Forex - Waiting for the ECs Assessment of Greeces Deficit Cutting Plan

Forex News and Events:

Just a day after the RBA mentioned China shift in policy as a rational for holding rates, Fitch Rating warned that banks in China faced the greatest “bubble risk” of any Asian country. This temporarily took the wind out of the risk-on tone, pushing the EURUSD down to 1.3946. However, markets were able to rally as Europe opened and traders prepared for an event and data filled day. Gold then broke its trend line resistance at $1122, pulling EUR along for the ride. Just a day after the RBA stunned the market by keeping rates unchanged, Australian trade deficit widened to A$2.25bn vs. -A$2.5bn exp in December from A$1.7bn in November, illustrating a strong recovery in both imports and exports. We still believe the RBA will hike in March and AUD should be well supported near term (AUDUSD powered to 0.8920, as commodities and risk also rallied). In Europe, the highlight will be the release of the EC assessment of Greece's deficit-cutting plan. Part of today’s rebound in risk correlated trades might be from the easing concerns over Greece and just the fact that something is being done. As a testament, Greek sovereign 5y CDS spreads have tightened slightly. The press conference is expected to mention two items: 1. the analysis and endorsement of the Greek public finance cutting strategy and 2. explanation of the EC monitoring plan. In the long run, we believe the EC will eventually need to step in with some kind of funding program, but most probably it will not mention it in this report. For today, the risk is that the report and comments will not go far enough to ease the markets concern, causing the EUR to suffer. We prefer to play the short side of the EURUSD. The Norges Bank is expected to keep rates on hold at 1.75% at this meeting, after raising rates at the previous two consecutive meetings (the last on 16 Dec). After the surprise hike of 25bps the last time around that caught many analysts wrong-footed, there is certainly a possibility that the consensus may have underestimated the Norwegian economy once more. Recent retail sales figures have been strong at 1.1% MoM, and PMI data for January at 50.1 was also indicative of further improvement in the economy. Nevertheless, we would align ourselves with the majority in believing rates will be kept on hold this month; consistent with the prediction offered by the Norges Bank Deputy Governor in December that he expected rates to be at 1.75% in March, and also compatible with the rationale that the Executive Board will want to see the contents of the next Monetary Policy Report published on 24 March, before deciding on further tightening. In the US, ADP reports will help solidify expectations for Friday critical NFP. We have seen an adjustment lower in recent days, with the current consensus standing now at -30k. Should ADP fall in line and not repeat one of its spectacular deviations, this will put NFP around 25k which should be very USD positive.

Today's Key Issues (time in GMT):

08:00 TRY Consumer Prices (% y/y) Dec 6.5 prior
08:53 EUR Germany: Final Services PMI, index Jan 51.2 exp, 51.2 P
08:58 EUR Final Services PMI, index Jan 52.3 exp, 52.3 P
08:58 EUR Final Composite PMI, index Jan 53.6 exp, 53.6 P
09:00 NOK Unemployment rate AKU, % Nov 3.3 exp, 3.2 prior
09:28 GBP PMI services, index Jan 56.5 exp, 56.8 prior
10:00 EUR Retail sales, % m/m (y/y) Dec 0.4 exp, -1.2 (-4.0) prior
10:00 EUR EC Press conference on Greece's stabilization programme:
13:00 NOK Norges Bank rate announcement, % 1.75 unchanged
13:15 USD Change in ADP private payrolls, thous Jan -30 exp, -84 prior
15:00 USD ISM non-mfg index Jan 51.0 exp, 49.8 prior
21:45 NZD Unemployment rate % q/q Q4 6.8 exp, 6.5 prior

The Risk Today:

EurUsd Despite yesterday’s lack of catalysts, we are seeing a few more signs that EURUSD is shifting towards a bullish correction in the near-term: Firstly, we have the RSI divergence that accompanied Monday’s 1.5852 lows which suggests momentum is waning in this leg of the sell-off. Secondly, the crossover of our stochastic oscillator (first seen Monday but confirmed yesterday) strongly suggests a reversal from oversold levels. And thirdly, the morning star candlestick pattern carved out on the daily chart also points to the likelihood of a bullish reversal as the bulls get the upper hand. This morning the pair has surged above 1.4000 resistance, but really only a break back above 1.4300 would compel us to reconsider the overriding bear trend in the medium term. For now we remain on the sidelines with the impending risk event due tomorrow.

GbpUsd The bounce in GBPUSD will have short-term traders rubbing their hands in glee at the opportunity to re-short around 1.6080 levels; an area which should represent a major hurdle for the pair to overcome after its recent break below on 29 Jan. The 50-day moving average resistance now comes in at 1.6139 which will attract further selling interest, and the 29 Jan highs of 1.6180 will also act as an added layer of protection for shorts –coinciding with the top of the 2 week downtrend channel. Only a sustained break above 1.6200 will threaten the bearish bias on this one, so for now we’re going short waiting for a retest of 1.5833 and thereafter 1.5707.

UsdJpy USDJPY has failed to capitalize on recent upside surprises in USD data, meeting considerable supply between 90.75-91.00 (coinciding with the top of the downtrend channel in play since 7 Jan). As we expected yesterday, the crunch point of the apex between the 1-week uptrend and the 4-week downtrend finally evoked a break-out in the past 12 hours, but ultimately it was to the downside –contrary to our bias. Since that breakdown of the trend line at 90.40, the pair found temporary support at 90.35 (38.2% fibonacci retracement of the rally from 84.83 to 93.77); but once sellers got the upper hand, the pair quickly tumbled to lows of 90.09. The technical picture now strongly favours a resumption of the downtrend from here, and we see any bounces towards 90.50 as an opportunity to sell; expecting a look at 89.30 (50% fib retracement of 84.83-93.77) before 89.14 (27 Jan lows).

UsdChf USDCHF traders have been starved of volatility of late, with the pair still caught in tight intraday ranges; case in point, today’s boundaries so far confined to a meagre 1.0512-1.0568. Even so, before we discard the pair to the scrap heap of dull currency crosses along with EURDKK, it’s worth paying attention to last night’s dip below the 3 week uptrend line at 1.0555, which has held on the re-test earlier today in the Asian session. Certainly not a spectacular move lower on this breakdown, but with the data calendar hotting up towards the end of the week, the possibility of a non-positive non farm payrolls would be exactly the sort of catalyst to prompt a correction. We keep an eye on the 1.0522 support below (23.6% fibonacci correction of the move from 1.0131 to 1.0643), and below there the 1.0450 level coinciding with 27 Jan lows and 38.2% fib retracement. In the more medium term, we remain firm USDCHF bulls, looking for a break above 1.0643 (Friday’s post-intervention highs) to target major downtrend resistance around 1.0710; and really only a break below 1.0250 would threaten our view that 0.9919 is the bottom for this downtrend.

Resistance and Support: