Forex - At The Apex Of A W-Shaped Recession?

Forex News and Events:

The collapse in risk sentiment over the past 24 hours has been triggered by seemingly innocuous events, with most news agencies pointing to concerns of sovereign debt woes in Spain and Portugal adding to the well-publicized situation in Greece. Others have also highlighted yesterday’s disappointingly high US claims figures which have certainly knocked optimism for today’s non-farm payrolls. But what is confounding is the aggression of the move given the weak causes attributed to the move; the contagion effect of fiscal woes across Europe has been discussed for weeks, and rarely has the market taken claims data in such regard with the prospect of the arguably more significant non-farm payrolls due the following day. Instead, this dramatic collapse in equity markets (major indices universally down around 2-5%), the plunge in commodities (crude down over 5% yesterday) and the vicious rout of risk assets across the board smacks of an over exuberant market all taking the same side of the global recovery trade and all exiting at the same time. What is clear, is that the markets are now hanging on for one last possibility of redemption; non-farm payrolls. The number due at 13:30 GMT has the potential to reinvigorate some semblance of belief in the US economy, or conversely to derails hopes that the recovery is underway. For the risk assets hardest hit yesterday, the technical picture certainly looks grim. But the last nail in the coffin of this phase of the recovery would be the realization that US unemployment is not falling. And unemployed people do not spend, meaning that we may be heading back towards the second dip of a W-shaped recession. This payrolls needs to be positive, or we can expect a lot more pain in the financial markets to come.

Today's Key Issues (time in GMT):

12:00 CAD Unemployment rate %, Jan exp: 8.5 prev: 8.4
13:30 USD Nonfarm payrolls, Jan exp: +5k; last -85k.
13:30 USD Unemployment rate %, Jan exp: 10.1; last 10.0

The Risk Today:

EurUsd For anyone who doubted the momentum of EURUSD’s downtrend at the start of this week, there was a rude awakening yesterday with an utter rout of risk assets; sending EURUSD clattering dramatically down through 1.3855 short term support before then quickly negating 1.3801 (50% fibonacci retracement of the rally 1.2459-1.5144) and 1.3750 (16 Jun lows) to touch a low today of 1.3649. The plunge through 1.3750 is doubly significant as it also represents trendline support that has been intact since 8 Jan and which has held on three prior sell-offs; leaving EURUSD acutely vulnerable to further selling pressure on any rallies back up toward 1.3740-50 and opening up the next downside targets 1.3540 (next vibration channel support) and then 1.3484 (61.8% fib retracement of the 2009 rally). Obviously, non-farm payrolls due later will be the deal breaker so we remain wary of adding to shorts at current levels, but look to trade this resolutely from the short side should we get any bounces.

GbpUsd It seems that today’s theme is bearishness, and GBPUSD certainly doesn’t counter that trend. Despite yesterday’s post-BoE bounce to 1.5880 levels, the collapse of risk appetite soon took the wind out of GBP’s sails, sending the pair down to 1.5730 major support. Although this level bravely held up on the first visit, today we have dipped lower to 1.5654, but unlike some other currency pairs, there is slightly more room for optimism for GBPUSD from here. The 14-day RSI is (like many others featured) in oversold territory at 29, but in addition, the 12 month uptrend support comes in below at 1.5480, backed up by 1.5315 prior technical support and 23.6% fib retracement of the sell-off 2.1161-1.3507. The enduring GBP-bearishness that has pervaded the market over the past year may actually benefit GBP now – at least from a positioning perspective, but once again, we respect the downtrend currently in play and are in no hurry to catch a falling knife just yet.

UsdJpy Utter carnage yesterday afternoon as EURJPY plummeted like a lead balloon, dragging USDJPY down with it. USDJPY’s inability to puncture the 4 week downtrend resistance at 91.15 was swiftly punished by a spectacular collapse through interim support levels at 90.35, 90.00, 89.30, 89.14; all the way to lows of 88.55. So far, the rebound has been capped by selling interest around 89.70, and fresh bear interest is expected on any bounces back towards 90.30 (back side of the downtrend channel and 50% fib retracement of 84.83-93.77). Support expected to come in around 88.10-88.25 area (major trendline support and 61.8% fib retracement), but with a move of this gravity only the very brave or very stupid would be hoping to go long ahead of non-farms later. If non farms disappoint later then expect a lot more blood on the walls for USDJPY this afternoon.

UsdChf Yesterday's wave of USD strength quickly overpowered 1.0643 prior intervention highs, and after suspected SNB buying of EURCHF overnight the pair ripped higher to 1.0796. Significantly, this move has now negated the major downtrend that has been in play since Nov 2008, and any re-test of the back of the trend line (coming in at 1.0625 today) will likely meet plenty of bids as we re-calibrate our sights on the next upside targets 1.1020 and 1.1170.

Resistance and Support: