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EURUSD trades above its 55−day moving average for the first time since July

Thu, Dec 11 2008, 08:39 GMT
by John Hardy

Saxo Bank

US auto-bailout package in doubt - may be weighing on the USD. SNB likely to lower rates again today - whither CHF?

HEADLINES

• New Zealand Nov. Business PMI fell to 35.4 from 43.3

• New Zealand Nov. REINZ House Sales fell -45.4% YoY vs. -34.8% in Oct.

• Australia Nov. Unemployment Rate out at 4.4% as expected and vs. 4.3% in Oct.

• Australia Nov. Employment Change out at -15.6K vs. -15k expected

• China Nov. CPI out at 2.4% vs. 3.3% expected

THEMES TO WATCH – UPCOMING SESSION

Events Today:

• Sweden Nov. Unemployment Rate (0830)

• Switzerland SNB to announce Libor Target Rate (0830)

• UK Dec. CBI Industrial Trends (1100)

• Canada Oct. International Merchandise Trade (1330)

• Canada Oct. New Housing Price Index (1330)

• US Oct. Trade Balance (1330)

• US Weekly Initial Jobless Claims (1330)

• New Zealand Oct. Retail Sales (2145)

• China Nov. Retail Sales (0200)

• Japan Nov. Consumer Confidence (0500)

Market Comment:

The USD was weaker again overnight as the fate of the auto-bailout package suddenly became less certain. The $14 billion dollar aid package was passed in the House, but it is unclear whether the Senate will be able to muster a majority vote and at least one Republican Senator was threatening a passage-blocking filibuster attempt. From our view, the package doesn't really look at the real long-term problem at hand: the legacy costs that will always weigh on the US automakers relative to their foreign competitors. The so-called prepackaged bankruptcy options seemed better and far less intrusive than the current plan. The plan's idea of appointing a "car czar" and taking partial government ownership smacks of dirigisme and might only make things worse in the long run..

We're not sure why the market is getting so upset about the auto-bailout package, but clearly it is clouding the market's view on the USD right now and could continue to do so in the days to come until the issue is resolved. Other factors were also important in the move weaker for the USD yesterday.
Commodities jumped higher yesterday, with gold especially on the move as it sliced through key resistance around the 800 dollar/oz. level and looks ready for more. A bit surprisingly, relative to recent patterns, the weakness in equities in the US Session failed to provide convincing support, so this divergence, in addition to technical breaks in places overnight, raises the probability that the USD sell-off may gain further legs in the short term - see more on this below

The alarming data out of China yesterday shows that the Chinese economy is hitting a brick wall. Chinese exports fell 2.2% in November after a 19.2% rise in October, a profound shock to the system. Shipping indices have also long been telling a story of declining pressure on trade volumes and are off over 90% from 12-month highs in some cases. Analysts are falling all over one another to adjust the Chinese growth expectations downward in 2009. Consensus is that 7-8% growth is the minimum to avoid a hard landing. Goldman Sachs expects 6% growth and some are throwing around the 5% figure. It seems to us that outright negative growth is possible early in the New Year judging from the speed with which everything is unwinding. Beyond that, machinations and massive stimulus from the authorities could slow the trajectory of the growth deceleration. China saw some of the worst excesses during the global growth boom and it has to make a painful adjustment along with everyone else. With talk of China heading into deflation, the ability of China to navigate the bust cycle and transition from an export economy to a more balanced one will be critical for whether the world economy merely goes into the doldrums for a while or an outright depression.

The SNB will announce rates today and is widely expected to lower rates another 50 basis points to bring the rate to 0.50% after surprising the market recently with a 100 bp cut that was not preannounced. Still, there is plenty of disagreement on whether the central bank will cut or whether it will want to wait for more cutting further out, so there could be plenty of reaction if the SNB surprises with no cut or a 25-bp cut. The Swiss Franc continues to creep weaker versus the Euro. The safe haven aspect of the Swiss Franc has come into doubt as the world realizes that the country has enormous liabilities abroad and therefore a very large foreign exchange risk. On the other hand, foreign countries also have enormous liabilities in Switzerland and CHF due to loans taken out to finance investments during the boom years, so the question is which factor outweighs the other.

GBP reached new lows against the EUR late yesterday, and yet we still question the staying power of this rally. It is not our nature to fade strength, but we continue to keep an eye out for technical cracks in the chart that show any signs of weakness.

Market action

The dollar index is trading just above its 55-day moving average this morning at around 84.50. This was also close to the low of the dip in the dollar index a little over two weeks ago, so it is clear that we are poised at a fulcrum here in the market action. Either we see an acceleration of this move here or a rejection. There are plenty of arguments to muster for a further rally in EURUSD (supported by interest rate differentials and mild decline in some of the risk spreads as well as the action in commodities) or for a rejection of the rally (equities haven't rallied as much as EURUSD). For the shortest view, the technical view is bullish for EURUSD (as representative of the dollar index) as long as we remain above the technically significant break above 1.3080. Further frustrating our confidence in what is going on here, the break occurred in the Asian session, so we need to see follow through in Europe today if we are to believe that this one is for real. Possible targets higher? 1.3280 was an old technical support/resistance Fibo level and the 200-week moving average comes in around 1.3360. It's hard to believe that the 55-week moving average is still way up at 1.4700 (red line in chart below).

Published on  Thu, Dec 11 2008, 08:43 GMT