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USD pushing toward big resistance areas ahead of pivotal Wednesday FOMC meeting.

Mon, Jun 22 2009, 14:01 GMT
by John Hardy

Saxo Bank

Is the USD about to blast stronger? USDCAD on a rocket ride with fall in crude prices.

MAJOR HEADLINES – PREVIOUS SESSION

• UK Jun. Rightmove House Prices fell -0.4% MoM vs. +2.4% in May and fell -5.5% YoY vs. -6.2% in May

• Japan Q2 BSI Large All Industry Survey rose to -22.4 vs. -51.3 in Q1

• Australia May New Motor Vehicle Sales rose 5.4% MoM vs. 0.9% in Apr.

• Germany Jun. IFO out at 85.9 vs. 85.0 expected and 84.3 in May

• Canada Apr. International Securities Transactions out at 9.05B vs. 5.5B expected

THEMES TO WATCH – UPCOMING SESSION

Market Comments: 

We've seen plenty of important FOMC meetings over the last couple of years, and this Wednesday's rates at least a "top five" in terms of its importance relative to the kind of expectations and uncertainty in the market about the Fed's future behavior. Until two weeks ago, the market was very clearly pushing the story that inflation is the predominant threat and that the Fed would be forced to hike rates to defend against inflation expectations and even the devaluation of the USD - possibly already by year end. Since then, the market has unwound a good portion of this bet, but by no means all of it. In any case, it seems to be looking at Wednesday's monetary policy statement as an event trigger. With headlines now creeping up that the Fed is likely to send a clear signal that it has no plans in the near term for hiking rates (also our expectation), it is clear that the surprise side is now less pronounced, but the ranging trading of late suggest there may be some pent-up energy in the market.

Looking across markets, the major equity markets are on very shaky ground technically and also nearing key technical support just as the USD nears key resistance, a sign that the risk appetite/greenback negative correlation is largely intact. Confirming indicators on the risk appetite front are an uptick in corporate bond spreads and emerging market spreads, with the latter much more pronounced than the former. Some speculate that the situation in Iran is helping to weaken the knees in risk appetite, but it appears to us that few are playing the geopolitical card just yet. After all, oil prices are sharply lower in a knee-jerk reaction to USD strengthening. Gold is also plummeting as the USD and equity markets seems to be the primus motor for commodities rather than geopolitical tremors. Still, plenty of attention to the Iran issue is warranted as it has enormous geopolitical implications if the situation spirals out of control.

The Swedish krona weakened sharply today after the IMF's rather dour words on Lithuania. With more risk aversion evident in the increase in emerging market risk indicators, SEK is on the offer again. For some reason, NOK is following suit and even weaker, even as we feel this is highly unjustified vs. the EUR. This could be due to some unwinding of USDNOK positioning on the recent USD bear move or the sharp fall in oil prices, but we look for a sign of a NOK reversal to the strong side eventually. And in general - is the EUR really a safe haven against these two currencies? In the case of the NOK, we answer with an emphatic "No". Let's look at the preliminary PMI numbers out of Europe tomorrow for a confirming indicator on the continued weakness in the European economy. There has been too much focus on the US lately as Europe's problems are at least as bad and have hardly been discussed. We are seeing growing noise in the press on Europe as well as a shift in sentiment may be underway.

The JPY has strengthened even more than the USD on the across the board risk aversion and fall in interest rates. Pivotal levels are nearing on the likes of EURJPY (see more in the charts below). It seems GBPJPY ought to be playing some serious catchup as well as long as risk appetite continues to wane.

Chart: AUDUSD

Likely to remain one of the higher beta pairs this week with the FOMC meeting and its potential implications for the USD, which has been the weakest pole of the major currencies while AUD has been the strongest pole over the last couple of months. The 0.7850 area looks very important as a flatline support level as does the rising trendline that stretches all the way back to early March. A close at current levels or lower today would also break the 21-day moving average rather decisively. USD/emerging market currency pairs are also looking potentially explosive to the upside for the USD as momentum has entirely abandoned the weak USD trend over the last two to three weeks vs. these currencies. Things could get hairy later this week.

Chart: EURJPY

Once again nearing the key rising trendline, trading at the 55-day moving average and closing in on the key flatline support levels around 132.35. Volatility could continue to expand here on a break lower.

Published on  Mon, Jun 22 2009, 14:11 GMT