Forex - Temporary Rebound in Sentiment Fades Quickly

Forex News and Events:

How quickly optimism fades in this uncertain environment. Risk appetite had rebounded in yesterday's US session as comments by Treasury Secretary Geithner strengthened confidence in the banking system, by stating the “vast majority of banks have more capital than they need”. In addition, Geithner stated that most banks have sufficient reserves and those that lacked adequate reserves, the Financial Stability Plan have roughly $109bn to strengthen balance sheets. Overall the comments allayed some concerns but results of the stress test (methodology released tomorrow and results May 4th), general stability of the banking sector and corporate earnings will trump slight positives in leading indicators in the near term (ie yesterday the German ZEW economic sentiment survey which came well above expectations at 13.0 versus expectations of 2.0). Also weighing on sentiment was a gloomy Global Financial Stability Report from the IMF revising its estimates (again). Total global write-downs were revised higher to USD4.1trn (USD2.7bln is attributable to US assets). In the Asian session, Australian CPI for Q1 was released this morning and rose by 0.1% q/q, less than market expectations of 0.5% q/q, while the trade balance in Japan for March showed fairly balanced trade with a surplus Y11bn versus expectations of a deficit of Y5bn. In this environment of uncertainly and fragile risk appetite we expect USD and JPY to remain supportive. Currently European equity indexes are trading in the red and US stock futures are pointing to a negative open..

Yesterday held two surprise central bank rate decisions in the Riksbank and Bank of Canada. The Riksbank surprised the markets by easing rates only 50bp and did not announce any extraordinary measures. It seems the central bank is looking to buy some time, yet keep maximum flexibility stating "resort to other measures if the crisis deepens". We expect at the July meeting for the central bank to cut 25bp and introduce some form of quantitative easing (probably purchase of government bonds or MBS). Surprisingly the market took the decision as a positive and the SEK rallied dropping to 8.5165 against the USD. With our expectations for the next meeting we believe this strength is short term and are looking to buy USDSEK on weakness. Meanwhile, in Canada the BoC cut its overnight target rate by 25bp to 0.25bp and has committed to hold the current policy rate until 2010. In addition the accompanying statement noted that a new framework of monetary policy would be detailed in Thursday Monetary Policy Report. This can only be interpreted as the introduction of some type of credit or quantitative easing plan. As with the SEK, a migration into unconventional monetary policy will weaken the underlying currency, ie the CAD. The undeniable signal caused CAD selling and a temporary pierce of the 1.2500 lvl against the USD.

Today, participants will have one eye on the equity markets and the other on the UK . Public Finances is expected to show significant deficit expansion (expect something shocking) and budget highlighting debt and spending projections. The BoE has already called for spending to be reduced in and there will only be room on the margins for select spending increases. The BoE minutes to the March meeting will also be important. Although the decision was not in doubt, the MPC's assessment on the economy will be important, especially on credit conditions as the market needs to understand the progress of asset purchases. Overall, we think today’s release will emphasize domestic deterioration and bring the Sterling down with it.

Today's Key Issues (time in GMT):

00:00 PLN Poland: Retail sales, % y/y Mar -2.1 exp, -1.6 prior
08:30 GBP BoE MPC minutes, vote Apr 9-0 exp
08:30 GBP Claimant count unemployment, change K Mar 100.0 exp, 138.4 prior
08:30 GBP ILO unemployment rate, % Feb 6.7 exp, 6.5 prior
08:30 GBP Average earnings, % 3m y/y Feb 1.5 exp, 1.8 prior
08:30 GBP PSNB, £ bn Mar 15.2 exp, 9.0 prior
08:30 GBP PSNCR, £ bn Mar 16.5 exp, 4.4 prior
08:30 GBP BoE provisional M4, % m/m (y/y) Mar 1.4 (18.7) prior
09:00 EUR Government budget balance, % of GDP 2008 -0.6 prior
11:30 GBP Chancellor Alistair Darling presents the annual budget statement
14:00 USD FHFA house prices , % m/m (y/y) Feb 1.7 (-6.3) prior
19:30 MXN Unemployment rate, % Mar 5.5 exp, 5.3 prior

The Risk Today:

EurUsd Firm floor comes in at 1.2900 as a crucial level we tested several times yesterday and this morning. Furthermore the upper extremity for the current range stands at 1.2954. General trend continues to be bearish as the dollar gains on a return to risk aversion ahead of the results of the stress tests due on May the 4th. A break out of the range would set sights on 1.2986 then 1.3016 – however tentative moves higher (extending the range) have failed to hit crucial levels. However, the resumption of the general trend on March 19th has led to a 5 wave formation which (in Elliot wave’s theory) would see a 3 wave A-B-C reversal; this dynamic is not to be discounted. This said a bias for a strong greenback and break below 1.2900 would allow for 1.2834 then 1.2732 with a long term view for 1.2517 levels.

GbpUsd Concerning releases are expected out of the UK today, however how much of that is already priced in to the recent 1.5067 – 1.4480 decline that started on the 15th of April. Yesterday brought a slight rally in risk which benefited the sterling however risk is back in play today. Intra day support is located at 1.4500 a break on the downside aand resumption of Sterling biased weakness would retest current support and extend to 1.4353.

UsdJpy Predictions of fthe buying of oreign security investment trust (scheduled for March 24th) to be the demise of Yen streght are over done. Momentum warnings point to faltering rally and the risk of a test of trendline support near 97.20. Continued risk aversion as earnings season moves on would focus 97.07 then 95.96 as support levels. This said, we maintain a light bullish bias in the long-term with initial resistance at 98.45 which would then allow for 99.75 then 100.74.

UsdChf We are still flirted with the 23.60% retracement at 1.1678 on the 1.1465 – 1.1744 move and are set to do it again. Consolidation above this level is likely a bullish setup. We see the pair trade sideways as we await further data and developments on the risk front. On the upside (and as risk aversion continues) our initial target stands at 1.1744 then 1.1784. A return to risk appetite would see the pair trade lower towards 1.1625 and 1.1520 for a longer term view (however the closer EURCHF pushes towards 1.5000 and the SNB line in the sand), the less likely we like long CHF positions.

Resistance and Support: