Top–sellers cap EUR-strength, BRL tense

Forex News and Events

The risk sentiment remains limited in the Euro-zone as the peripheral bond sell-off continues. EUR/USD sees some support as the spread between core and peripheral yields increase. Top-sellers chase good opportunities to cash in profit before the week-end. EUR-complex is comprehensibly ultra-sensitive to any discussion on the QE. While the EZ inflation remains disturbingly low, discrepancies between Euro-zone’s policy makers reinforce tensions. In Brazil, the Real lost 10 figures in two days versus USD as recent election polls give more chance to Rousseff’s victory on October 26th runoff.

Cold Winds in the Euro-zone

The risk sentiment in EUR remains limited as Greek 10-years climb to 9% for the first time since October 2013. Traders seek exit from peripheral risks and fast, as fading liquidities increase anxiety; Portugal (+50 bp), Italian (+35bp) and Spain (+20bp) 10-year yields rise significantly. The 40-day rolling correlation between Spain-German 10-year spread extends above 50%, partially explaining EUR/USD holding support even after soft CPI release yesterday. As fragmentation in the Euro-zone surge, EUR/USD increases as traders need more hint on a potential ECB QE (as support). Although the short-term bullish momentum strengthens, top seller strategies dominate pre-1.30 as the EUR-negative risks prevail. Markets are very sensible to QE-related comments as the Euro-zone recovery remains very fragile.

On the other hand, the discrepancies between policy makers increase tensions at the heart of the Euro-zone. ECB President Draghi insistently asks political support to establish fiscal reforms (lower taxes, lighter fiscal consolidation) to avoid a dangerous deflationary spiral to install in the Euro-zone. The Euro-zone aggregate CPI accelerated 0.4% in month to September; the CPI y/y remained stable at 0.3%, the core CPI advanced from 0.7% to 0.8%. Given the alarming macro-metrics, peripheral countries ask for more easing to step out of recession, while German politicians and Bundesbank have enough of monetary stimuli and the ongoing financial chaos. German Chancellor Angela Merkel said yesterday that economic aid was underused, adding “We in Germany are showing that growth and investment can be strengthened without leaving the path of consolidation”. Cold winds blow in Europe.

BRL implied vol above 25%!

The Brazilian Real sold-off aggressively over the past two trading sessions. USD/BRL gained 10 figures (!) and hit 2.5061 as recent poll results (Datafolha & Ibope) suggested Neves would be left behind Rousseff with 38% chance (vs. 34% a week ago). Datafolha survey sees better ability in Rousseff campaign for converting undecided voters, as Neves fails to build on Silva’s supporters.

In week to Oct 17th, even the sharp fall in oil prices (good news for Brazil’s current account deficit) couldn’t boost demand in BRL. USD/BRL rallied to pre-election levels (1st round), the 1-month implied volatility climbed over 25% for the first time in three years. The 3-month (25-delta) risk reversals (computed as implied vol for calls minus implied call for puts) spiked to highest levels over a year, confirming significant BRL-negative skewness among traders. Walking into October 26th runoff, we expect to see spiking volatilities, aggressive price action. A critical resistance stands at 2.6202 (over 9-year high). Option bids at 2.40/2.50 will likely keep the bias on the upside before the week closing bell.

Today's Key Issues (time in GMT)

2014-10-17T10:30:00 CAD Sep CPI NSA MoM, exp 0.10%, last 0.00%
2014-10-17T10:30:00 CAD Sep CPI YoY, exp 2.00%, last 2.10%
2014-10-17T10:30:00 CAD Sep CPI Core MoM, exp 0.20%, last 0.50%
2014-10-17T10:30:00 CAD Sep CPI Core YoY, exp 2.10%, last 2.10%
2014-10-17T10:30:00 CAD Sep CPI SA MoM, exp 0.10%, last 0.10%
2014-10-17T10:30:00 CAD Sep CPI Core SA MoM, last 0.20%
2014-10-17T10:30:00 USD Sep Housing Starts, exp 1008K, last 956K
2014-10-17T10:30:00 CAD Sep Consumer Price Index, last 125.7
2014-10-17T10:30:00 USD Sep Housing Starts MoM, exp 5.40%, last -14.40%
2014-10-17T10:30:00 USD Sep Building Permits, exp 1030K, last 998K, rev 1003K
2014-10-17T10:30:00 USD Sep Building Permits MoM, exp 2.70%, last -5.60%, rev -5.10%
2014-10-17T11:55:00 USD Oct P Univ. of Michigan Confidence, exp 84, last 84.6

The Risk Today

EURUSD EUR/USD made a large daily lower shadow yesterday, suggesting persistent short-term buying interest. However, given the resistances at 1.2901 (see also the rising channel) and 1.2995, the upside potential seems limited. Hourly supports can now be found at 1.2706 (16/10/2014 low) and 1.2625 (15/10/2014 low). In the longer term, EUR/USD is in a downtrend since May 2014. The break of the strong support area between 1.2755 (09/07/2013 low) and 1.2662 (13/11/2012 low) has opened the way for a decline towards the strong support at 1.2043 (24/07/2012 low). As a result, the recent strength in EUR/USD is seen as a countertrend move. A key resistance stands at 1.2995 (16/09/2014 high).

GBPUSD GBP/USD is bouncing near the key support at 1.5855. Hourly resistances can be found at 1.6127 (13/10/2014 high) and 1.6227. An initial support lies at 1.6021 (intraday high). In the longer term, the collapse in prices after having reached 4-year highs has created a strong resistance at 1.7192, which is unlikely to be broken in the coming months. Despite the recent short-term bearish momentum, we favour a temporary rebound near the support at 1.5855 (12/11/2013 low). A key resistance lies at 1.6525.

USDJPY USD/JPY has exhibited significant lower daily shadows for the last two days, suggesting some buying interest near the recent low at 105.23. A break of the hourly resistance at 106.81 (see also the declining trendline) is needed to improve the short-term technical structure. A key resistance stands at 107.59. A long-term bullish bias is favoured as long as the key support 100.76 (04/02/2014 low) holds. Despite the recent decline near the major resistance at 110.66 (15/08/2008 high), a gradual move higher is eventually favoured. Another resistance can be found at 114.66 (27/12/2007 high). A key support lies at 105.44 (02/01/2014 high).

USDCHF USD/CHF remains thus far in its declining channel. However, key supports stand at 0.9368 and 0.9301. Hourly resistances can now be found at 0.9491 (see also the declining channel) and 0.9562. From a longer term perspective, the technical structure favours a full retracement of the large corrective phase that started in July 2012. As a result, the recent weakness is seen as a countertrend move. A key support can be found at 0.9301 (16/09/2014 low). A resistance now lies at 0.9691 (06/10/2014 high).

Resistance and Support: