Forex - Chinese & Australian Data Supports Risk Appetite

Forex News and Events:

The better than expected Chinese PMI and Australian GDP gave risk appetite a boost and allowed for the accumulation of risk-correlated trades. However, our gut feeling is that the summer risk on/off pattern is still in effect and we suspect the Asian momentum will fade as we get a slew of economic data today. The Asian surprise print help momentarily suspend the market’s obsession with global recession fears and allowed it to ponder the possibility of just a moderate slowdown.

Asians regional stock indexes were broadly higher following yesterday’s decent Wall Street close. The FOMC minutes released yesterday went pretty much how the market expected with the language hinting that members were increasingly concerned over the recovery. The release stated that "members generally saw both employment and inflation as likely to fall short of levels consistent with the dual mandate" and confirmed that the decision to reinvest proceeds from mortgage-backed securities into the market was a strategy to steer clear of natural market tightening forces without the Fed having to instigate another round of full-fledged quantitative easing.

As for inflation, the wording backed off deflation concerns but still sounded cautions and dovish. Clearly the Fed is still on the fence and future decision will be based up future data. Although US data has hit a significant slow patch this summer, we suspect this is more a natural adjustment on its way to modestly trending higher. Today and the reminder of the week’s data should help build the ground work for this theory.

As already mentioned, Australian GDP surprised strongly to the upside at 1.2% q/q, against the anticipated 0.9% q/q. The release put y/y GDP growth above the RBA’s and market’s expectations and put pressure on the RBA to tighten further – most likely by 100 bp to 5.20% by the end of 2011. Should the environment turn risk positive, AUD will be one of the clear outperformers.

The EU got some disappointing news out of Germany yesterday with German retail sales worse than expected at -0.3% m/m. Much of the argument for the Euro’s survival is based on the strength of economic engine of the region, namely Germany. Without that strength, prices and market pressures could get sticky in a hurry. Our thoughts is that the soft patch running through the US has and will spread to Europe which may cause a renewed bout of sovereign risk concerns in September.

We are already seeing this theory through credit-default swap pricing and yield spreads which for a few of the peripheral country have hit pre-bank stress test levels. Markets will be particularly keen on measuring the divergence between EU data and US data. Lingering fears over stability of Irish banks and sovereign financing persisting while speculation of some extension of ECB’s unconventional measures at this week's ECB decision will continue to weigh on the EUR.

In Switzerland and after a few attempts, the EURCHF finally broke through the 1.300 support and traded down to 1.2852, a record low. We expect the CHF rally to continue across the board. First of all, the Swiss fundamentals are very sound and second, the fact that the SNB is willing to let the CHF appreciate provided that deflationary risks do not arise. Should those risks arise, SNB member Hildebrand hinted to potential FX intervention and a tightening of monetary policy. The cherry on top is that the CHF is the new darling of safe-haven trades with insiders believing EU capital will begin to gush into Switzerland seeking safety.

As for today, Eurozone PMI followed by US ISM & ADP employment numbers will define risk appetite in the immediate short term.

Today's Key Issues (time in GMT):

06:30 SEK Aug mfg PMI; prior 64.2.
07:00 NOK Aug mfg PMI; prior 54.9.
07:13 EUR ESP Aug mfg PMI; prior 51.6.
07:30 CHF Aug mfg PMI, 66.0 exp; prior 66.9.
07:30 SEK Q2 current account balance; prior SEK63.6 bln surplus.
07:30 SEK Aug new car registrations.
07:43 EUR ITA Aug mfg PMI, 54.0 exp; prior 54.4.
07:48 EUR FRA Aug mfg PMI, 54.7 exp; prior 54.7.
07:53 EUR GER Aug mfg PMI, 58.2 exp; prior 58.2.
07:58 EUR Aug mfg PMI, 55.0 exp; prior 56.7.
08:00 EUR ITA Jul wages; prior +0.1% m/m, +2.5% y/y.
08:28 GBP Aug mfg PMI, 57.0 exp; prior 57.3.
12:15 USD Aug ADP employment survey, +15k exp; prior +42k.
14:00 USD Aug ISM index, 53.0 exp; prior 55.5 53.0 49.9 56.0
14:45 USD Fed Governor Duke (FOMC voter)
17:40 USD Dallas Fed President Fisher (FOMC non-voter)
21:15 USD Chicago Fed President Evans (FOMC non-voter)

The Risk Today:

EurUsd EURUSD has spent the past 24-hours in a somewhat directionless sideways consolidation, but with the 3-week downtrend now creeping into view our preference is once again to start looking for short entry levels. The upper edge of the 3-week downtrend is now eyed at 1.2740 so expect that trendline to act as first resistance, then above there the key area of supply to overcome will be 1.2780-90 (27 Aug high and 50-day moving average. Above there, next resistance is expected 1.2915 (back side of former 2-month uptrend) and 1.2930 (12 Aug high and a major resistance level in the middle part of this month). Our base case is that the bears will launch another attack on the downside in due course and therefore we expect a return to last Tuesday’s low 1.2588 eventually. A slump through that level opens up the path to 1.2522 (13 Jul low), 1.2500 (lower edge of a 3-week downtrend) and then the 2 & 6 Jul lows of 1.2483.

GbpUsd GBPUSD has looked very sickly since the beginning of the week, with the 1.5370 support (24 Aug low) being the latest casualty. Fortunately, the combination of trendline support around 1.5325 (also the 38.2% fibonacci retracement of 1.4229 –1.6000) has managed to contain the blood-loss for now, and may yet have the potential to evoke a bounce from here. Nevertheless, bulls wrong-footed by the collapse are likely to cap the upside at 1.5440; even on a break higher thebulls will need to prove their worth at overcoming the 2-week downtrend resistance (now 1.5525) and then that 1.5580 challenged on Monday. If they can achieve this, then the way is clear for a return to 1.5715 resistance (12 Aug high). On the flipside, should 1.5325 break down, there’s a big and barren plunge until weak support at 1.5235 and then major support kicks in at 1.5115-25 (50% fibonacci level and 21 Jul lows). Should 1.5370 hold and indeed managed to elicit a recovery in the pair, then bulls will still to to prove their worth at overcoming the 2-week downtrend resistance (now 1.5540) and then that 1.5580 level we looked at yesterday. If they can achieve this, then we’d instead be looking at a return to 1.5715 resistance (12 Aug high).

UsdJpy Not a great deal of change in the picture for USDJPY today as the pair has merely spent the last day chopping around in an 80 pip range. We still expect a high chance of another visit to 83.60 (last Tuesday’s low), and then a trip to the lower edge of the 6-week downtrend (currently 82.85). Really not many technical landmarks are highlighted below as this area has not been explored since 1995. Our short-medium term target (barring the possibility of physical BoJ intervention) is therefore the 79.75 –80.00 area where the pair bottomed out on that run 15 years ago. On the topside the key levels of note remain the upper edge of the 6-week downtrend (now 85.05), major support at 85.90 (where the bears thwarted a previous break of the 6-week downtrend) and86.50 (5 Aug high).

UsdChf As we were expecting yesterday, the eventual break of 1.0229 support (19 Jan low) has quickly given way to another test of 1.0131 (11 Jan low), and the bears look to be gearing up for another assault on the downside today. We see a potential bearish flag pattern being marked out on the hourly chart, so are primed to sell on a break below 1.0140-45, aiming for a target below around 1.0040. Beyond there the big landmark on the horizon is 1.0000 (which also coincides roughly with the lower edge of the current downtrend), and below there the key remaining supports 0.9960 (3 Dec 2009 low) and 0.9920 (26 Nov 2009 low). Expect rallies to be hindered by resistance through 1.0185 (overnight highs) and 1.0229 break-out area. Extended rallies likely to be blocked by 1.0550 (13 Aug high), 1.0640 (27 Jul high), and 1.0673 (200-day moving average).

Resistance and Support:

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