected that the Swedish central bank would remain on hold. This forced some massive selling in the krona, which is now the weakest currency on the day, down nearly 1.50% against the buck. The fact that the Riksbank has once again opted to cut, could be interpreted as a deeper reflection on the state of the global economy and a warning that we are still not yet out of the woods. Price action in the krona has been very highly correlated to the US equity markets. US equities point to a lower open, while commodities are also weighed down. Finally, Moody’s has cut Ireland’s bond rating to Aaa fro Aa1 on elevated concerns over the troubled local banking sector. Looking ahead, all eyes will be keenly focused on the ECB Trichet press conference at 12:30 GMT for additional insights into the future direction of monetary policy at the European Central Bank. Market participants will also need to deal with the much anticipated and potentially more market moving NFP (-365k expected) and US unemployment rate (9.6% expected) that follows at 12:30GMT. Also out today are initial jobless claims (615k expected) and continuing claims (6740k expected) at 12:30GMT, with factory orders (0.9% expected) capping things off at 14:00GMT.

Quant –

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Techs - EUR/USD confined to inside day price action with key levels to watch above and below by 1.4200 and 1.4000. We have booked some profits on Wednesday’s short from 1.4180 and have trailed the stop to cost to eliminate any risk. USD/JPY also confined to some tight inside day trade with key levels to watch coming in by 97.00 and 96.15. GBP/USD continues to track lower with Tuesday’s sharp bearish outside day appearing to set the tone into the final sessions of the week. The rejection and subsequent decline after setting fresh 2009 highs by 1.6745 on Tuesday has accelerated the drop today and could now potentially expose key short-term support by 1.6185 ahead. Only back above 1.6545 gives reason for concern. USD/CHF also confined to inside day price action with the key levels to watch above and below by 1.0890 and 1.0710 respectively.

Flows – Macro accounts, real money and UK clearer all selling Cable. Real money buying Eur/Gbp. Plenty of option expiries in Eur/Usd today at 1.4000, 1.4100, 1.4150, and 1.4200.

Trade of the Day – Usd/Zar:
While we are not inclined to recommend any formal position in the pair, we are very attracted to the idea of establishing long positions at current levels, with a potential upside that looks extremely compelling. The market has been in a virtual free fall since early 2009, with the Rand gaining well over 20% against the USD to standout as the best performing currency on the year. However, the USD has now declined back to former longer-term resistance now turned support from August 2007, and with daily and weekly studies looking stretched, we see good reason for some fresh USD buying and Rand profit taking at current levels. Shorter-term price action shows an end to a sequence of 56 consecutive negative daily closes of lower highs and lower lows after the market failed to break lower on Wednesday and has just taken out Wednesday’s highs today. The Rand has also been highly correlated with price action in equities (0.64) and given our view that equities are likely to start to pull back, we see good reason for the Rand to sell-off as well. It seems as though officials have become less optimistic with the recovery prospects for the global economy, instead favoring more of a double dip recovery over a “V” shaped bottom, and any deterioration in investor sentiment resulting from this will ultimately weigh on the emerging market currency. Look for the market to start to carve out a bottom, with a minimum upside extension now seen back towards 8.28, above which should formally shift the overall structure and open a fresh wave of medium-term buying. Any dips back towards the recent 2009 lows at 7.66 and psychological support at 7.50 should be used as an opportunity to build on long positions.

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