Forex - Correction in Short Positions Not a Shift in Sentiment

Forex News and Events:

Risk appetite has been rallying since yesterday, as the meeting of the Eurozone Finance Ministers resulted in the delay of any meaningful decision till mid-March. On the surface, this would seem to be negative for risk correlated trades, but given the size and speed of the recent selling, we view this recent move as a natural short-term unwind of overly sold positions, rather than a complete shift in sentiment. Nervous traders who were expecting a speedy rout of the single currency are now unlikely to sit on these speculative trades for 30 days. Greek sovereign 5y CDS and government bonds have tightened slightly, defusing the short term probability of “contagion” and providing the EU more time to manoeuvre (which we believe was their ultimate goal). Wall Street closed up 2%, crude and copper up over 4.0% and the feel good sentiment carried through the Asian session. Despite the positive tone, we are highly suspect of the move and would be looking to sell risk correlated trades in the near term. The much anticipated BoE MPC Feb 4th meeting minutes failed to excite the market. Given the dovish Inflation Report, which forecasted lower inflation and growth, markets had anticipated a 6-3 split between those voting for pause and those looking for an extension of QE. However, the minutes reported a unanimous 9-0 vote for no extension (at £200bn) which had a muted effect on the sterling. For the remainder of the day, the market will be focused on the wealth of data expected from the US . The trend in US has been moderately positive (yesterday’s Empire state manufacturing 24.9 vs. 18.0 exp, NAHB housing market index rose to 17 from 15) and we expect industrial production and housing starts to continue the trend with risks to the upside. Then, the FOMC Feb 28th meeting minutes should show members are optimistic regarding the economic recovery, yet committed to “exceptionally low levels of the federal funds rate for an extended period.” The minutes might also provide some insight and consideration of Kansas City Fed President Hoenig's dissent view, but not so far as voting in that direction. In this current environment, we continue to expect USD strength, as US data improves and markets remain skittish. And on the other side of the Atlantic, the EU sovereign credit concerns linger and any monetary policy adjustment is far, far away. 

Daily Forex News

Today's Key Issues (time in GMT):

09:30 GBP BoE MPC minutes, vote Feb
09:30 GBP Claimant count unemployment, change k Jan -15.2
09:30 GBP ILO unemployment rate, % Dec 7.8 prior
09:30 GBP Average weekly earnings, % 3m y/y Dec -
09:30 GBP Core average weekly earnings, % 3m y/y Dec
10:00 EUR Construction output, % m/m (y/y) Dec -0.8 (-7.6) prior
10:00 EUR Trade balance, € bn (sa) Dec 3.9 prior
13:30 USD Housing starts, thous saar Jan 580 exp, 557 prior
13:30 USD Import prices, % m/m (y/y) Jan - 0.8 exp
13:30 USD Nonpetroleum import prices, % m/m (y/y) Jan 0.5 (-0.2) prior
14:15 USD Industrial production, % m/m (y/y) Jan 0.6 (0.8) exp
14:15 USD Capacity utilization, % Jan 72.5 exp
19:00 USD Minutes of January 26-27 FOMC meeting released

The Risk Today:

EurUsd It was a lively return to business yesterday as investors cut short EURUSD bets on improved risk appetite, sending most risk assets higher. As we noted yesterday, the 2 week downtrend line was the key one to watch, and by the afternoon session this broke, leading to a short squeeze all the way up to highs of 1.3783 –coinciding with the 23.6% fibonacci retracement of the sell-off from 1.4580 to 1.3530 and the upper bound of the steep downtrend channel that has been in play for the last month. For now, the selling interest associated with these technical lines is impeding any further rally, but given the aggressive pace of the sell-off, there is still plenty of scope for a further rally to 1.4115 before we would threaten the upper bound of the major downtrend channel (defining the entire move lower since November). Areas of supply still reman at the psychological 1.3800 level (and 50% fib retracement level of 1.2457-1.5145), then the major pivot level of 1.3850, so expect stops above there. It still feels like the market is heavily short this pair so any sell-off could face positioning headwinds, in particular at 1.3579 Monday’s low, then the 1.3531 reaction low from 12 Feb, and below there the 1.3484 fibonacci retracement level (61.8% of 1.2457 to 1.5145).

GbpUsd GBPUSD looks to be carving out a bearish flag pattern on the daily chart, but this morning the continued short squeeze on risk assets has threatened to test the upper bound of that sloped channel around 1.5820. Given the overarching bear trend, this seems like a tempting opportunity for a very low risk punt on a continued move lower; we prefer to sell around 1.5800-10 area, leaving a tight stop just above the 1.5833 major pivot level, and look for the pair to move back towards 1.5650 levels. Obviously in the current unpredictable climate, this strategy has the appeal that even a quick 100 pip profit into the channel would represent a very tasty reward compared to potential risk taken, and the only decent supports to be wary of do not come in until 1.5600. The fibonacci retracement level at 1.5690 (38.2% of 1.3505 to 1.7043) proved to be highly ineffectual in the past few sessions, and the major 14 month uptrend vibration channel is a way off at 1.5545 which adds to our conviction. Although there is likely to be a build up of stops above that 1.5833 pivot (hence our adherence to a very disciplined stop around there), really only daily close above 1.5900 (above the 1 month downtrend) would force us to reconsider our bearish outlook for the short to medium term.

UsdJpy In the last few weeks, the 1 month downtrend has been the dominant driver of USDJPY (as noted in yesterday’s report), but after the recent improvement in risk appetite, the bulls finally overcame trendline resistance around 90.05 and we quickly popped up to 90.53, just a few pips shy of the 90.55 pivot level. This break of the 1 month downtrend is significant in the short to medium term, as the major 2.5 year downtrend resistance does not come in above until 93.60 levels, so there is clearly a lot of room to the topside before we face significant downtrend resistance once more. Nevertheless, the considerable price action on the way down has carved out a number of areas of supply to watch for, namely at 91.00, 91.65 (23.6% fib retracement of 84.83 to 93.77) and 91.85. For now we expect any re-test of the back of the prior 1 month downtrend to be an opportunity for long entry, with a stop below 89.30 (50.0% fib level of 84.83 to 93.77) and the anticipated support from the 2 week uptrend channel coming in around 89.40. If we do see a resumption of the larger downtrend below 89.15 then really the 88.55 lows from 4 Feb represent the final level of buying interest, before the lower bound of the prior downtrend channel at 87.00.

UsdChf The recent break of the 3 week uptrend has been tested over the past few sessions, but after a number of failed attempts to break back into the uptrend channel, the ubiquitous USD weakness over the past 24 hours has seen USDCHF slump from 1.0790 levels seen yesterday to 1.0665 (coinciding with the 23.6% fib retracement of the move from 1.0130-1.0828). Current levels don’t look that attractive for new positions (stuck between 1.0600 weak support and 1.0800 next resistance), but any further dips towards 1.0600 would entice us to go long, looking for support to come in around 1.0580 which represents the back side of the major down trend channel broken on 4 Feb, and further bolstered by the 1.0560 fibonacci level below (38.2% of 1.0130-1.0828). However, we note that upside potential is likely to be capped by that 1.0800-30 area of supply for now, so remain nimble and willing to play the range until a new breakout materializes.

Resistance and Support:

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