Forex - RBA Leads The Way

Forex News and Events:

Market sentiment has been buoyed this morning after a surprise 25bp rate hike from the RBA overnight and the hawkish summation of the global recovery going forward. The move was very much ahead of the market consensus for a first hike in November, and underscores our view that the AUD will be a leading performer as the Australian economy returns to trend growth. The Australian central bank statement noted that it was no longer necessary to maintain "such a low interest rate setting", and that it would be "prudent to begin gradually lessening the stimulus" of loose monetary policy; pointing to more hikes to come in Q4 09/Q1 10.
Even before the RBA surprise, Asian equity markets found support from the improvement in yesterday’s ISM non-manufacturing index, and the deterioration in the DXY today (76.35) lends credence to our theory that good US data is likely to have a far more marked effect in encouraging USD-selling than good US data on encouraging USD-buying. Today’s data calendar remains light; the main release of the morning has been Swiss CPI which remained flat on the month against expectations of a 0.1% increase. These numbers are likely to be closely monitored as the SNB remains wary of the threat of deflation. Given the rapid resumption of CHF strength since the alleged intervention last week, this release may ensure that the SNB remain committed to enforcing a weak CHF, and we would repeat our strategy of going long EURCHF around current levels (1.5100) in anticipation of further verbal or physical intervention to come. This strategy should however be taken with some caution, as clearly the market is at odds with the central bank in this instance on where the CHF should be trading, and with every passing day the improvement in the global outlook will lessen the need for the central bank to weaken the CHF.

UK Industrial Production numbers posted a dismal -2.5% MoM in Aug versus forecasts for a 0.2% rise, and there were revisions lower to last month’s figures (0.7% from 0.9%). Manufacturing Production figures were just as disappointing; -1.9% MoM (0.3% expected), causing the GBP to drop heavily to 1.5940. We see further downside for the currency as the deterioration in the economy persists in contrast to its G10 peers.

Today's Key Issues (time in GMT):

07:15 CHF Swi: CPI, % m/m (y/y) Sep exp: 0.2 (-0.7) prev: 0.1 (-0.8)
08:30 GBP UK: Industrial production, % m/m (y/y) Aug exp: 0.2 (-8.7) prev: 0.5 (-9.3)
08:30 GBP UK: Manufacturing output, % m/m (y/y) Aug exp: 0.3 (-9.3) prev: 0.9 (-10.1)
12:30 CAD Cad: Building Permits, % m/m Aug exp: 5.0% prev: -11.4%
14:00 CAD Cad: Ivey Purchasing Managers Index, Sep exp: 56.2 prev: 55.7

The Risk Today:

EurUsd Stops have been triggered all over the place overnight as the pair breaks the short term downtrend and is now looking to break the head and shoulders formation. The 12 month bull trend players are taking firm control back from the bears but in doing so they have moved straight back into the major resistance zone around 1.4750 / 1.4850. Earnings season in the US kicks off tomorrow with Alcoa and this will likely give us a very clear indication of whether the risk appetite is warranted.

GbpUsd GBPUSD has made a move this morning up to the 4 week downtrend channel that has been forming the second shoulder in the pair. There is a chance of some bravehearted shorts selling around current levels (1.0630 at time of writing) but with EURUSD and USDCHF having broken their respective short term trends, it is debatable as to whether a short right here is brave or foolhardy. Expect stops at 1.6080 on those positions that are taken.

UsdJpy The pair continues to work its way into a triangle as it consolidates between 89.00 and 89.85. Not much to do here but play the range and obviously follow the breakout which ever side it comes on.

UsdChf A similar picture to EUR USD this morning with the short term trend broken overnight and in this case the inverse head and shoulders formation is undoubtedly ruined. There is support below at 1.0227/44 so there may be a small bounce for those longs still looking for the exit but any move higher faces resistance now at 1.0284 and 1.0324.

Resistance and Support: