Forex - Soros Questions the Euros Survival & Bernanke's Testimony in Focus

Forex News and Events:

Issues surrounding Greece are still the key driver of FX pricing and given the outlook, it will keep the EUR under pressure. This weekend, the German magazine “Spiegel” suggested that a eur25bn bailout was being negotiated, which gave the single currency and risk correlated trades a slight boost, but optimism was quickly grounded when the German Finance Minister denied the rumour. But more eye-opening was a very lucid piece in the FT by G. Soros. Soros states that the EUR “construction is patently flawed” and that “The crash of 2008 revealed the flaw in its construction, when members had to rescue their banking systems independently. The Greek debt crisis brought matters to a climax. If member countries cannot take the next steps forward, the euro may fall apart.” While the arguments outlined in this article are well understood by most market professionals, this piece will clearly bring the EUR situation mainstream. While the EURUSD was able to regain most of its lost ground after the knee jerk selloff prompted by the Fed decision to hike the discount rate (Friday), we believe as participants begin to view the current problem as less of a funding issue and more of a structural problem, the EUR will continue to be sold heavily on rallies. In the near term, the issue of funding cost will be highly debated and scrutinized. According to some reputable sources, Greece is expected to issue a second tranche of eur5bn 10 yr bonds sometime this week. Greek Prime Minister Papandrou in an interview over the weekend with the BBC indicated his support for a financial tool that could allow Greece to "borrow at the same rate as other countries, not at high rates which in fact undermine our possibility for making the changes and cutting down our deficit". Its clear that the current cost funding is critical, since Greece can ill afford to issue debt at problematic levels and with large redemptions coming do in March/April, participants will be watching issuance seriously. On the other side of the pond, the highlight of the trading week should be Fed Chairman Bernanke’s semi-annual testimony on Wednesday. This will be the first time markets have heard from Bernanke’s since the “unexpected” change in the discount rate. Fed officially was quick to tote the company line that discount rate adjustment was by no means a shift in policy or outlook. However, at the very least, it was a vote of confidence and baby steps towards larger monetary policy tightening. While Bernanke’s tone will be similar to recent FOMC minutes, given the strong reaction to Friday’s move, the market will be watching closely for any signals to the Feds monetary path. 

Today's Key Issues (time in GMT):

13:00 MXN Hungary Base Rate Announcement, % Feb-23 5.75 exp,
6.00 prior
14:00 MXN GDP, % y/y Q4 -2.6 exp, -6.2 prior
16:00 JPY San Francisco Fed President Yellen (FOMC non-voter) speaks on the US economy
23:50 BoJ minutes published

The Risk Today:

EurUsd Looks like we’re in for another snooze of a Monday in the majors with the economic release calendar not really kicking off until tomorrow –and even then we’ll be saving our popcorn until the afternoon’s US consumer confidence. The RSI divergence we noted on Friday has ensured a decent bounce off the 1.3444 lows, but we want further confirmation this is a bona fide trend reversal (as opposed to position squaring into the weekend) before we start loading up on EURUSD longs. The rebound has taken us within 10 pips of a major downtrend vibration channel (1.3654 the high), a channel that should provide decent selling interest on the first look. If this breaks, we anticipate a quick revisit of 1.3800 resistance (50.0% fibonacci retracement of the rally from 1.2457 to 1.5145), but beyond there the crucial trendline resistance and major pivot level to overcome will be around 1.3840-50. It is this 1.3850 level that will be key in our mind to defining this recent dip as a major low, and we would obey any break above here as an argument to shift towards a structural long bias for the next few weeks. Supports on the downside are largely predictable from the stops on the way down; 1.3580, 1.3530 and 1.3444 the nearest ones to watch.

GbpUsd This has probably been one of the most well-behaved pairs for us technical analysts in the past week, and our assertion that Friday’s RSI divergence was a good argument for taking profit on shorts below 1.5400 has turned out to be a prudent one. The lows on Friday coincided beautifully with the 1.5350 May 2009 lows and lower bound of the shallow 7 month downtrend channel; with the price action carving out a hammer candlestick pattern on the daily chart as added evidence of a correction. Despite the correction, the bearish bias is still firmly entrenched for in our view; and the target of the recent bearish flag we discussed last week is still waiting down below at 1.5080 so we use this bounce above 1.5500 as a chance to re-short (backed up by resistance around 1.5535 prior support). We like to play with a bit more caution here given the propensity for GBPUSD to exhibit nasty short squeezes higher, but the 1.5615 break out level should provide a strong ceiling of sellers if we get back up there.

UsdJpy USDJPY has lost some of thrill-factor in the past week as that problem of what to do with the USD and JPY on good/bad US data continues to confound. The 2-3 week uptrend channel has continued to assert its dominance, although a couple of assaults on the 14 Jan highs at 92.09 have only got as far as 92.15 before paring back down. We continue to feel that the significant break of the 1 month downtrend means that a revisit of the major 2.5 year downtrend is due; and that downtrend resistance now comes in around 93.50 above, with really only the 92.75 prior resistance beyond the sticky 92.10-15 recent highs. Given the lack of economic drivers due in the coming sessions, it’s likely to be a choppy ascent, but 91.30 should provide a decent layer of bids to minimize the downside, with 90.50 remaining as a major floor to any sell-off.

UsdChf USDCHF is still gradually marching higher, with the early price action at the start of the week testing and rebounding nicely off the 5 week uptrend vibration channel around 1.0740 (defined by the 1.0650 lows and the slope of the uptrend peaks from 21 Jan and 5 Feb. 1.0600); a trendline we is expect to form a cushion for any further sell-offs today, and bids should come in once again at 1.0500. The notorious sticky areas of price action above are still in wait at 1.0828 prior resistance and the 1.0900 Friday highs, but given the significance of 4 Feb’s breach of the 11 month downtrend , the bias from here remains to the upside, with 1.1150 forming our next major upside target.

Resistance and Support: