Correlated GBPUSD & GBPJPY Could Offer Shorting Opportunities

Both GBPUSD and GBPJPY have been moving in tandem and we had a clear downside break Monday. Any correlated pullback to the line could be seen as a chance to short with tight stops in place.

Placing lines is never an exact science so having two charts for reference will be a help for fine tuning the entry point.

Post FOMC Risk Selloff Continues, Dollar Firm

Markets have clearly responded negatively to Fed's Operation Twist announcement overnight. Asian equities are broadly lower with Nikkei down -2% following the -2.5% fall in DOW. 10 Year yield dropped to record low of 1.875% while 30 year yield barely held above 3%. Crude oil broke 85 level and should be heading back to 75 .71 low set August. Dollar index jumped on risk aversions and breaches 78 level today so far. Commodity currencies are hardest hit on risk aversion as well as on respective reasons. Sterling is also pressured by expectation of more QE from BoE and hover around record low against yen. Euro, on the other hand, is relatively resilient so far and is holding above 1.35 again dollar even though it's vulnerable.

As expected, the Fed announced to extend the average maturity of its holdings of securities so as to stimulate the economic recovery and to help ensure inflation is consistent with the dual mandate over time. The operation twist that the Fed adopts is an active one. It involves selling $400B of Treasury securities with maturities of 3 years or less and simultaneous purchase of a similar amount of Treasuries in the 6-30 year remaining maturity range. The Fed funds rate was keep unchanged at 0-0.25%. 3 Fed presidents who voted against additional policy easing were Richard Fisher, Narayana Kocherlakota, and Charles Plosser.

Additional pressure is seen markets after China HSBC manufacturing PMI dropped to 49.4 in September as export and output declined. The index has been staying in contrationary territory for three consecutive months and suggests further mild contraction in near term. The news added additional weight on Aussie, where China is the country's biggest trading partner. New Zealand dollar saw some pressure after RBNZ governor Bollard said there are "significant global risks" and there is no "particular rush" to raise rates even though the bank still has expectation to tighten. Canadian dollar is pressured by anticipate that crude oil is heading back to below 80. Canadian Prime Minister Harper also warned yesterday that the BoC is "prepared to intervene if they thought there were movements in the currency that were contrary to the country's interests and not being driven by actual underlying fundamentals", that is, intervening in the markets to curb CAD strength.

Looking ahead, Eurozone PMIs will be a major focus in European session and is expected to show further deterioration in the economic outlook. Swiss ZEW and UK CBI industrial orders expectations will also be released. In US session, main focus will be on Canadian retail sales and US jobless claims.

New Zealand Dollar is one of the weakest currency this week and the break of 0.7962 support confirms resumption of the whole fall form 0.8842 high. Near term outlook will remain bearish as long as 0.8118 resistance holds and current fall should now target next key cluster support level at 100% projection of 0.8842 to 0.7962 from 0.8572 at 0.7692 and 50% retracement of 0.6560 to 0.8842 at 0.7701.

GBP/JPY Daily Outlook

Daily Pivots: (S1) 117.68; (P) 119.14; (R1) 119.93; 

GBP/JPY drops to as low as 118.35 so far and broke key support level of 118.81. There is no sign of bottoming yet and intraday bias remains on the downside for deeper decline. Sustained trading below 118.81 will target 161.8% projection of 130.83 to 123.29 from 127.31 at 115.11 in near term. On the upside, note that break of 122.26 resistance is needed to signal short term bottoming in the cross. Otherwise, outlook will remain cautiously bearish even in case of recovery.

In the bigger picture, focus remains on 118.81 support. Sustained trading below this level will confirm resumption of the long term down trend from 2007 high of 251.09 and should pave the way to 61.8% projection of 215.87 to 118.81 from 163.05 at 103.06, which is close to 100 psychological level. Meanwhile, strong rebound from the current level, followed by break of 140.02 resistance, will revive the case that consolidation from 163.05 is merely the second leg of the consolidation pattern that started at 2009 low of 118.81. In such case, there should be one more medium term rise before the long term down trend resumes.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
22:45	NZD	GDP Q/Q Q2	0.10%	0.50%	0.80%
7:00	EUR	French PMI Manufacturing Sep P		48.5	49.1
7:00	EUR	French PMI Services Sep P		54.2	56.8
7:30	EUR	German PMI Manufacturing Sep P		50.2	50.9
7:30	EUR	German PMI Services Sep P		50.6	51.1
8:00	EUR	Eurozone PMI Manufacturing Sep P		48.6	49
8:00	EUR	Eurozone PMI Services Sep P		51.1	51.5
9:00	EUR	Eurozone Industrial New Orders M/M Jul		-1.20%	-0.70%
9:00	CHF	ZEW Survey (Expectations) Sep			-71.4
10:00	GBP	CBI Trends Total Orders Sep		-5	1
12:30	CAD	Retail Sales M/M Jul		-0.30%	0.70%
12:30	CAD	Retail Sales Less Autos M/M Jul		0.20%	-0.10%
12:30	USD	Initial Jobless Claims		420K	428K
14:00	EUR	Eurozone Consumer Confidence Sep P		-18	-16.5
14:00	USD	Leading Indicators Aug		0.10%	0.50%
14:00	USD	House Price Index M/M Jul		0.10%	0.90%
14:30	USD	Natural Gas Storage			87B

Daily Forecast for Crosses

EURJPY Forecast
The EURJPY had another volatile but indecisive movement yesterday, made another Doji on daily chart. The bias remains neutral in nearest term. A quick look at the hourly chart easily reveals that price is moving in a sideways mode since Monday but as long as price stays below the trend line resistance my overall technical outlook remains strongly to the downside, still targeting May 2001 low at 100.08. Immediate resistance is seen around 105.50. A clear break above that area could trigger further upside pullback testing 106.57 but overall I still prefer a bearish scenario at this phase. On the downside, we need a clear break and daily close below 103.88 to continue the bearish scenario.

GBPJPY  Forecast
The GBPJPY continued its bearish momentum yesterday and hit 121.14 earlier today in Asian session. The bias is bearish in nearest term and looks like the hammer formation bullish pullback scenario is diminishing now as price seems ready to resume its bearish scenario still targeting 118.83. Immediate support, which is also the nearest bearish target is seen around 120.00. Immediate resistance is seen around 121.60. A clear break back above that area could lead price to neutral zone in nearest term testing 122.00/50 but as long as price stays below 122.93 my overall intraday bias remains strongly to the downside.

AUDUSD Forecast
The AUDUSD was indecisive yesterday, made a Doji on daily chart but had a bearish momentum earlier today in Asian session hit 1.0209. The bias is bearish in nearest term testing 1.0120 and the lower line of my triangle as you can see on my daily chart below. Immediate resistance is seen around 1.0300. A clear break back above that area could lead price to neutral zone in nearest term as direction would become unclear. Price is now below EMA 200 on daily, h4 and hourly chart suggests a strong bearish outlook, but we need a clear break from the triangle to see a clearer long term direction.

Big picture G10 Currency Charts

The charts below are for each of the G10 currencies versus an evenly weighted basket of the remainder of their G10 peers. The charts are small (as we work on updating the blog to allow links to larger graphics), but they nonetheless do cover quite a bit of ground – 2500 data points for each in fact, which hopefully gives an interesting perspective. Each of the time series starts at indexed 100 as of early February 2002. (The start point of the index changes with every refresh of the charts on  a rolling basis.)

Note that the charts were cut before the last leg of the action in the early US session after the news that Stark will resign from the ECB (rumored because of disagreements on bond buying) and on news ECB will back off on penalty rates for banks accessing emergency facilities.

USD

The US dollar has been dropping forever – note that while the dollar index crossed the 200-day moving average, the USD/G10 basket has not yet crossed this important level, though it is trading at the highest level in months and may be confirming a transition to a bullish trend after the recent basing action and loss of downside momentum.

EUR

How ironic is it that, as the EU is experiencing its worst existential crisis to date, the Euro is back close to its lowest levels in years….which are also the lowest levels since the Euro was launched amid intense skepticism over the entire idea of a single currency back in 2002.

JPY

The JPY remains resilient and relatively strong – but will likely only be so as long as rates remain absurdly low and/or the BoJ and Japanese government steal a page from the SNB’s book on the intervention front

GBP

GBP is experiencing a bit of a revival on Euro misery and as its down trend has been losing steam for a long time. Could the market be getting too complacent on further GBP weakness?

CHF

The magnitude of the run-up and the subsequent reversal is breathtaking, but leaves us, amazingly, still poised above the 200-day moving average! There’s a lot more room for franc weakness if the SNB’s intervention project succeeds.

AUD

AUD is extremely overvalued if the Asian growth story in any way derails. The focus has been intense on Europe, but many risk appetite signals are flashing around the world, which are most often associated with Aussie downside. Aussie hasn’t been garnering sufficient notice.

CAD

CAD has been a relatively low beta currency over the years relative to some of its peers. It is generally out of favor now, but could put up a fight or at least avoid broad weakness if the US economy and USD prove stronger than the market is currently expecting.

NZD

The NZD bull market has enjoyed an Indian summer, but it may fade on the potential for an Asian hiccup and if the post NZ earthquake GDP bump fades in the months ahead.

SEK

The krona is gaining favor as a safe haven from Euro turmoil. It may rally passively for a while, but historically has a hard time if its export markets are threatened.

NOK

NOK is very credible as a safe haven from a fundamental standpoint and has room to rally further, but what point does the Norges Bank begin to rattle it saber when EURNOK is already at almost decadal lows?

Forex Technical Set-ups for the Week Ahead

Friday's movement should see EURUSD push towards 1.4700

Having moved higher off 1.4322 support on the weekly chart, EURUSD has clearly broken from the corrective channel (blue). An engulfing green candle from Friday should have the follow through to break through the triangle formation (pink), which should push the pair up towards 1.4700; the previous high; and 1.4746; the weekly trend line.

Bullish views of EURUSD could create long opportunities in GBPUSD

GBPUSD has pushed off 1.6289 support on the weekly. A large reversal candle was recorded on Friday, with the pair unable to hold below support. The pair has yet to make a higher low on shorter time frames.

However, the EURGBP chart (analysis to follow below) suggests a corrective pattern (lower), so with a EURUSD bullish view, pullbacks in GBPUSD might be seen as buying opportunities.

A choppy 3 wave corrective pullback could soon follow for EURGBP

On the weekly chart, EURGBP has recorded a bullish candle off support at 0.8691, however the previous area of resistance can be seen at 0.8880-0.8900.

On the daily chart, after producing a double bottom with divergence EURGBP has rallied strongly.

On the four hour chart, the 261.8% projection of the first wave would take the pair to 0.8894; close to the area of resistance, however the top may be in place from Friday’s 4hr engulfing pattern at the high. A corrective pullback is expected soon in a choppy three wave sequence. This might be seen as an opportunity to ‘get long,’ with the prime area being 0.8770 - 0.8750. A larger Bullish pattern is then likely to unfold with the resistance area (0.8900) broken to the upside.

Whilst views are bullish AUDUSD faces strong resistance at 1.0574

AUDUSD appears strongly bullish on the weekly chart. The pair does however face some some strong resistance at 1.0574.

On the daily chart, it looks like a higher correction is due in an ABC pattern. 1.0638; the 61.8% retracement; looks to be the first area of attraction.

A bullish triangle breakout (4hr engulfing candle) would suggest that the rally could extend past 61.8% with 1.0829 (78.6%) looking more likely.

Despite evidence of investor indecision, AUDJPY could move higher

The previous week produced an indecisive ‘Inside Doji’ in AUDJPY. Last week’s price action produced a bullish candle and; although still an inside candle; this gives the cross a slight upside bias.

Having now broken through resistance, AUDJPY looks set to make a larger bullish ABC correction. A perfect formation would see the pair target 83.50.

On the four hour chart, a bullish engulfing pattern should give the cross enough momentum to break and clear the high from the 17th August.

After consolidating, the DOW could move lower following the rally

Since the strong sell-off at the end of August the DOW has been consolidating in a large triangle formation. This consolidating pattern would normally have a slight bias to break to the downside, however Elliott Wave theory may see this as a 4th wave correction with wave C yet to be fully realised. The weekly candle also shows an Inside Harami candle, which illustrates indecision with a slight upward bias. This should only be a temporary rally before the next major sell off.

GBPJPY shows indecision, with Wave C targetting 127.75 to 128.00

For GBPJPY, the last two weekly candles have been inside the range of the week 8th August. This shows investor indecision at these levels.

The Daily chart suggest that a larger ABC formation has yet to complete with wave C targeting 127.75 - 128.00.

NZDUSD could target 0.8509 within an ABC corrective sequence

Price action in NZDUSD produced an engulfing green candle after the previous week's indecisive inside red.

The pair now looks set to produce a larger ABC corrective sequence with 0.8509 – 0.8612 the prime target area.

An ascending triangle breakout to the upside – trading with the bias could see the pair rally beyond the aforementioned area with 8840 the triangle target.

 

Daily Report: Dollar Maintains Post FOMC Gains

Asian equities follow US stocks lower today after Fed Bernanke provided no hint on QE3 overnight as QE2 ends in June. Fed offered a less optimistic view on the economy with downward revision in GDP projection and upward revision in unemployment projection. Also, sentiments are hurt a bit by poor HSBC China PMI reading today, which dropped to a 11-month low of 50.1 from May's final reading of 51.6. Overall mild risk aversion and lack of QE3 talk sends dollar higher against most major currencies Sterling remains the weakest currency this week and hovers around record low against Swiss Franc after BoE talked about the possibility of extending the quantitative easing program in the minutes released yesterday.

To recap, Fed left federal funds rate unchanged at historical low of 0-0.25% yesterday and kept that language on keeping rates at low for "an extended period." QE2 will end in June as expected and continue to reinvest principal payments from the holdings. In the second post meeting press conference, Bernanke signaled there is no QE3 as the current situations are very different from last August. Deflation is now a "non-trivial risk" while the job markets has been improving even though the pace is "frustratingly low". Though, Bernanke still kept the option open as he noted that part of the slowdown in the economy is "temporary" but part "maybe longer". And, there "maybe some of the headwinds that are concerning us, like the weakness in financial sector, problems in the housing sector - some may be stronger and more persistent than we thought."

Fed also published their updated forecasts. For 2011, GDP is expected to grow 2.7-2.9%, revised down from prior projection of 3.1% to 3.3%. That's the second time Fed lowered growth projections. For 2012, GDP is expected to grow 3.3-3.7%, also lowered from prior projection of 3.5-4.2%. Regarding unemployment, for 2011, unemployment rate is projected to be at 8.6-8.9% in Q4. That's higher than April's projection of 8.4-8.9%. For 2012, unemployment is projected to be 7.8-8.2%, also, higher from April projection of 7.6-7.9%. Regarding core inflation, core PCE is projected to be at 1.5-1.8% in 2011, higher than April projection of 1.3-1.6%. For 2012, core PCE is projected to be at 1.4-2.0%, also higher than April forecast of 1.3-1.8%.

ECB President Trichet the debt crises in Eurozone and the contagion threat are flashing "red" warning signals. And, the most serious threat to financial stability "stems from the interplay between the vulnerabilities of public finances in certain EU member states and the banking system, with potential contagion effects across the Union and beyond." And, "the difficulties in programme implementation in some countries pose a significant challenge for the financial system." German Chancellor Merkel warned that full-scale debt restructuring in Greece would have "completely uncontrollable" effects on financial markets and could threaten other countries' stability, including banks, creditors as well as institutions that sold insurance policies against a default. Merkel also insisted that the contribution by private investors in Greece second bailout must be "substantial ... and measurable." Greek Prime Minister Papandreou now targets to get parliamentary approvals for austerity measures by June 28 and then get EU approval for the EUR 12b funding to rollover maturing debts on July 3.

On the data front, Australian conference board leading indicator rose 0.1% in April. Swiss trade surplus was wider than expected at CHF 3.31B. Eurozone flash PMIs will be released and are expected to drop further in June. From UK, there will be CBI reported sales and BBA mortgage approvals. From US, initial jobless claims and new home sales will be featured.

Dollar index's recovery from 74.51 is still in progress and is back above 75 level. We'll stay neutral in the index for the moment. On the one hand, it's clearly still limited below medium term falling trend line resistance from 88.70 and thus, there is no indication of reversal yet. A break below 74.51 support will likely send dollar index through 73.50 support towards 72.69 low. On the upside, break of 76.36 resistance will now affirm the case of medium term reversal and should turn outlook bullish for stronger rise. 

GBP/JPY Daily Outlook

Daily Pivots: (S1) 128.49; (P) 129.51; (R1) 130.05; More

GBP/JPY's break of 128.91 suggests that recent decline has resumed and intraday bias remains on the downside for 100% projection of 140.02 to 130.27 from 135.11 at 125.36 next. On the upside, above 130.53 will turn bias neutral again. But after all, near term outlook will remain bearish as long as 132.32 resistance holds and we'd expect whole decline from 140.02 to resume sooner or later.

In the bigger picture, choppy fall from 163.05 is treated as second leg of the consolidation pattern that started at 2009 low of 118.81. The failure to sustain above 55 weeks EMA and subsequent decline suggests that rebound from 122.15 was possibly just a correction. That is, fall from 163.05 is still in progress for another low below 122.15. Outlook will remain cautiously bearish as long as 135.11 resistance holds. Nevertheless, we'd be watching for reversal signal once again around 118.81 (2009 low). On the upside, decisive break of 140.02 resistance will now confirm medium term reversal and should start the third leg of consolidation pattern from 118.81 for 163.05 resistance and above.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
0:00	AUD	Conference Board Leading Index Apr	0.10%		0.40%	-0.10%
6:00	CHF	Trade Balance (CHF) May	3.31B	1.68B	1.52B	1.44B
7:30	EUR	German PMI Manufacturing Jun P		57	57.7
7:30	EUR	German PMI Services Jun P		55.7	56.1
8:00	EUR	Eurozone PMI Manufacturing Jun P		53.8	54.6
8:00	EUR	Eurozone PMI Services Jun P		55.3	56
8:30	GBP	BBA Loans for House Purchase May		30.0K	29.4K
10:00	GBP	CBI Reported Sales Jun		13	18
12:30	USD	Initial Jobless Claims		410K	414K
14:00	USD	New Home Sales May		310K	323K
14:30	USD	Natural Gas Storage		91B	69B

Today's Call: GBPJPY – Bearish below 137.23

The buy recommendation for Q2 is underpinned by clear bullish signals that long term sentiment is improving and so far this is being confirmed. From the 7am open on Monday April 4 the cross rallied 400 pips in the first week, recording the strongest performance in one and a half  years. However on a daily basis the indications have been for stalling investor  enthusiasm at overstretched extremes and all through last week this was supported by increasingly bearish momentum signals warning that selling interest is strengthening. Going into this week, prices have now pulled back 50% of the rally since the end of March ( 130.12 – 140.03 ) and the forecast is bearish below 137.23 to 133.89, a broader 62% correction, then April’s 133.23 bottom or potentially 132.00.

Risk to this forecast would be buying through Wednesday’s 137.23 top. This should be a bullish signal that sentiment is improving again and further gains are likely to retest last Tuesday's top at 138.60 then the April high at 140.03.

Daily Report: Euro Mildly Lower On Debt Worries, But Downside Limited

Euro opens the week mildly week against dollar and yen as last week's retreat continues. There were more talks on restructuring Greek debts over the weekend. In Germany, Deputy Foreign Minister Werner Hoyer said a Greek sovereign debt restructuring 'would not be a disaster'. Hoyer added, 'whether all [the efforts to reform] this is enough, whether the results will be there soon enough, is a different question. We are looking at the economic developments, the fiscal developments in Greece and we are worried'. Debt crisis in the region is reemerging. The situation in Greece remains fragile after it received a bailout from the EU and the IMF last year. Markets are concerned that the fates of Ireland and Portugal may be similar despite bailouts. Finland's situation also gives Euro some mild pressure after the True Finns party wont 19% of the vote in the weekend's election. The party is know to be against bailouts for deeply-indebted Eurozone counterparts. The increase change for becoming part of coalition government now also raises changes of opposition to further bailouts and could theoretically prevent EU from granting new rescues.

Nevertheless, the common currency will likely continue to be supported by rate expectations and recent up trend against dollar and yen are expected to resume sooner or later. ECB Executive Board member Jose Manuel Gonzalez-Paramo said that "a 25-basis-point increase like that on April 7 may not be convenient for those countries who are behind in their recovery, but the ECB cannot hold off its mandate because of that," which is to maintain price stability. Bundesbank President Axel Weber see "significant increase in inflationary pressure." Weber noted that "if global price pressure continues -- there have been few signs in IMF discussions that this will change over the rest of the year -- one has to expect a further normalization of monetary policy in view of the price outlook.” Governing Council member Ewald Nowotny said market expectation of another 50 bps hike from ECB is "well founded" and "the exact timing is a matter to be decided according to the economic situation." Governing Council member Luc Coene said interest rates are "still too accommodative" and have to be adjusted.

The China government obviously concerns about rising inflation and overheating economic growth in the country. The PBOC announced over the weekend that it will raise the reserve requirement ratio (RRR) by 50 bps to 20.5%, effective April 21. Governor Zhou Xiaochuan stressed that monetary tightening will continue for 'some time'. This 4th hike was expected as China's CPI jumped to 5.4%yoy in March, the fastest pace since 2008. The tightening process remains in progress and more rate hikes will be seen later in the year. While the government has been trying to avoid involving RMB appreciation as a means to combat inflation, it appears to be a more effective tool than merely using rate hikes and RRR increases.

On the data front, New Zealand CPI rose 0.8% qoq, 4.5% yoy in Q1, missing expectation of 1.0% qoq, 4.6% yoy. UK Rightmove hour prices rose strongly by 1.7% mom in April. Canada international securities transactions, US NAHB housing market index and Eurozone consumer confidence will be released later today.

Today's weaker than expected New Zealand inflation data triggered some retreat in the NZD but so far there is no change in the bullish outlook in both NZD/USD and NZD/JPY. As noted before, NZD/JPY's medium term consolidation from 69.70 should have completed at 54.78 already and whole rise from 44.19 should be resuming. We'll stay bullish in the cross as long as 64.23 support holds and expect a break of 69.70 resistance eventually towards 61.8% retracement of 97.74 to 44.19 at 77.28. 

GBP/JPY Daily Outlook

Daily Pivots: (S1) 134.95; (P) 136.00; (R1) 136.72;

GBP/JPY's pull back from 139.99 extends further today and dips to 134.86 so far. Intraday bias remains mildly on the downside for further decline. But still, downside is expected to be contained by above 132.96 resistance turned support and bring rally resumption. Above 137.62 will flip bias back to the upside to retest 139.99 first. Break will target 50% retracement of 163.05 to 122.40 at 142.72 next.

In the bigger picture, as noted before, choppy fall from 163.05 is treated as second leg of the consolidation pattern that started at 2009 low of 118.81. The break of medium term falling channel as well as 55 weeks EMA suggests that such decline has finished at 122.40 already. In other words, the third leg of the consolidation should have started and should target 163.05 and possibly above in medium term. On the downside, below 130.17 support is needed to invalidate this view. Otherwise, we'll now stay bullish in the cross.

USD resurgence to persist?

The greenback is fighting back once again on resurgence in US yields across the curve after Obama tax deal and renewed growth hopes. Does this jibe with action in other markets and will the renewed USD strength persist?

Higher US yields and the USD
The sharply higher yields at the long end of the US yield curve are pushing the USD stronger – a relatively rare phenomenon if we look at the post-global financial crisis environment. Generally since 2008, we’ve been trained to look for USD strength when interest rate spreads improve in favor of the US via non-US yields falling more rapidly than the already very low us yields. This time is very different, as we are seeing US yields sharply higher all along the curve on renewed hopes that US growth will surprise in the coming year. This view is supported by the new round of “stimulus” by the Obama administration in its unemployment benefits/tax cut extension move this week. Although this program only adds new outlays via the unemployment benefits, the combination of these benefits in addition to the Bush era tax cut extensions and the payroll tax cut are north of 5% of GDP relative to what would have been the case had no action been taken. This virtually guarantees that there will be no real double dip in 2011 for the US. Of course, this comes at a huge cost to the already dire fiscal picture, but for the moment, the market continues to express no worry on that front, perhaps hoping that the economy will make a strong enough comeback to keep the Fed sidelined and grow tax revenues. This is an impossibly sanguine view on the fiscal side, but the market seems very content to live in the now these days and as long as US yields outperform, we should see a continuation of the USD strength – particularly against the low-yielding JPY.

EuroZone periphery
The Irish budget passed as expected, with no strong reaction in the FX markets, save for continue weakness. The sovereign debt noise is now shifting to Italy, where Berlusconi’s hold on the reins of power seems to be slipping and he faces a confidence vote on December 14. If one dials back to the past of Italian politics, one can easily find grounds for further worry that fractious politics could hinder any timely solution to Italy’s deficit and debt challenges. See this Bloomberg article for coverage of Italy’s 2011 budget proposal and Berlusconi’s confidence vote. 

UK manufacturing data
The UK CBI manufacturing orders data surged to its strongest level in years and well above expectations. This together with Euro-area nervousness has EURGBP trading to a new low for the week as last week’s low around 0.8335 is rapidly coming into view. The current yield spread picture at the front of the curve suggests that GBPUSD is fairly priced in the 1.5800-1.6000 area. UK vs. Japanese yield spreads suggest that GBPJPY should be breaking to new highs for the cycle.

Chart: GBPJPY
Yield spreads suggest GBPJPY should be trading at a new high for the recent cycle. While the pair has rallied sharply on the last couple of days of bonds selling off, it is still below the previous highs. Also looming soon is the 200-day moving average above 134.00. We’ll likely need to see a continued pummeling of the bond market to get the pair to achieve further altitude. Otherwise, this is just one more false hope rally for the JPY funded carry trades. 

Looking ahead

 Reversal to see follow through?
Yesterday was a key technical event across markets, as the break to new highs in equities failed to close at new highs and as we saw an almost climactic reversal in some of the most volatile markets like precious metals. Silver, for example, posted a strong new high above 30.50, but then closed the day below 29 dollars and therefore below the previous high.  As well, US treasuries resumed a sell-off and USDJPY reversed sharply back to the upside. Today and the rest of the week will be about determining whether this move continues or whether it was just a headfake.  The next key triggers are the 1.2970 lows in EURUSD and perhaps the 0.9700 area in AUDUSD (which is struggling today to figure out whether it wants to break down through the 55-day moving average just above the 0.9800 level.

Key US 10-year auction
Today’s US 10-year auction is one of the more important auctions in recent memory now that bond yields have punched through critical levels.  At some point, rather than serving as a reflection that risk appetite is improving, higher bond yields might generate worries for growth rates. Certainly, sharply higher rates from current levels mean that we need to see strong fundamental improvement in economies and corporate earnings again, since the higher rates go, the more they pressure the fragile mentality of the liquidity punchbowl and rising asset prices as a response to Fed priming.

RBNZ on tap
Don’t forget that the RBNZ is on tap with its rate decision (no change expected – we’re sure that the RBNZ is not particularly happy with the strong kiwi – even if it is resigned to it. On the economic data front, there is little to suggest that the RBNZ needs to pull the level here and now with housing sales collapsing and prices easing lower while there are few signs of inflation and the major activity surveys have decelerated a bit recently. Still, guidance will be worth watching.

Economic Data Highlights

• US Weekly ABC Consumer Confidence out unchanged at -45
• Japan Oct. Adjusted Current Account Total out at ¥1463B vs. ¥1556B expected and ¥1661B in Sep.
• Japan Oct. Machine Orders fell -1.4% YoY and rose +7.0% YoY vs. -0.1%/+8.3% expected, and +4.2% YoY in Sep.
• UK Nov. BRC Shop Price Index rose +2.0% YoY vs. +2.2% in Oct.
• Australia Oct. Home Loans rose 1.9% MoM vs. 0% expected
• Germany Oct. Current Account out at +11.7B vs. +14.3B expected and +14.5B in Sep.
• Germany Oct. Trade Balance out at +14.2B vs. +15.1B expected and +16.8B in Sep.
• Germany Oct. Industrial Production rose +2.9% MoM and +11.7% YoY vs. +1.0%/+10.0% expected, respectively and vs. +7.7% YoY in Sep.
• UK Dec. CBI Total Orders Trend rises to -3 vs. -13 expected and -15 in Nov.
• Canada Nov. Housing Starts out at 187.2k vs. 173k expected and 167.8k in Oct.

Upcoming Economic Calendar Highlights

• US Weekly DoE Crude Oil and Product Inventories (1530)
• New Zealand RBNZ to announce Cash Target (2000)
• New Zealand Nov. Credit Card Spending (2145)
• Australia Q4 Westpac ACCI Industrial Survey (2330)
• Australia Nov. Employment Change and Unemployment Rate (0030)
• Japan BoJ’s Morimoto to Speak (0130)
• Japan Nov. Machine Tool Orders (0600)

FX Closing Note: CAD cries Wolf

Market action
The greenback remained on a weak footing for most of the NY session, as US treasuries tread water and equities sold off and then rebounded slightly. The JPY firmed on weaker risk appetite and finally noticed firmer Euro Bund prices that it ignored in the European session. CAD was the day's weakling as the Bank of Canada's David Wolf came out with a number of CAD-negative broadsides and as oil prices cooled sharply after posting new 15-month highs today.

Technical and other developments
USD - generally lower today, but most losses occurred in Asia, with no real follow through in later trading. AUDUSD is less than a figure off of its low for the cycle as this throwback rally is doing a full test of the top of the old rally, it seems, after all of the Fibo retracements have failed to contain the rally for long. Fitch said that it saw long term risk ("by second half of decade") of pressure on US's AAA rating if the US didn't do something to address its budget deficit over the next 3 to 5 years.

CAD - the Bank of Canada's Wolf said in a speech today that housing market strength in Canada is "striking", that a housing revival is "desirable" and that it is "premature" to suggest that the housing market is in a bubble even if must be monitored. Mr. Wolf said that it was premature to raise rates now. "If the Bank were to raise interest rates to cool the housing market now - when inflation is expected to remain below target for the next year and a half - we would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession." This helped USDCAD reverse from its new multi-month lows.

Chart: USDCAD reversal
CAD was lower across the board today on the oil price decline and Wolf comments. The bullish candlestick comes in just ahead of the old lows for the cycle and may be followed up with more upside in the coming sessions barring a renewed spike in oil.

GBP - lost ground on the Euro again and is closing up close to recent resistance levels. A new downleg for the pound in store here?

Chart: GBPJPY
GBPJPY made an ugly reversal and close on the day (bearish shooting star and outside day, as the JPY sell-off has taken a breather on bond markets that have steadied of late. If risk aversion gets nervous on the first earnings reports in coming days, JPY crosses could see some further consolidation lower.

JPY - bonds are flashing a bit of a warning light here as bonds are continuing to consolidate. The reversal today in the likes of EURJPY and GBPJPY even more so, looks rather compelling for some possible short term strength in JPY (downside for JPY crosses).

CHF - responsed very little to the SNB's warning on intervention. Later, the CHF was a bit stronger as the SNB's Hildebrand

said that if interest rates are kept at the current rate for too long term, it would create problems and that the SNB has begun to withdraw liquidity.

NOK - It would seem that EURNOK is at risk of consolidating on the reversal in oil prices, though the correction there may need to pick up the pace to add serious pressure on NOK after today's higher than expected inflation data. NOK managed to make a comeback after a spike lower early in the NY session

Looking ahead: Earnings season upon us
Besides the usua US corporate earnings are very much the focus with Alcoa traditionally kicking off the earnings season today. Stories abound on whether equities are fairly priced at present and to what degree corporate earnings will improve. The coming couple of weeks will be important for the asset markets as equity traders determine how comfortable they are with the expectations priced into the market relative to the earnings reports rolling in and companies' guidance.

Another question we have for the shortest term is how much the market is willing to bid up EURUSD ahead of Thursday's ECB press conference...

Be careful out there.

Forex Market Update

The meltdown of the three FX stooges: USD, JPY and GBP, continues, as equities notch new highs.

Banking Holiday in Canada and United States today - though US equity markets will be open.

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MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand Sep. QV House Prices fell -1.1% YoY vs. -2.8% in Aug.
• Germany Sep. Wholesale Price Index fell -0.2% MoM vs. +0.3% expected
• Sweden Sep. AMV Unemployment Rate out at 5.3% vs. 5.4% expected and 5.5% in Aug.

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• US National Economic Council's Summers to Speak (1615)
• US Treasury's Krueger to Speak (1715)
• New Zealand Retail Sales (2145)
• UK Sep. BRC Retail Sales Monitor (2301)
• UK Sep. RICS House Price Balance (2301)
• Australia Sep. NAB Business Conditions (0030)

Market Comments:

The USD meltdown continued this week after a brief respite on Friday after Bernanke threw out a snippet of rhetoric suggesting that rate. With equities jumping higher again in the Asian and European sessions today, the greenback and its low yielding fellow travelers, the pound sterling and Japanese Yen, didn't stand a chance, and all three weakened again versus the high flying Loonie especially, which continues to find support from the shockingly strong  Canadian employment report from Friday.  Crude oil tacking on to recent gains fueled further gains for the currency, and likely also helped NOK notch new highs vs. the Euro in Asia before backing off in the European session today.

Today is one of those odd "half holidays" in the US in which banks - and therefore the treasury market - are closed for the day, while equity markets will be open for business.

Reserve accumulating central banks are the primus motor of the moves in currencies here, as US and UK policies are seeing major banks shun the fiscally hopeless and low yielding currencies and diversifying especially into Euros, and the Yen to a lesser extent. A Bloomberg article this morning cites Barclay's Capital tally of the latest quarter's accumulation of FX reserves at over $400 billion. Barclay's also estimates that 63% of new reserves are being funneled into Euros and Yen. This was for the quarter ending in June, and there is certainly no sign of a change of behavior since then, in fact, the trend only seems to have strengthened. If the Chinese economy is doing so well, we ask again, then why have they not signaled that it is time to allow the renminbi to begin appreciating again? And while Europe has begun to complain about the unfair strengthening of its currency, why have the complaints not been more belligerent?

With the current persistent trends very clear and powerful, we have a look at coincident indicators and any event risks on the horizon that might provide a pivot point in the action. On the former, the strength in the Aussie, to take an example, is outpacing differentials in interest rates and is beginning to feel overdone, particularly as the last leg of Aussie appreciation has shown an acceleration in an already very well established trend. Usually, such aggravated action cannot be sustained for long, so we might expect sideways consolidation at minimum soon. Speculative positioning suggests that long Aussie positions have been crowded for some time, as well. In the case of CAD, the recent data surprise triggered moves in interest rates that fully justify the latest strengthening. And the over-riding theme of high risk appetite feeding the weaker USD will continue as long as equity markets are rallying.

As for upcoming event risks, the most interesting items on the calendar this week are Wednesday's US Advance Retail Sales and US FOMC minutes. The former is very important for measuring the strength of end demand, as our outlook suggests that end demand will not bounce back enough to provide a strong recovery due to private balance sheet deleveraging and weak wage growth. The FOMC minutes could be interesting due to the continued signs of a divided Fed, so we'll look for signs of the split widening or the hawks' impatience growing. Thursday's jobless claims number will be important for showing whether the trend toward fewer jobless claims continues now that we have entered the seasonally most important part of the year for employment. (Still interesting that more claims were filed last week than for the same week last year, just to show how much further we need to go to get real improvement rather than "less badness"). Then on Thursday we have the first two of the regional US manufacturing surveys.

Chart: GBPUSD
GBPUSD managed to stave off new lows today below 1.5800 as GBP, USD and JPY fight for lowest spot on the currency totem pole. Today's low and the 1.6110 area are the two key trigger areas for GBPUSD's next larger move now.

A mixed Asian session - risk off, then back on again

Early G20 communique reports suggest risk may make a comeback

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MAJOR HEADLINES – PREVIOUS SESSION

• US Weekly Initial Jobless Claims out at 530k vs. 550k expected and revised 551k prior
• US Weekly Continuing Claims out at 6,138k vs. 6,183k expected and 6,261k prior
• US Aug. Existing Home Sales out at -2.7% m/m vs. +2.1% expected and +7.2% prior
• NZ Aug. Trade Balance out at -NZ$725 mln vs. -NZ$329 mln expected and revised -NZ$175 mln prior
• JP Aug. Corporate Services Price Index out at -3.5% y/y, as expected, vs. -3.4% prior
• SI Aug. Industrial Production out at +12.3% y/y vs. +5.0% expected and revised +17.0% prior

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THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• GE GfK Consumer Confidence (0610)
• JP Convenience Store Sales (0700)
• Swiss SNB’s Jordan to speak (0715)
• Sweden Trade Balance (0730)
• Sweden Household Lending (0730)
• EU Euro-zone M3 (0800)
• UK Total Business Investment (0830)
• Swiss KOF Economic Forecast (0930)
• US Durable Goods Orders (1230)
• US Pres Obama to make statement at G20 summit (1230)
• US Final Univ. of Michigan Confidence (1400)
• US New Home Sales (1400)
• Swiss SNB’s Hildebrand to speak (1645)
• EU ECB’s Orphanides to speak (1515)

Market Comments:
Markets were impressed by the US initial jobless claims data and this appeared to but a cloud over the USD bulls that had gathered during the Asian session yesterday. However, the euphoria failed to last and the greenback was back in favour as existing home sales data disappointed.
Further dollar support was garnered from the results of the auction of 7-year US Treasury notes which saw bidders more confident once the FOMC was out of the way. The $29 bln issue was heavily oversubscribed (bid/cover ratio at 2.79 times) resulting in a 3.005% yield versus a consensus 3.047%. Weak commodity prices also contributed to the dollar’s bid tone as gold slid back below the 1,000 mark and oil below $66.
Finally, the Fed’s announcement that it was to downsize a couple of its liquidity programmes (TAF and TSLF) in the coming months. While some interpreted the move as a further step towards an exit strategy, others suggested it merely reflected the improving situation in financial markets
GBP was once again the whipping boy in the ring, pressured initially by talk of a “crisis meeting” of economists next week to discuss the reasons for the pound’s decline but then knocked again as BOE Governor Mervyn King said “the fall in the exchange rate will be helpful” in rebalancing the UK economy and noted that the UK banking sector was not in good shape while the economy can only register “small growth” after a very large fall.
Activity in the Asian session was mostly witnessed by the early birds. Stop-loss triggers in GBPJPY saw GBPUSD slice through the 1.60 easily and we were soon visiting near 4-month lows at 1.5920. Elsewhere, the string of better-than-expected New Zealand data came to an end this morning when trade data for August disappointed. While imports were a tad stronger (+3.5% m/m) reflecting improved demand, exports unexpectedly plunged 13.6% m/m despite a better external situation, possibly a victim of the Kiwi’s recent strength.
Some of the first comments from the sidelines of the G20 meeting came from China this morning where it seemed to be talking up the dollar. China’s central bank said the stability of the major reserve currencies still needs to be supported, adding that the US should bear in mind the USD’s reserve currency status when setting policy. US Treasury Secretary Timothy Geithner had mentioned the same theme when saying a strong dollar was still “very important” to the US while expecting the dollar to remain the world’s primary reserve currency. One news bite that does not appear to have grabbed too many headlines came from the new Japanese finance minister reportedly during a meeting with Geithner that he was opposed to intentionally devaluing the JPY, or any other currency for that matter, and during the press conference, when asked whether shifting to a stronger JPY would support domestic demand by cheapening imported goods, he said he is not inclined to shift the currency in that way either, but leave it to market force adding that the public sector should not intervene in the market.
The first reports of the draft communiqué from the G20 summit are suggesting that authorities are not looking at an early withdrawal of stimulus measures to avoid a premature stifling of resurgent economies. The late Asian session is seeing a renewed risk appetite and the USD is retreating from its early morning highs as European players enter stage left. Looking ahead , data-wise German consumer confidence and Swiss KOF economic forecasts are on tap in Europe while the US sees durable goods, new home sales (could they be as bad as existing home sales?) and final Michigan sentiment. The key question whether the current USD rally is yet another minor temporary blip or the start of a more concerted, a deeper correction. We could be in for a volatile session.
Have a great F1 weekend, vroom-vroom from Singapore.