Forex - Chinese Prime Minister Wen Jiabao Halts CNY Appreciation Speculation

Forex News and Events:

Putting aside the plethora of important economic data releases, this should still be an important event filled week to say the least. In the Eurozone, The Eurogroup of 16 Eurozone Finance Ministers is due to convene in Brussels today, then the wider Ecofin group of 27 on Tuesday. Obviously, the issue of Greece and potential solutions will be high on their agenda. The media buzz / speculation has been mixed, with a slight lean (perhaps it makes for better news) that some bailout solutions will be announced. However, we still believe that EC drag their feet as long as possible in the hopes that markets “normalize” and any shift in the original tone of the Maastricht Treaty completely avoided. Baring any official commitment on aid, we believe the EUR will continue to be sold on rallies (especially given uncertainty around Greece to re-finance debt maturing in the Spring). Generally, BoJ’s two-day meeting is hardly a mark in FX trader calendar. However, this week’s should warrant a great deal more attention. In recent weeks, the government pressure on the BoJ has intensified, including today’s comments from Japanese FM Kan, who stated that the BoJ has been working and will continue to work with Government to beat deflation and the central bank understands Government’s expectations through discussions in Parliament. A number of media reports have speculated that the policy board is ready to introduce measures necessary to create an even loser form of monetary policy. While we believe QE is around the corner, with policy rate of 0.1% there is not much room for further contraction. Without a wider US-Japan yield differential, USDJPY upside will be limited (unless we see FX decouple form yields). In the UK, the BoE MPC minutes are due on Wednesday and markets expect a unanimous vote to hold monetary policy unchanged. There has been a growing call for further quantitative easing from several members and we expect that additional £25bn asset purchases remains in place. However, the timing of the increase will be variable, based heavily on CPI coming down. In this environment, we expect the GBP to come under significant selling pressure (already hearing grumbling over low liquidity). The US and USD will start the week on a high note, as retail sales came in much better than expected rising 0.3% vs -0.2% exp., despite the severe February weather. The FOMC rate decision on Tuesday should be pretty run-of-the-mill, with the accompanying statement reiterating policy rate 'exceptionally low' for an 'extended period' and even mentioning positive progression in economic conditions. And if this was not enough to keep FX traders busy, the minutes from the RBA's March meeting will also be released. The minutes should help market determine if expectations for a June hike is overly optimistic or is a July or August more realistic. And on a final note, Prime Minister Wen Jiabao threw cold water on last week’s CNY appreciation exuberance. Wen Jiabao said that the CNY wasn’t undervalued and rejected other nations’ unwarranted political pressure. With the US Treasury Department delivering its biannual report to Congress in April, we expect things to heat up further. Overall, in this environment, especially considering the Greek situation and UK potentially reinstating their QE, we favor long USD and EM positions. We are high suspicious of any JPY strength and would be looking to fade positive news.

Today's Key Issues (time in GMT):

00:00 EUR EU Economic and Financial Affairs Council (to 16/3)
00:00 Russia Industrial Production 6.6 exp, 7.8% last
08:15 CHF Feb producer prices.
09:30 EUR ECB Tumpel-Gugerell speech.
10:00 EUR Q4 employment; last -0.5% q/q, -2.1% y/y.
12:00 EUR ECB Gonzalez-Paramo speech in Zaragoza.
12:30 USD Mar Empire State mfg index, 23.50 exp; last 24.91.
13:15 USD Feb industrial production, -0.2% m/m exp; last +0.9%.
13:15 USD Capacity utilization, % Feb 72.6 exp, 72.6 last
17:00 USD NAHB housing index Mar 16 exp, 17 last

The Risk Today:

EurUsd There was cause for celebration for EURUSD bulls on Friday as excellent Eurozone data and improvement in risk appetite conspired to push the pair up through 1.3535 range highs, and even on to puncture the long term downtrend at 1.3780. As we noted on Friday however, the 1.3800 fibonacci level (50% of 1.2457-1.5145) has proved to be a hurdle of supply yet to be breached, and with the price action still skirting around our old trendline there is obviously some edginess that a resumption of the downtrend cannot be ruled out. Ideally we would like to see the pair consolidate above 1.3760 (back of the former trendline today) to reassure us that the long term downtrend has indeed been broken, but we take heart in the fact that two brief corrective sell-offs have so far failed to drop past 1.3725 before fresh buyers have stepped in. For now then, look for 1.3725 to once again provide support below, and expect that any slump back within old ranges gets caught by significant buying interest around 1.3530. Unless that 1.3530 level is taken out, our bias is now for a bullish move above the 1.3850 pivot level, and ultimately, back to 1.4000; however we do anticipate a pause around 1.3900 psychological resistance and 50-day moving average.

GbpUsd As anticipated on Friday, the confluence of extreme short GBPUSD positioning, improvement in risk appetite, and significant break of the 2 month downtrend channel propelled us back above 1.5200 levels; challenging resistance at the top of recent ranges. Given the importance of the break above the 2 month downtrend, we feel that a further extension higher is on the cards, with a very short-term uptrend eyed at 1.5120 today expected to give some support to any sell-offs. Below there, it will be absolutely critical that the pair remains above 1.4885-1.4900 (coinciding with prior range lows and the back side of the downtrend) to ensure a bullish reversal can take place. Our conviction will be boosted by further price action and consolidation above 1.5200 this week, and beyond there we set our sights on the target 1.5350 and 1.5580 beyond.

UsdJpy Choppy price action in USDJPY; although Friday’s surge above 90.80 resistance does fuel anticipation that the next target from here will be the topside major downtrend channel at 92.85 –a channel that has dominated for nearly 3 years. Frustratingly for the bulls, Friday’s spike above the 90.80 was very short-lived, and if anything, the pair looks to be consolidating back within the ascending triangle we highlighted at the end of last week. A break to the topside is still very much on the table (with a proposed target of 92.60); but the uptrend at 90.30 must hold to ensure the viability of this pattern. Fortunately, the 50-day moving average comes in at 90.40 below which should provide some buying interest, and even a brief dip lower can be expected to stall around the 90.15 technical level (and 100-day moving average). Whilst a break to the upside is our favoured scenario; with resistance anticipated at 91.76 (200-day moving average) and 92.15, we note that a contrary move back towards 89.50 would neutralize our bullish bias and instead signal a resumption of range trading mode.

UsdChf USDCHF’s collapse through 1.0650 range lows is a significant development for this pair, and may well have confirmed a very protracted head and shoulders pattern on the hourly chart. If this 1.0650 level is indeed the neckline for such a pattern, then we would expect the sell-off to extend to 1.0400 levels below. However this calculation may be somewhat optimistic for bears as there are some considerable support levels below to consider. There is currently sticky price action around 1.0600 (38.2% Fibonacci retracement of 1.0131-1.0898), and bids are expected around 1.0500-15 below. The critical trendline to monitor will be the back side of the former downtrend channel which currently comes in at 1.0480; and any re-test MUST hold for the bullish trend to continue.

Resistance and Support:

S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot