Forex - FT Article Prompts USD Selling

Forex News and Events:

Markets are currently stable, as participant wait for fresh news or data. Overnight, a report from the Financial Times weighed on the USD. The FT ran an opinion piece by David Walker, the former comptroller general of the US , suggesting that the US needs to take immediate action to steer clear of a downgrade in its AAA rating (re-hashing the long-term critique of US public finances). It’s important to mention that a downgrade of US sovereign debt will lead to downgrade in sovereign elsewhere, due to the fact the US is a global benchmark. In addition, the USD selling was compounded by a comment from a Japanese opposition party leader that stated that the MoF would transition to holding non USD denominated US government debt. The knee jerk reaction in the FX market lead to new highs in the EURUSD and AUDUSD. The EURUSD traded up to 1.3722, while the AUDUSD has traded up to 0.7705.

The markets are still debating the merits of the recent bright spots in economic data. Heavy weights such as former Fed Chairman Greenspan are now arguing that the US and global economy have in fact turned the corner. Recent positive surprises in economic data have given this theory significant traction, including today massive's jump in Chinese retail sales (April 14.5% y/y). It seems clear that just the expectations of a recovery (regardless of the exact timing) are pushing investors towards risk taking and causing USD selling. Movement of capital back into EM (Asian EM looks specifically good due to rising reserves) , renewed correlation of oil prices and short term interest rate differentials should continue to create a negative USD environment. Released today, the BoE Inflation Report showed inflation at 1.2% two years out, assuming market rate and GBP125 bn worth of QE. While In the EU March’s decline in industrial production confirms that the recession deepened in the first Q. The 2.0% m/m decline in output was below the consensus forecast but expectations were revised down following the weaker country data released this week. Today markets will be focused on US retail sales. The FX market reaction will be dominated by the figures effect on recovery and risk appetite. We believe the data will have to significantly deviate (on the downside) to trample the recently sprouted “green shoot “theory. And most likely even the slightly optimistic read will cause broad based USD weakness.

Today's Key Issues (time in GMT):

08:30 GBP ILO Unemployment rate 6.9 exp, 6.7 prior
08:30 GBP Claimant Count Unemployment 79.3 exp, 73.7 prior
08:30 GBP Average Earnings -0.8 exp, 0.1 prior
09:00 EUR Industrial Production -1.0 exp, -2.3% prior
12:30 USD Import Prices 0.4 (-16.9) exp, 0.5(-14.9) prior
12:30 USD Retail Sales % m/m (y/y) -0.1(-9.7) exp, -1.2(-9.6)
12:30 USD Retail Sales ex-auto 0.0(-6.8) exp, -1.0(-6.0)
14:00 USD Business Inventories -1.1(-4.7), -1.3(-4.6) prior
16:00 USD FRB President Lockhart speaks

The Risk Today:

EurUsd Constructive under immediate resistance (Piercing line on daily chart) at 1.3669 (Yesterday’s high), consolidation subsides as we head higher, we continue to aim for 1.3740 area, a break past this level would set our sights on 1.3971 within the week. The bias really is for the upside here as the retracement only managed a 38.20% counter. On the downside 1.3557 serves as initial support but real test for bearish bias comes at 1.3507.

GbpUsd dollar weakness continues to shine through as bullish channel persists. Broke strong double top resistance at 1.5246, decisive push past this level would set sights on 1.5456 via 1.5352 (100% move after 50% retracement). On the downside 1.5180 (50% retracement) holds as soft support for a constructive bearish reversal with a floor on today’s moves at 1.5074.

UsdJpy Yen continued to gain against the dollar. We are currently trading particular range, with a double top head and shoulders about to confirm, initial resistance at 97.99 proves crucial, a push past would allow for 98.35 and 99.56 (50% and 100% respectively). A failure to break 98.00 with enough panache would focus morning lows of 97.14 – via 96.35.

UsdChf pair is trading a perfect mirror image to the EURUSD pair, EURCHF holding steady in 1.5080 – 1.5160 range with a bias for the downside would indicate USDCHF is set for further declines (strong recommendation for 3 graph comparison). Yesterday’s support at 1.1022 was respected in early hours, we are set to test it again, eyes on 1.0670 (for monthly forecast) via 1.0960. On the upside (while a significant move up is countered by clear rounded top culminating at 1.1109) we see resistance at 1.1133 (38.20%) then 50.00% level at 1.1167.

Resistance and Support: