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Forex − Risk Appetite Tapers Ahead Of Central Bank Week

Mon, Nov 2 2009, 10:30 GMT
by Peter Rosentreich

ACM - Advanced Currency Markets

Forex News and Events:

It is an exceptionally important week for economic releases this week, with four major central bank rate meetings; RBA (Tue), Fed (Wed), BoE and ECB (Thu), in addition to the minutes of the recent Riksbank and BoJ meetings on Wednesday. The RBA is likely to be the only one to alter monetary policy, as the market is anticipating another 25bps of tightening to 3.5%. There is an outside chance of 50bps as latest data this month has shown a reduction in unemployment (5.7% in Sep from 5.8% in Aug), and an uptick in CPI in Q3, but considering the continued fragility of market sentiment, it is far more likely they will opt for 25bps and signal their intentions in more detail in the accompanying statement. The Fed meeting the following evening will be a crucial event for FX markets as we will get the first official appraisal of last week’s US GDP figures. Thus far the market has been deliberating between whether the better-than-expected 3.5% annualized rate of growth merely presents a rosier global backdrop for further risk-asset rallies, or whether it implies the Fed may shift their stance on the low interest rate environment – a move that would potentially threaten USD-funded carry trades. We feel it is a step too far to draw the latter conclusion just yet; in the face of continuing deterioration in the labour market and many questions about the sustainability of growth without stimulus yet to be answered, it seems more likely that policy-makers will be cautious not to appear hawkish prematurely. The retracement in EURUSD and equity markets in the past few days is, in our view, a temporary correction; and we expect a rebound in these assets after Wednesday. The notable exception to the weak USD-fuelled rally continues to be GBP; after the dismal Q3 GDP figures not only have markets gradually come around to our view that further quantitative easing is virtually ensured on Thursday, but consensus has gone from an expansion of £25bn to expecting £50bn. This is sure to be distinctly GBP negative and we look for further weakness in GBPUSD in spite of any resurgence of risk appetite. Meanwhile, the markets seem to be defying the SNB as we once again toy with the EURCHF 1.5090-1.5100 intervention zone. After dipping to 1.5083 on Friday we saw another suspected round of intervention, albeit less aggressive than that seen on 30 Sep. We remain in the pinnacle of the symmetrical triangle formation that has been in play for over a year, and of crucial importance to the continued SNB interest to weaken CHF will be the Swiss CPI due on Thursday. The market has clearly been at odds with the SNB thus far in terms of where they want CHF to trade, but if deflation continues to pose a threat we have no doubt the SNB will be resolute in maintaining their standpoint on EURCHF levels.

Today's Key Issues (time in GMT):

15:00 USD ISM manufacturing, index Oct exp: 53.0 prev: 52.6
15:00 USD Pending home sales, %m/m (y/y) Sep exp: 0.0 (12.2) prev: 6.4 (12.1)
15:00 USD Construction spending, %m/m Sep exp: -0.2 prev: 0.8

The Risk Today:

EurUsd The pullback in risk sentiment has once again brought EURUSD within a whisker of the pivotal 1.4684 support in the Asian session, but the bullish trend remains intact and thus far the 50dma (now coming in at 1.4654) has provided a floor to any sell-offs in the rally. A bounce off this level will likely meet resistance around 1.4810-15, and thereafter 1.4876 and 1.4967.

GbpUsd GBPUSD met continued supply just below 1.6600, and since then has tested support around 1.6350 twice this morning. Below here there is minor support coming in at 1.6290 and key support below there at 1.6240. The bullish cup and handle formation still however remains in play and we would caution that a break above 1.6604 highs would target 1.6663 resistance and major downtrend channel before 1.7000 resistance.

UsdJpy With the sharp sell-off in USDJPY after CIT bankruptcy news, USDJPY broke below the head-and-shoulders neckline and key support at 90.10, spiking to a low of 89.20. 90.25 presents first minor resistance with scattered supply expected above 91.00 to 91.80 before major resistance 92.50.

UsdChf The pair continues to mark its range between 1.0150 support and 1.0270 resistance. Bearish trend remains as long as we continue to close below 1.0270, but decent long interest should come in at 1.0123 with lots of support at 1.0037 below.

Resistance and Support:

Published on  Mon, Nov 2 2009, 10:35 GMT