Forex - EU Summit Not Expected to Help EURO

Forex News and Events:

With Japan on a long weekend, FX trading activity was somewhat limited. Over the weekend, US President Obama passed his healthcare legislation despite intense and vocal opposition. While the short term ramifications should be limited, adding around $1 trillion additional spending over the next decade to an already worrying debt load is not insignificant. In the not so distance future, we expect bond yields to react (head higher) causing a negative reaction in the USD. However, right now the focus is clearly on Greece and the EU. It’s another important week for the EUR and Eurozone, as the scheduled Forum 2010 in Brussels (Thursday and Friday) could provide clarity on aid to Greece . Our central tenet is that the EU will do nothing, but use well placed verbal “bailout grandstands” to make short Eurozone more of a two-way bet. But by Monday morning when the smoke clears and headline fades, there will be no EU sponsored solution and a EUR still being sold on rallies. The latest round of comments hints that the European Council is working on bilateral loans with a clause for IMF involvement. Over the weekend divergence / inconsistent views on the viability of a Greece bailout continued to cloud any forecasts. German Chancellor Merkel has continued to insist the aid strategy for Greece might not be finished in time for the Council to endorse it. However, there core thinking is that no plan is actually necessary. Greek Prime Minister Papandreou stated that the Eurozone could be destabilized by forces who "forget the political importance of the euro" and he reiterated that Greece would not default on its debt obligations. Developments from Switzerland will be in focus this week, given the current elevated level of the CHF. Comments last week by newly-appointed SNB Board Member Danthine have emboldened EURCHF traders to continue to test the SNBs tolerance. Jean-Pierre Danthine said that consumers and businesses should be prepared for market set FX rates and higher borrowing cost, which seems to suggest that FX intervention is slowly coming to a close. This week, SNB Chairman Hildebrand and Vice-Chairman Jordan will be speaking and market will be focused on whether they repeat or even elaborate on last week comments. Today lacks any first tier data and we expect trading to remain subdued barring any random EU official comments on Greece.

Today's Key Issues (time in GMT):

10:00 CHF SNB Quarterly Bulletin published Q1
11:00 EUR Germany: Bundesbank Monthly Bulletin
15:00 EUR "Flash" Consumer confidence, index Mar -17 prior
15:30 EUR ECB President Trichet speaks an introductory Statement at a Quarterly Hearing in Brussels
16:45 EUR ECB Member Gonzalez-Paramo speaks
19:45 USD Atlanta Fed President Lockart (FOMC non-voter) speaks on the economic outlook

The Risk Today:

EurUsd Today’s holiday in Japan coupled with a very light economic release calendar means we’re off to a sleepy start to the week in EURUSD; however after last week’s rapid sell-off, the heavy tone persists, and rebound rallies have been stifled ahead of 1.3550 thus far (1.3547 the high). The price action at the end of last week has carved out a bearish engulfing candlestick formation on the weekly chart which is likely to come as further misery for those still caught long EURUSD; although there is somewhat of a silver lining to extract from the current situation with notable support levels on the near horizon. First support comes in at 1.3484 (61.8% fibonacci retracement of 1.2457 –1.5145), and just below there the former range lows and critical 1.3425 support that has been in place since May 2009. From here, 1.3425 level must hold to avoid a resumption of the longer term downtrend, but if this breaks we concede that another leg lower is on the cards. As we pointed out on Friday, if such a move were to mimic the previous failed test of the downtrend, that could amount to as much as 9 big figures in a matter of weeks.

GbpUsd Friday’s abrupt sell-off in GBPUSD on Friday breached our 2 week uptrend channel at 1.5075 and the subsequent collapse has taken us all the way down to lows of 1.4932 so far. Although the break of this uptrend neutralizes our bullish bias, the confirmed break of the larger downtrend back on 11 March still indicates to us that the bears have lost some capacity to push this pair much lower for the time being. As such, we now anticipate a period of range trading ahead –at least until we see a breakout of the major technical levels either side. On the downside, the first level to note is 1.4850 (prior range floor) and then below there the critical 1.4780 support (1 March lows). Any rallies back up will probably face selling pressure at the back side of the former uptrend (currently 1.5100), and above there the 1.5215 and 1.5350 major resistance levels.

UsdJpy Same old same old in USDJPY this week. 90.80 resistance caps intraday rallies for the time being, with offers likely to extend to 91.10 (12 Mar highs) above and then the 200-day moving average lurking at 91.58; these strong areas of supply coupled with a lack of economic drivers today seem to ensure any moves to the upside will find it very tough going. Less easily defined is the lower bound of the current choppy range; the back side of the former downtrend had served as our line in the sand last week, but understandably, that trendline support now comes in much lower at 89.35 today, so we may need to consult some other technical levels for a better guide of next support. The 50-day and 100-day moving averages come in below at 90.20 and 90.10 respectively, and the 89.50 pivot level remains intact below which can be expected to provide good bids on the first test.

UsdChf USDCHF spent most of last week lodged between 1.0507-1.0650, with a couple of jabs towards 1.0500 failing to garner enough fresh selling momentum to break lower –despite a spectacular collapse in EURCHF through its major supports in the latter part of the week. As we once again creep higher at the start of this week, the price action now appears to be etching out an inverse head and shoulders pattern on the hourly chart. Obviously, this chart pattern would only be confirmed by a break back above the neckline at 1.0650 (which has repelled attempts on the 15 and 18 March), but if we do swing above this level, then the target for this bullish pattern would be 1.0800 –coinciding with resistance levels from the start of the month. We do however note that former uptrend resistance comes in just ahead of there at 1.0785, so we would be slightly conservative in setting our TP on such a trade, aiming instead for a more modest target around 1.0750. In the meantime we note that any slumps back into the current range will likely meet good bids once again ahead of 1.0500, with the 200-day moving average providing back-up support at 1.0485, and the back side of the former downtrend at 1.0450.

Resistance and Support:

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