Forex - Hungary's Default Talk Overdone

Forex News and Events:

Quietly, European sovereign debt spreads continue to widen which can only be read as a EUR negative marker. In addition, a Belgian government auction languished with only a 1.4 bid-to-cover ratio and cost 50bp less than a week ago. This trading week will be littered with sovereign auctions and there is growing concern that the amount of EU paper will exhaust investors interest.

On the positive side, yesterday’s German factory orders were very strong and today’s industrial production should also be robust, signaling to markets that Germany is weathering the storm relatively well and perhaps even benefiting from the weak EUR. EU officials continue to slowly leak out details on the European Financial Stabilisation Fund which should help to lessen market unease. Other Euro events such as the Merkel/Sarkozy meeting cancelation or any remarks from Bernanke's speech on the Eurozone are honestly just noise and won’t provide markets with any insight. Today’s ultra-light calendar will keep major participants sidelined as low liquidly will continue to plague short-term position holders.

Three events that may turn into market movers and in no particular order will be the: 1). EU-Estonia Vote 2). Hungarian Fiscal Plans 3). Turkish Constitutional Vote.

The EU is to vote on Estonia becoming the 17th nation to join the European Monetary Union, most analysts expect the resolution to pass without a hitch. Next, the Hungarian government is to provide details on its fiscal plans and projections for the future. The markets will be looking for some heavy fiscal austerity measures with an emphasis on spending cuts rather than any tax hikes. We suspect fears of a hungarian default is over done. Yesterday Eurogroup meeting, finance ministers talked down the probability of a default in Hungary. Junker stated "was not really concerned about Hungary," and repeated the must cited "the Hungarian situation is in no way similar to the one in Greece."

Lastly, Turkey's Constitutional Court is anticipated to rule today on whether the AKP's constitutional reform package should be brought to vote by the people as a referendum. There is growing concern that that the Court may strike down specific controversial amendments which will be a clear signal to markets that tension between the AKP and secular forces in Turkey will likely increase in the short-to-mid term.

Otherwise, market volatility seems to have taken the day off today. US stocks closed in the red yesterday but Asian equities were able to limp into positive territory this morning, albeit unconvincingly. For FX this means some polite, calm, range-bound trading as investors lack the directional indicators needed for a good breakout. One thing we can say for sure is that FX markets never remain calm for long - especially given the current macro environment.

Today's Key Issues (time in GMT):

00:00 CHF EcoFin meeting in Luxembourg.
05:45 CHF May jobless sa and nsa, 4.0% and 3.9% eyed; last both 4.0%.
06:00 EUR EUR GER Apr trade balance, E14.0 bln surplus eyed; last E13.3 bln surplus.
06:45 EUR FRA Apr budget year-to-date; March E28.9 bln deficit.
06:45 CHF FRA Apr trade balance, E4.2 bln deficit eyed; last E4.72 bln deficit.
07:15 SEK May CPI, +0.1% m/m, +1.2% y/y eyed; last +0.9%, +1.4%.
07:30 EUR Apr unemployment; last 9.8%.
10:00 USD GER Apr ind production - prelim, +0.8% m/m eyed; last +4.0%.
12:00 Fed Governor Duke (FOMC voter) speaks
13:00 USD World Bank Chief Economist Lin speech in San Francisco.
13:10 EUR Chicago Fed President Evans (FOMC non-voter) speaks
16:30 JPY Parliament financial crisis delegation press conference in Washington.
23:50 Core machinery order, % m/m

The Risk Today:

EurUsd EURUSD is still on a very fragile footing despite yesterday’s relief rally off yesterday’s 1.1876 lows; significantly, the pair has failed to get back above the psychologically important 1.2000 level, and in our minds this sets the stage for another move lower. We therefore look to add to longs just ahead of that level (around 1.1980-90), with a stop around 1.2040, eyeing a target of 1.1910-20 (yesterday afternoon lows). Whilst 1.2000 resistance holds, the supports eyed on the downside come in at yesterday’s low 1.1876, and then the historical supports at 1.1827 (27 Feb 2006 low) and 1.1644 (15 Nov 2005 low). Recall that we are still in the process of playing the descending triangle pattern on the hourly chart (which was activated by a break below 1.2145 critical support), and the target for that pattern is set even further down at 1.1620. The 7 week downtrend support does not come in below until 1.1490, but if we do start threatening those depths it then puts the massively significant 1.1214 level on the radar –a level which represents the 61.8% retracement of the entire rally from 0.8232-1.6140.

GbpUsd In tandem with EURUSD, we have a slight bearish bias on GBPUSD in the short-term; but contrasting with EURUSD, the outlook is a little more constructive for this pair considering the recent break-out above the 7-week downtrend. Although we still look to sell this pair on rallies for now –looking at that 1.4555 level as the high water mark –we would only be looking for a modest target around 1.4450 and would be quick to exit the trade on a break above yesterday’s 1.4563 spike highs. Should the bearish momentum kick in, expect supports below to appear around 1.4389 (yesterday’s low) and then again at the critical 1.4240 lows that held so well back in mid-May. On the topside, resistance is quite patchy but beyond 1.4555 we anticipate sellers at 1.4770 (2 Jun high) and 1.4918 (13 May high).

UsdJpy Despite our medium-term bullish bias for USDJPY, we are neutral to mildly bearish in the very short-term as resistance around 92.00-10 keeps a lid on price action. We therefore prefer to sell some just ahead of there (only risking a tight stop at 92.30), and look for another test of the lower edge of our uptrend channel down at 91.30. Given the unpredictable nature of headline risk at the moment we do acknowledge the possibility that any sell-off could overshoot our target, but we would happily switch to being buyers of USDJPY if we get a dip back towards 90.50 (1 Jun low). This strategy would be in harmony with our medium-term view, but we do note that agility is key in these markets, and if the bears have enough momentum to break 90.50 support then it would open up another look at 89.80 further down. For now, expect rallies to stall back up towards 92.00, and then again at the upper edge of the 2-week downtrend at 92.90. The 92.96 resistance remains the one to beat before we can expect another charge at 95.00 levels.

UsdChf Uncompelling range-trading prevails in USDCHF at the start of this week, with the pair still lodged in the middle of the range and rallies unable to hold back inside of the former uptrend channel. We look at rallies towards the back side of that former uptrend (now seen at 1.1690) as an opportunity to sell; or for those with more patience the major resistance at 1.1742 is the more robust resistance level. Given our lack of directional conviction, we only aim to take 100 pips or so back towards yesterday’s lows (1.1585). In contrast, should the bears push us back towards the range lows (1.1450) we would put bids just ahead of there with a tight stop just beyond the 1.1420 low from last Friday. Being flexible will be key however, as if the bears have the mettle to stop us out through 1.1420, it would make a lot of sense to flip round and get short as next support below is not anticipated until the trendline support at 1.1325.

Resistance and Support:

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