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Forex − RBA Tightens But Sounds Less Hawkish

Tue, Nov 3 2009, 10:36 GMT
by Peter Rosentreich

ACM - Advanced Currency Markets

Forex News and Events:

Yesterday saw the US ISM manufacturing index improve to a three and a half year high and combined with the resurgence of residential construction, this suggests the pace of US fourth quarter growth is on track to meet Q3s whopper. However since the release of these impressive figures the USD and risk correlated trades have had a choppy ride. Wall Street closed the session slightly higher with the S&P up 0.64% but Asian regional indexes were broadly lower. EURUSD continued to consolidate trading between 1.4725 - 1.4850 while the remaining G10 pairs were evenly / randomly spit between winners and losers against the USD. The lack of arrangement illustrates the confusion over market drivers. Clearly the markets are searching for direction and most expect tomorrows FOMC meeting to provide a course. Given the very impressive string of economic data, the US markets have been speculating that the Fed will shift to a slightly less dovish statement. A move which will have traders worried over a world without endless liquidity to freely gamble in the markets. We would expected a pull back in asset prices should the Fed choose to humor the hawks. Currently profit taking and USD short covering ahead of the central banks (Fed, BoE, ECB), NFP and end of the year’s performance reports seem to be a key motivator of price action. Yesterday the SNB’s Jordon reiterated that it was still not time to exit loose monetary policy and the Swiss central bank is committed to its interventionist policy. Interestingly enough, despite the strong language, the reaction in the EURCHF was muted. With verbal intervention failing to scare sellers & growing choirs of EURCHF sell recommendations, the SNB will have to resort to more drastic measures. I believe that any move down to 1.5080 would have buy signal written all over it. The major event in the Asian session was the RBA rate decision. As was widely expected (some notable exceptions were thinking 50bp) the central bank increased its policy rate by 25bp to 3.50%. The accompanying statement was moderately less hawkish as the RBA stressed a measured reduction in policy stimulus: "...the Board's view is that it is prudent to lessen gradually the degree of monetary stimulus..." The noticeably less hawkish statement weighed on the AUDUSD as the pair traded down from to 0.8960 from 0.9095. The calendar is relatively light today and we don’t expect traders to build any meaningful positions ahead of tomorrows festivities. In Europe Norway & UK, PMI is expected to improve to 49.0 & 47.2 respectively, following the global trend. And in the US session, Factory Orders will momentarily distract traders from pondering the worlds 3 major central bank actions. We would expect that a better than expected release would have a similar reaction to yesterdays figure in short term USD selling. 

Today's Key Issues (time in GMT):

08:00 NOK Manufacturing PMI, index Oct 49.0 exp, 47.4 prior
09:28 GBP Construction PMI, index Oct 47.0 exp, 46.7 prior
13:00 USD FOMC meeting begins
14:00 EUR ECB Council Members Mersch and Weber speak in Germany and Turkey
15:00 USD Factory orders, % m/m (y/y) Sep 1.0 (-17.0) exp, -0.8 (-20.4) prior
00:00 USD USD Vehicle sales, mn saar Oct 9.8 exp, 9.2 prior 

The Risk Today:

EurUsd EURUSD continues to consolidate and ahead of tomorrow FOMC we dont expect any breakout pressure. The pullback in risk sentiment in Asia has once again brought EURUSD down to range support. However the pair stand squarely in the middle of the broader 1.4680 - 1.4860 range. The bullish trend remains intact and thus far the 50dma (now coming in at 1.4679) has provided a floor. A bounce off this level will likely meet resistance around 1.4810-15, and thereafter 1.4870. 

GbpUsd GBPUSD met continued supply just below 1.6600, and fell through 1.6330 support today. 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 USDJPY continues to track daily cloud cover lower. With the sharp sell-off in USDJPY after CIT bankruptcy news, Yesterday USDJPY broke below the head-and-shoulders neckline and key support at 90.10, spiking to a low of 89.20. Cloud covering at 90.80 provides heavy resistance with support coming into play at yesterdays lows. 

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. Lack of drivers should push the pair down to 1.0150 support. 

Resistance and Support: 

Published on  Tue, Nov 3 2009, 10:48 GMT