Forex - After a Positive Start Risky Assets Lose their Luster

Forex News and Events:

Equity markets have been bouncing around and sending risk correlated fx trades with them. Asian had a mildly positive day, but European indexes have failed to maintain the positive momentum and have a heavy tone. Overall, markets feel disjointed with price action, such as yesterday’s USD late day sell-off not consistent with current themes. However, we do acknowledge that thin liquidity often lead to periods of quiet trading punctuated by exaggerated moves. In Australia, the RBA held the cash rate steady at 3.00% as was universally expected. While the overall tone of the accompanying statement was positive it didn’t not provide the specific language needed to warrant the aggressive tightening the markets are anticipating. We don’t feel that the RBA is in any great rush to tighten, or even encourage, rate speculation, as the carry through into AUD pricing would have negative consequences. In this light, combined with declining growth prospects in China and tomorrow’s GDP figure we are expecting AUD recent strength to unwind near term. JPY has continued to perform well against the USD on the back of optimism surrounding the DPJ historic victory. However, there are signals within Japan that DPJ will be too inexperience to govern successfully. The rigidity built up by the LDP 50 year rule in will hinder the young party’s efforts to enforce reform. But in the near term, the macro trend of risk aversion will keep the yen supported. Today’s data released during the European session was mixed, with German retail sales and Eurozone manufacturing PMI improving slightly, while the UK PMI fell to 49.7 vs. 51.5 exp, 50.2 prior reading. In the US session the individual economic data will be less important that the markets reaction to the figures. Recently, the correlation between USD and risk has become less correlated and particpants have begun to fantasize about markets driven by growth differentials. While we don’t believe we are at that point just yet (especially after the current pull back in risk appetite and lock-in-step sell off in risk correlated assets), that said, we can envision a shift in drivers after the summer.

Today's Key Issues (time in GMT):

07:30 CHF Manufacturing PMI, index Aug 47.0 exp
07:43 EUR Italy: Manufacturing PMI, index Aug 46.2 exp
07:48 EUR France: Final Manufacturing PMI, index Aug 50.2 exp
07:53 EUR Germany: Final Manufacturing PMI, index Aug 49.0 exp
07:55 EUR Germany: Unemployment change, 000s (sa)Aug 30 exp
07:55 EUR Germany: Unemployment rate, % (sa)Aug 8.4 exp
07:58 EUR Final Manufacturing PMI, index Aug 47.9 exp, 47.9p prior
08:28 GBP Manufacturing PMI, index Aug 51.5 exp, 50.8 prior
08:30 GBP BoE mortgage approvals, K Jul 50.6 exp, 47.6 prior
08:30 GBP BoE net mortgage lending, £bn Jul 0.3 exp, 0.3 prior
08:30 GBP BoE net consumer credit, £bn Jul 0.1 exp, 0.1 prior
09:00 EUR Unemployment rate, % (000s, sa) Jul 9.5 exp, 9.4 (158) prior
00:00 USD Total vehicle sales, mn (saar)Aug 12.0 exp, 11.2 prior
14:00 USD ISM manufacturing, index Aug 50.2 exp, 48.9 prior
14:00 USD Pending home sales, % m/m (y/y)Jul 1.0 (9.7) exp, 3.6 (6.7)
14:00 USD Construction Spending % Jul -0.2 ( -10.0) exp, 0.3 (-10.2) prior

The Risk Today:

EurUsd We have been talking in the last few days about a series of higher highs and higher lows and this pattern was confirmed twice yesterday with a bid hitting the pair just below the 1.4277 support followed by a rapid move to the 1.4360 / 80 resistance. Looking at the 4 hourly chart over 3 months, it is clear to see that the pair has a tough challenge ahead with the 1.4445 resistance but in the meantime intraday traders should continue to play this uptrend with longs at 1.4310. Shorting at 1.4380 has become somewhat riskier due to the short term uptrend remaining intact and is actually now forming an ascending triangle suggesting a break higher to the major resistance.

GbpUsd Lots of trouble ahead for the GBP USD bulls as the pair faces resistance at 1.6381 and the 3 week downtrend at 1.6400. Assuming they can break both of those levels, they are then faced with the back side of the medium term uptrend channel and the 2 year downtrend channel around the 1.6435 / 70 level along with another round of heavy resistance. Expect shorting to occur all around those levels. Only a move above 1.6500 negates the bearish picture for sterling.

UsdJpy The action continues to be a extremely messy with support levels broken then trend lines picking the pair back up again only to roll over and fail to stay up. The pair has rallied up to its 3 downtrend channel and resistance at 93.37 where continued short selling can be expected. Only a break above 93.86 will counter the downtrend.

UsdChf Yesterday we spoke about playing the range of the triangle and nothing has changed there. Just a word of caution that since the pair last touched the upper range of the triangle it has tested the horizontal support at 1.0556 no less than 7 times, so please manage your risk sensibly when playing the long side. 1.0632 is the first hurdle to clear followed by 1.0707.

Resistance and Support: