EURJPY vs. S&P 500 futures, the correlation has a bit off last months

Fri, Mar 5 2010, 09:25 GMT
by Per-Erik Karlsson

Market Comment

S&P 500 futures could not break above the 1128 level today either and volume declined for the 3rd straight day. However given that it is US nonfarm payrolls Friday tomorrow it is logic that traders cut back on the activity going into the report. Big move yesterday came after Greece came out with news to cut spending and Euro move towards the key 1.3780 resistance level, however the visit above 1.37 level was short lived and following a comments from IFO’s Sinn today that Greece could be forced out of the Euro and Deutsche Bank was downgraded by Moody’s. The Euro fell rather quickly below 1.36 again and only the rising near term support at 1.3550 was able to contain further losses. Bank of England and ECB held rates unchanged and little new from either to be honest. We reiterate that we expect rates to stay low for a considerable period of time.

Back to Greece and what IFO’s Sinn talked about. The problem is that Greece has become very uncompetitive as a producer of services and goods over the last 10 years and they have to be willing to come down to a lower price level to solve this problem. That means cuts in wages, social welfare, pension benefits etc, which could of course lead to social unrest. There we see another challenge of the Euro zone going forward, the different countries have to big of difference in social systems and norms to really function as a union. Why should Germans work to age of 65 when Greeks retire at 55? As long as the economy is steaming ahead and everybody is happy these things doesn’t get much focus, but when things turn bad and people start to look around to find something to blame it turns out rather quickly to us that there are major flaws with how the Euro zone is run today. Something has to be done rather quickly to get a more streamlined system in order to succeed. If the nations are willing to do that is a whole different question.

Tomorrow payrolls report is expected to show a reading of -56k, which is up from around the 40k earlier in the week. Seems to be much concern about how the February weather has played a role on the outcome of the reading. We certainly think the reading can come out very surprising and the weather factor is impossible to account form, or is it? Actually people that could not work due to bad weather should not be counted as unemployed according to the Labor Department. So if that is true the variation due to the snowstorm should be very limited. It looks a bit messy to us so we avoid predicting the outcome by any means. We note that the ADP report out yesterday was decent and points to a outcome a bit better than the expectations of -56k.

Interesting to see gold moving towards the 1164 level, which is the 2010 high. We note that the +- 2 Sigma bands have contained the price action almost every day since November 2010. Given the fact that +2 Sigma is at 1155 for tomorrow, it should be limited how much more upside we see from there near term. Lots of people that are trying to describe why gold is moving up lately and it looks to us that the problem in several countries and currencies makes it rather a good alternative to diversify into gold. China, India and Russia have been reported as buying gold from either IMF or mines to increase their holdings. Given the shakiness of the financial system in Euro and USD terms, we expect this process to continue. We keep an eye on the 1164 level as any break above this level should see short covering or stops go off. Quick note on Crude, the DOE inventories showed a massive build of 4.1m barrels vs. 1.25m expected yesterday and failed for a 3rd time over the last 2 weeks to get above the 81.50 USD per barrel level. This shows a bit of weakness given that S&P has moved materially higher last week. Nat Gas on the other hand is clearly weak over the last few weeks and approaching the 4.42 key support level (4.58 now), which is the lower end of the 3 months low.
We remain bearish of Nat Gas until we see a clear reversal signal.

EURJPY vs. S&P 500 futures, the correlation has a bit off last months. Looking at the EURJPY vs. S&P 500 futures chart is looks like every time there has been a longer time of very low correlation it has been followed by a strong directional move.

FX Implied Volatility updated this morning: 

Some interesting news stories:

Technical’s

Euro: We see near term resistance up at 1.3780 level with more key resistance up at 1.3850 level.
Have to break these levels to really get any real momentum to the upside and below these levels it looks like a sell on rallies.

Cable: Bearish below 1.52, actually to be picky the level is 1.5150 and need to see a daily close above this level to open for any rally. Sell rallies below this level. Next major support level is 1.4780, which is former resistance and break out level.

USDJPY: Tested key falling resistance from April 09 high at 92.05 at a couple of weeks ago, which needs to be taken out to open for any stronger move higher. We still favor buying dips as long as 88 level holds and longer term we still expect JPY to underperform due to high public debt, weak demographics and tougher export markets due to slower growth going forward.

Swissy: We note that key falling resistance from the October 2009 high is coming in at 1.0880, which is level we have outlined for weeks to watch. A break above here would be significantly bullish and potentially open for a rally toward 1.15 to 1.17 levels.

AUDUSD: Good support above 0.8950, with key resistance up at 0.9070 (100 day MA) and would like to see a daily close above this level this week to avoid a sell off. Was the failure to get above the 100 day MA yesterday a leading indicator for a correction lower in risk?

USDCAD: As we expected after the pair was rejected up at 1.0750 it would drift back towards the 1.0400 level, which has proved to be a important pivot point over the last months. A daily close below 1.04 would open for another run at the key 1.02 support level that has held since July 2008.

EURJPY: Failed to close above 124.25 and bearish below this level for now.

GBPJPY: Couldn’t close above 143 and still remains weak below this level. Support down at the 131.40 level

AUDJPY: Key support at 76.30 has held so far and next resistance is now the 81.92 level (former rising support trend line from Feb 09 low, now resistance). We expect strong AUD and weak JPY going forward, buy dips.

Our outlook

• Download Full Foreing Exchange