Ahead of ECB and BoE Meetings

Forex News and Events:

The global risk appetite started to improve as the US stock earnings helped boost optimism. Yesterday, Alcoa was among the firsts to release its results at the end of the US trading session. The US largest aluminum producer’s sales beat the forecasts, and the news gave enthusiasm to the markets. The markets were prepared to hear about weak earning season, yet Alcoa surprised to the upside. The European stocks opened the day to the upside, while the S&P, Dow Jones and Nasdaq futures added 0.13%, 0.09% and 0.11% respectively. The German monthly and yearly industrial production data is expected to increase to 1%, from the previous month’s -2.6% release. Over the global optimism, the yield spread between German and the periphery bonds narrows, while EURUSD recovered from 1.3057 low, hit during the US session. Ahead of the ECB meeting scheduled tomorrow, we believe that EURUSD should get support from 1.3050, ahead of the Governing Council gathering in Frankfurt. ECB will announce its interest rate decision tomorrow (January 10th, 2013) at 12:45 GMT to give more direction to the markets. According to a Bloomberg survey, the rate is expected to remain unchanged at 0.75%, while five economists (over forty-five) predict a decrease to 0.50%. In between, we expect EURUSD to trade not outside of 1.2924 - 1.3303, upper and lower BB, range. EURGPY registered a sharp downside and 0.81342 in a single move, as UK announced a decrease in deficit regarding the global and non-EU trade balance (even though the deficit reduction did not reach estimates). The global deficit retracted to £-9,164 from previous months £-9,539 (exp. £-9,000), while the non-EU deficit fell to £-4,519 versus October’s £-4,502 reading. The BoE is expected to keep its key interest rate at the record-low level of 0.50% at tomorrow’s meeting (January 10th ,2013), as the inflation risk is growing higher. Overseas, Japan gave details on its easing policy plans. Jiji press stated that the extra budget will top to Y210trln, including Y2.6trln in assistance to public pensions, and Y5.2trln in additional debt financing. The overnight trading session was dominated by USDJPY moves (FX volumes continue to be dominated by JPY flow). The currency swung between the optimism over the policy statement and the fear of the strengthening Yen. USDJPY fell to 86.83 (intra-day and last week’s low), and consolidated back over 87.50 levels. EURJPY fell to 113.56, while GBPJPY traded at 139.41 (year-to-date lowest level). The selloff in Yen seems to lose pace amid the easing measures announcements. Despite recent strengthening, the Yen is still oversold against GBP (65%), EUR (65%) and USD (71.75%). Technically, there is more room to further consolidation. In the mid-term, we suspect that the level of verbal intervention by PM Abe will demand some high level of action and anticipate further deprecation in JPY. Traders will look to position themselves from the long side on dips.

Today's Key Issues (time in GMT):

2013-01-09T09:00:00 NOK Nov retail sales ex-autos, actual +0.3%, +0.9% m/m eyed; last -1.1%.
2013-01-09T09:00:00 EUR ITA Q3 Deficit to GDP; actual 3.7%, last 4.7% (revised)
2013-01-09T09:30:00 GBP Nov trade bal - global, actual GBP9,164 bln deficit, GBP9,000 bln def eyed; last GBP9,539bln def.
2013-01-09T09:30:00 GBP Nov trade bal - non-EU, actual GBP GBP4,519, GBP4,200 bln def eyed; last GBP4,502 bln def. (revised)
2013-01-09T11:00:00 EUR GER Nov industrial output, +1.0% m/m eyed; last -2.6%
2013-01-09T12:00:00 USD MBA Mortgages Applications, last -10.4%
2013-01-09T13:15:00 CAD December Housing Starts, 195K eyed, last 196.1K
2013-01-09T21:45:00 NZD November Trade Balance, -670M m/m eyed, last -718M
2013-01-09T21:45:00 NZD November Exports, 3.55B m/m eyed, last 3.46B
2013-01-09T21:45:00 NZD November Imports, 4.20B m/m eyed, last 4.18B

The Risk Today:

EURUSD Technicals really have not change much in the last 24 hrs. EURUSD has staged a recovery rally to 1.3139 (off 1.2997 support) but has now shifted into sideways trading pattern. While MACD is still above its zero line, we will be watching for a closing cross lower to signal resumption of downside. Despite the moderate rebound, we would play this one from the short side as a break of 1.2986 should trigger an extension of weakness to 1.2878. The next support is located at 1.2986 (65d MA & Uptrend channel), 1.2931 (11th Dec low), 1.2878 (7th Nov reaction high), 1.2787 (200d MA), 1.2722 (13th Nov pivot high), 1.2630/62 (3rd July high & 100d MA), 1.2463 (31st Aug low), and 1.2386 (14th & 17th Aug high). The first level of resistance are located at 1.3160 (20th Dec low), 1.3240 (31st Dec high), 1.3310 (20th Dec high), 1.3389 (27th Mar High) then 1.3492 (2012 high). The first level of resistance are located at 1.3160 (20th Dec low), 1.3240 (31st Dec high), 1.3310 (20th Dec high), 1.3389 (27th Mar High) then 1.3492 (2012 high).

GBPUSD GBPUSD has found buyers up to 1.6128 near retracement resistance 1.6140 level but since then has lost much of the earlier gains, consolidating around the 100d MA. In the mid-term we remain faintly constructive on the pair and will look for a resumption of strength along its bullish uptrend channel (but this forecast is predicated on 1.6004 holding). However, a break below 1.6000/04 would signal deeper sell-off, exposing the next key support at 1.5958. The support zone is located at 1.6004 (Uptrend channel), 1.5958 ( 28th Nov. low), 1.5930 (100d MA), 1.5826 (15th Nov low) 1.5745/53 (30th July pivot), 1.5458 (26th July low), 1.5405 (8th June low), 1.5390 (6th June low), then 1.5266 (13th Jan low). Watch for next resistance to come into play at 1.6340 (2nd Jan high) and 1.6454 (29th Aug ’11 top).

USDJPY USDJPY’s sharp sell-off we had anticipated fell to just a stone’s throw from our corrective pullback target at 86.64. Since then the pair has rallied to 87.66 on renewed intervention verbiage & speculation. While indicators are clearly in over-stretched territory we suspect that downside will be limited as the threat of policy action will keep the JPY bulls sidelined. We would favor reloading longs positioned on dips for a range trade between 86.60 to 88.62.. On the downside, support is eyed at 86.64 (27th Dec high), 85.54 (5th April high), 84.23 (15th march high), 83.67 (13th Dec high), 83.10 (downtrend top), 81.50/69 (15th Nov. high & 28th Nov. low), 81.00 (16th April pivot), 79.06 (9th Nov low), 78.75 (8th Oct high), 77.94 (Symmetrical triangle floor), 77.12 (13th Feb low) then 76.03 (3rd & 17th Jan low). Above us, minor resistance remains at 88.12 (29th July high), 89.17 (12th July high), 89.74 (21st June high), then 92.09 (11th June high)

USDCHF USDCHF has corrected to 0.9204 (violating 0.9230 support) but buyers stepped in to slow the pace of decline and we are in a consolidation phase. However, despite the neutrality, the MACD is still pointing towards the zero line, indicating a potential bullish trend is developing (retest of near-term resistance at 0.9303). The next levels of resistance are located 0.9303 (4th Jan high), 0.9385 (7th Dec high), 0.9428 (200d MA), 0.9457 (21st Sept high), 0.9515 (13th Nov high & uptrend top), 0.9610 / 20 (26th Aug high), 0.9810 (10th Aug high & uptrend channel), 0.9900 (2nd Aug high), and 1.0000 (psychological resistance). The first levels of support should be located at 0.9255 (old resistance), 0.9100 (11th May high), 0.9085 (20th Dec low), then 0.9041(1st may low).

Resistance and Support: