Still Favoring December Tapering

Forex News and Events:

FX markets and our own strategy desk are still debating what effect the strong US payroll report and GDP read will have on the Fed policy path. From my perspective I believe that the Fed will start tapering in December. Just to recap, the anticipated November US employment report was sturdy, with another +200K non-farm jobs being created and unemployment rate dropping to 7.0%. There is growing choirs of not in 2014, yet it’s hard to believe that there are real reasons to wait. With the strong US domestic numbers, the only real justification for the Fed to continue tapering would be to provide the global financial system with easy profits. Fears of Washington derived political gridlock looks unlikely, as the republicans and democrats are declaring a “cease fire” in order to solute the current debt ceiling and budget deficit debates. In addition, the outlook for a stronger recovery in the global economy looks to have increased. We suspect that a key reason for the Fed's decision to hold asset purchasing in October was the aggressive rally in rates, and risky asset unwind. Fed members have spent the last few months separating deceleration of asset purchasing from interest rates in the belief that clarification would limit any disorder unwind. Given the reaction in asset prices, the Fed-speak seems to have worked. Baring an initial knee jerk reaction, prices have settled to prior payroll release levels. This is a good sign for tapering advocates. US 10 yr treasuries are off only 17bp from September's (tapering expectation) high, USD has not gone on global appreciation rampage and equities are trading above fair value. It looks as if the market has discounted “tapering” making next week’s FOMC meeting the perfect time to begin deceleration. To take this one step further I believe the current pessimism around the USD is way overdone and expected USD to rally from this point on. Plus Retail Sales on Thursday should further provide evidence that the US economy can withstand deceleration of asset purchases.

SNB rate decision

The strong performance of the CHF has many asking why. In the short term relative value seems to be working the CHF favor over USD and EUR. In the mid-term, higher November CPI data last week provided additional evidence that deflationary pressure in Switzerland has been easing. While the growth data continues to outperform, emphasized by Monday's retail sales up 1.2% y/y. However, given that inflation is still benign and developing concern over the political and economic situation in Eurozone (highlighted by France’s weak Industrial production read), we expect the SNB to maintain its current accommodative monetary policy stance and 1.20 EURCHF floor. Yet there clearly will be a convergent point in 2014 where policy will need to address the overly dovish expectations. EURCHF has sold –off to 1.2206, with techincal indicators pointing to a deeper correction.

NZDUSD Short Looks Interesting

Demand has dried up at 0.8320 just above downtrend channel top and prior to MACD crossing over the zeroline. The RBNZ is broadly expected to keep rates unchanged today, in-line with the central banks guidance for rates to stay on hold into 2014. The first hike is currently priced in with expectations of March 2014. And this is consistent with the stronger economic data since September. We could even see the RBNZ signal an earlier beginning to its hiking cycle. Markets have been trading the NZD up on expectations that the RBNZ will bring forward the hike date and shift to a more aggressive monetary policy path on improving economic data. However, we suspect we will see a more conservative central bank (not willing to stimulate a NZD buying spree) and look to play the disappointment.

Today's Key Issues (time in GMT):

2013-12-11T06:30:00 EUR FRA Q3 non-farm payrolls – revision; prelim -0.1%.
2013-12-11T07:00:00 EUR GER Nov CPI - final, +0.2% m/m, +1.3% y/y exp; prelim +0.2%, +1.3%.
2013-12-11T07:00:00 EUR GER Nov HICP – final, +0.2% m/m, +1.3% y/y exp; prelim +0.2%, +1.3%.
2013-12-11T07:45:00 EUR FRA Oct current account balance; prior E3.9 bln deficit .
2013-12-11T13:00:00 GBP BoE MPC Weale speech at NIESR event in London.
2013-12-11T14:30:00 USD US TsySec Lew House testimony on international financial system.
2013-12-11T19:00:00 USD Nov Treasury budget, $145 bln deficit exp; prior $172.1 bln deficit.

The Risk Today:

EURUSD bullish rally has stalled at 1.3794 (downtrend top) but pullback has been minor. With MACD having crossed over the zeroline we suspect any pullback should be transitory (1.3560 65-DMA should support downside move) and technicals are pointing to a test of 1.3830 year high. The first region of resistance is located at 1.3830/35 then a distant 1.4248 (Oct’ 11 high). The next support can be found at 1.3620 (28th Nov top), 1.3546 (65 dma), 1.3421 (Fibo 61.8% on Jul-Oct rally), 1.3365 (100 dma), 1.3295/99 (7th Nov low), 1.3106 (6th Sept low), 1.2995 (10th July reaction high), 1.2963 (11th July low), 1.2877 (Fibonacci 50% retracement on Jul 12’ – Feb 13’ rally), then 1.2820 (20th May low).

GBPUSD rally continues on its bullish footing climbing to 1.6468. Trend and momentum indicators are all bullish suggesting a challenge to 1.6488. In broader terms the decisive bullish break of key resistance 1.6388 indicates an extension of strength to 1.6746 should be anticipated. Yet failed to make new highs suggest a short term pullback. Watch for next resistance to come into play at 1.6440 (2nd Dec high), 1.6488 (8th Aug high), 1.6625 (18th Aug ‘11 high), then 1.6746 (2011 high). The support levels from here are 1.6265 (old range top), 1.6093 (21- DMA), 1.6045 (downtrend top), 1.5884 (13th Sep high), 1.5759 (17th June high), 1.5708 (fibo 61.8% on Jul-Oct rally), 1.5600 (resistance turned support) then 1.5429 (28th Aug low).

USDJPY has rallied to 103.38 (double top) where bullish momentum has temporally dried up. Any bearishness that had crept into USDJPY has been erased and we are just a stone’s throw from our 103.65 target. However, failure to break above current supply region will clearly give the bears confidence for staging a attempt at a reversal. The first resistance region is located at 103.65 (16th Sep 08 & 30th Sep 08 low), then 105.00 (psychological resistance). On the downside, supports are located at 101.61/70 (Fibo Aug-Dec retracement), 99.10 (13th Nov low), 98.59 (Ichimoku cloud top), 97.50 (triangle support), 96.56 (8th Oct pivot low), 95.83 (6th June low), 93.57 (Fibonacci 61.8% on Sept 12’ – May 13’ rally), 92.56 (2nd Mar low & Fibo 38.2% retracement), 90.93 (25th Feb low).

USDCHF Selling pressure on USDCHF continues as the pair pushed past 0.8886 support on its way to 0.8851. With momentum indicator MACD threatening to crossing below the zeroline and USDCHF within clear downtrend, we should see an extension of weakness to 0.8763. The first levels of support remains at 0.8860 (Fibo 38% Aug 2011 to July 2012 retracement level) then 0.8763 (2nd Nov 11’ low) The next levels of resistance are located at 0.9123 (21 & 65- DMA) 0.9179 (100-DMA), 0.9280 (17th Sept pivot), 0.9320 (200-DMA), 0.9450 (target), 0.9481 (range top), 0.9568 (fibo 61.8% on May-June drop),  0.9598 (11th July high), 0.9626 (31st May low & 3rd June low) then 0.9672 (fibo76.4% level on May – June drop).

Resistance and Support: