Forex - Shanghai Rallies While Markets Wait on the ECB

Forex News and Events:

Markets were generally quiet in Asia, as they await the ECB rate decision and then the payroll figures tomorrow. Asia was mixed, but the scrutinized Shanghai index rallied back 4.79% after a tought few days. A nice boost for equity bulls and a potential indicator that risk appetite will be healthy today. However, USDJPY remains weak, briefly penetrating the 92.00 support, before rumors of option barriers scared traders off. European indexes were able to hold on to China’s positive moment and are broadly higher. Gold prices continued to drive higher after yesterday’s massive $20 plus surge (breaching a 6 month high of $980oz). The metals move will have traders eyeing EURCHF, now approaching to 1.5100 and hiding SNB. From yesterday US session, markets are digesting the August FOMC minutes and subsequent Philadelphia Fed President Plosser comments and ADP report. The Fed minutes overall failed to surprise, but did sound slightly more optimistic than July’s meeting. In an interview with CNBC, Plosser stated that the Fed must carefully examine exit strategies from unprecedented quantitative easing program, including raising interest rates. ADP estimate of the change in private payrolls was -298k, slightly worse than expected. As always, we caution traders on making too much of this figure, since ADP has a sporadic correlation to actual BLS numbers. Australia showed the worst reading since mid 2008, as July trade deficit widened by more than expected to AUD1.56bn, but exports were resilient and import showed a healthy growth in domestic demand. Despite the slightly negative reading, the AUD gained on its correlation to rising China stocks (improving risk appetite). The main show today will be the ECB monetary policy meeting. The ECB is expected to hold rates steady at 1.00% as the outlook for the Eurozone remains uncertain. Traders have been buying into the Euro ahead of the announcement, signaling some support behind the central bank’s monetary policy stance. Most the price action in the Euro is consistent with movements in broader asset classes. Cross-asset correlation is the central theme in financial markets and continues to dominate directional patterns in the near-term. Bundesbank board member Sarrazin is scheduled to meet today as well as ECB Member Stark, both of which should express cautiously optimistic tones regarding growth in the region. Eurozone’s PMI services were slightly better than expected at 49.9 vs. 49.5, but retail sales worsened by -0.2% on a monthly basis, serving as an example of the mixed economic conditions. And in Sweden, the Riksbank held rates at 0.25%, as was widely expected.

Tech Note: The EURSEK has been testing the neckline in the last few days around the 10.3400 - 10.3600 level and is doing the same again today. The sellers have a helping hand this morning as the upper downtrend channel comes into play at 10.3450 and for now this should keep the pair under pressure. Looking at the daily chart it is clear to see how heavy the resistance is between 10.3400 and 10.4150. Do no expect it to be broken in a rush, if at all. After lightening on short positions on the downtrend channel at 10.0500 a couple of weeks ago, expect those playing the head and shoulders to use this as an ideal re-entry point for a medium term short position.

Today's Key Issues (time in GMT):

07:13 EUR Spain: Services PMI, index Aug 40.8 prior
07:30 SEK Riksbank interest rate announcement, 0.25 exp/prior
07:43 EUR Italy: Services PMI, index Aug 46.0 exp
07:48 EUR France: Final Services PMI, index Aug 48.9 exp, 48.9 prior
07:53 EUR Germany: Final Services PMI, index Aug 54.1 exp
07:58 EUR Final Services PMI, index Aug 49.5 exp, 49.5 prior
07:58 EUR Final Composite PMI, index Aug 50.0 exp, 50.0 prior
08:00 GBP Halifax house price index, % m/m (3m y/y) Aug ) 0.8 (-10.2) exp
08:28 GBP Services PMI, index Aug 53.9 exp, 53.2 prior
09:00 EUR Retail sales, % m/m (y/y)Jul 0.1 (-2.2) exp
11:45 EUR ECB rate announcement, %Sep 1.00 exp/prior
12:30 USD Initial jobless claims, thous (4wk mvg avg)29-Aug (570) 566
12:30 EUR ECB press conference - Latest macroeconomics projections published
14:00 USD ISM non-mfg composite, index Aug 48.0 exp, 46.4 prior
14:00 TRY CPI, % y/y Aug 5.4 prior
23:50 JPY MoF Corporate Survey capex ex. software, % y/yQ -23.1 exp, -23.5 prior

The Risk Today:

EurUsd The USD bears aren’t going down without a fight and the EUR USD, along with all the other pairs on the verge of breakdown, held on by the skin of its teeth, catching a bid on the support at 1.4178, just slightly above the 10 month uptrend at 1.4161. Due to the pairs inability to break 1.4380 to the upside last week we are now looking at a short term picture of higher lows and lower highs. Continue playing the range between 1.4161 and 1.4380.

GbpUsd A new new short term low was printed yesterday at 1.6115 and again the pair has bounced back from the brink of collapse up to the first significant resistance at 1.6380. The short term downtrend now bears pressure on the pair at the 1.6381 resistance so this level will be key today for the sterling bears. All time frames, except intraday, are still in a downward trend.

UsdJpy A new short term resistance and the 3 week downtrend channel now comes into play at 92.52 with the upper downtrend channel at 92.80 / 93.00. The range on the pair has become extremely tight so intraday plays are favored, with shorts possible at both level mentioned. To negate the downtrend we would now need to see a clearance and hourly close above 93.20.

UsdChf A second visit to the 1.0690 / 1.0707 level yesterday afternoon was met with fierce selling sending the pair straight back to 1.0581, just above the 1.0578 support level. The pair looks likely to hold yesterdays low as the hourly RSI and stochastics are in healthy shape as the pair trades higher this morning. Continue playing the intraday range.

Resistance and Support: