Forex - EURUSD Gains on Benign US Currency Report

Forex News and Events:

A noticeable void of fresh news has created a lacklustre trading environment which continues to promote USD selling. Asian equity markets were higher across the board with Shanghai leading the charge up 2.31%. In addition, yields firmed and commodities rallied as investors concerns over a double dip or potentially a meltdown subsided. However, currently risk appetite seems shaky and temperamental, with safe-haven trades such as JPY & CHF failing to surrender meaningful ground. On this hot, data de-void summer Friday we would be looking to fade risk correlated trades especially the closer we get to the European close. The big news yesterday was the US treasury Department stopped short of labeling any country (ie China) as a currency manipulator. The move was highly anticipated but well received when the report actually hit the street as the benign language should help ease trade tensions further. The report also noted that the recent decision by Chinese officials to halt the CNY peg was a positive development but would "monitor closely the pace of appreciation" and hinted that the Treasury still believes the CNY is seriously overvalued. Today China’s car sales slowed to a 14 month low but still printed a very respectable 19.4% y/y. Given this figure and other robust economic indicators we suspect the markets are undervaluing the rate of appreciation in the CNY against the USD. We will be watching commodity currencies particularly the AUD as the inter-dependant rally in commodities & China should support further appreciation.

Yesterdays ECB meeting provided very little new information as it was universally expected they would hold rates steady. However, Trichet sounded surprisingly optimistic about the EU economy and believed the market had an overarching tendency to be excessively negative on the domestic situation in the eurozone. More importantly, Trichet failed to discuss the critical bank stress test other then he believes the report was important and "action will have to be taken where needed after the tests."

In the UK the BoE MPC overlooked the elevated CPI reading and left policy rate unchanged. We suspect that inflation will continue to be a problem for the BoE and the previous MPC split vote is a clear indication of the growing concern within the central bank. While the sterling has received a boost from its recently adjusted rate path we suspect that given the UK's weak fiscal position, a move higher in rates will be sterling negative in the mid term.

As stated earlier we would be inclined to sell into any risk rally given the tentative nature of buyers and growing concern over Japan's Upper House elections over the weekend. Should the ruling government lose the fiscal discipline, which has allowed the country to run massive debt-to-GDP ratio, could be in jeopardy. Giving the transitory nature of the current sovereign debt crisis we wouldn’t rule out Japan coming under heavy scrutiny. Might be a good time to consider selling JPY.

Today's Key Issues (time in GMT):

07:30 SEK Industrial production, % m/m May
08:00 NOK CPI, % m/m (y/y) Jun
08:30 GBP Trade balance, £ bn May
08:30 GBP Producer input prices, % m/m (y/y) Jun
08:30 GBP Producer core output prices, % m/m (y/y) Jun
08:30 GBP Producer output prices, % m/m (y/y) Jun
08:30 GBP Current account, £ bn
14:00 USD Wholesale inventories, % m/m May 0.5 Exp, 0.4 prior
11:00 CAD Unemployment rate 8.1% exp, 8.1% prior
23:01 GBP BRC retail sales monitor, total sales, 3.0 prior
23:01 GBP RICS housing market survey, price bal Jun 22 prior

The Risk Today:

EurUsd The combination of Trichet’s upbeat assessment on Eurozone data coupled with decent gains in the equity markets has been sufficient to finally push EURUSD up through the 1.2675-85 resistance zone (representing the 13 & 21 May highs). We are however still wary that a bearish rising wedge formation may be playing out on the hourly chart, and the doji candlestick on the daily chart seen Wednesday does make us wary that the bears could still snatch this one. The upper edge of the wedge has repelled 5 or 6 rallies already, and now comes in around 1.2725-30. Should we threaten a break of the lower edge of the wedge (now eyed at 1.2645), the potential for a significant collapse lower is great, so we would advise anyone long to adjust their trailing stops to just below that level. For everyone else, look to sell towards the top the wedge, or on a break below 1.2645. Supports expected 1.2550 (7 Jul low), 1.2468 (former resistance from 20 Jun), 1.2410 (50-day moving average), 1.2400, then 1.2300. Should the wedge be negated by break above 1.2730, next resistance is eyed at 1.2750 then 1.2957 (100-day moving average).

GbpUsd Easy money in GBPUSD this week as we managed to scalp another 70-80 pips out of this 1.5080 –1.5230 range but this time from the short side; as you may recall from yesterday’s report, we went short just above 1.5200, and took profit at 1.5130 to give us ample cushion before the uptrend channel support came into play. Exactly according to script the pair tickled that trendline only briefly (around 1.5105) before rebounding higher today. With that uptrend occupying a significant chunk of the trading range now (currently seen at 1.5130), we have refrained from trying to get too greedy and play the upside (but those who did flip back to long positions on that last oscillation are sitting pretty on a tidy 70 pips or so of gains), and instead we wait to see whether the uptrend support or the 1.5230 range ceiling will be the first to capitulate. Should the uptrend channel break down, next supports expected at the 100-day moving average 1.4993, then major support at 1.4855. Should the uptrend resume, we’d go long on a break above 1.5230 and aim for another test of the 30 April high 1.5390. Next resistance above there is seen at trend channel resistance at 1.5455 trendline resistance.

UsdJpy As discussed yesterday, we have gone long on the break above 88.20, and thus far have been reaping the benefits of good USD claims data and equity market gains; both of which have resulted in upward pressure on USDJPY –hitting a high of 88.71 so far. Just to re-iterate our plan on this one; there looks to be a double bottom formation on the hourly chart with a neckline at 88.20, and which suggests a target on the topside at 89.40 –a level that still has a bit of breathing space before the cluster of resistance levels come into play between 88.60 and 88.77 (1-month downtrend resistance and 25 Jun high). Those who missed the breakout the first time around can still look to try and get in on the long trade should we re-test the neckline (88.30-40 still looks tasty for an entry point), and stops can be placed 10-20 pips below the 8 Jul lows 88.00. Resistance above still remains at 88.95 (20 May low), then 89.50 (28-29 Jun high), whilst buyers are likely back down at 87.65, then 86.97.

UsdChf An altogether uninspiring few sessions for USDCHF –with the break above the 1-month downtrend being more of a sluggish continuation of range-trading rather than an impulsively bullish push higher. The bearish engulfing candlestick on the daily chart on Tuesday makes the breakout look even less compelling, so we are in no hurry to relinquish our view that this pair goes lower in the short-medium term. We now prefer to sell on rallies back towards the 1.0580 pivot level, and aim for another test of yesterday’s lows of 1.0481. Supports below are eyed at the 1.0480 floor that has propped the pair up over the last couple of days and 1.0435, whilst resistance above 1.0580 is seen at the 1-week-downtrend resistance 1.0595, then 1.0700, 1.0780 and 1.0910.

Resistance and Support:

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