Forex - Ireland And Greece Return To Concern

Forex News and Events:

Risk sentiment continues to be the core driver of forex pricing and right now it is squarely negative. The market is once again squarely focused on events in Ireland and Greece. The decisions to split Anglo-Irish, while prudent, highlights the enormity of the potential banking problem. It has taken roughly 20% of Ireland’s GDP to bailout domestic banks and investors are concerned that further cash injections will be needed. In addition, there is growing speculation that the EU stress test lacked rigor and it will be a function of the markets to figure out which banks are in trouble. Unfortunately, it was this kind of groping in the dark which shut down credit markets the first time, and which we are witnessing once more. As to be expected, sovereign spreads have blown out and CDS have come into the limelight again. While the austerity measures on paper were enough, the x factor has always been growth. Without it, any recovery becomes challenging.

With Obama attempting to launch fiscal stimulus part deux and with a high probability of further Fed QE, it seems that the US is clearly looking to support its failed recovery and Europe will falter alongside (Greece's worse than expected GDP at -3.7% YoY and German exports in July unexpectedly dropping -1.5% m/m while imports fell -2.2%). Perhaps most worrying is the growing social unrest in EU nations which will just complicate the already difficult task of recovery. We suspect that this concern over sovereign risk will continue to put downward pressure on the EUR and risk correlated trades.

Finance Minister Noda continued to verbalize his concerns over the JPY appreciation and stated that intervention was being simulated in the lab; while in the background, BoJ Governor Shirakawa provided his usual comments. However there was little follow through in to the JPY as the market is clearly suffering from verbal intervention fatigue as Japanese policy makers have lost much of their credibility. The highlight of the trading day should be the BoE MPC meeting; while most expect the MPC to stay put and not issue any accompanying statements, markets will still be braced for the confirmation. The MPC is currently in a holding pattern, as inflation remains subtly elevated, while the recovery is far from stable.

Today's Key Issues (time in GMT):

11:00 GBP GBP BoE Rate Decision (Sep); exp: 0.50%, prev: 0.50%
12:15 CAD CAD Housing starts (Aug); exp: 185.0k, prev: 189.2k
12:30 USD Initial Jobless Claims (4-Sep); exp: 470k, prev: 472k
12:30 USD Continuing Claims (28-Aug); exp: 4450k, prev: 4456k

The Risk Today:

EurUsd Yesterday’s relief rally off the lows was thwarted by selling interest ahead of 1.2780, with the pair hitting a peak of 1.2764 before succumbing to the bears once more. Thus far 1.2660-70 support (100-day moving average, 1 Sep & yesterday’s lows) has managed to stand its ground against the bears, but taking into account our bias for EURUSD to head lower in the medium-term; we still anticipate a break lower will be forthcoming. Key supports to watch are eyed at 1.2625 (31 Aug low and the back side of a former 3-week downtrend), the 24 Aug low and range floor 1.2588, then the 13 Jul low 1.2522. Should range-trading persist a little longer (and thereby deliver another rally higher), we still see 1.2780 as a key technical level within the range and anticipate sellers to step in as the rally approaches there. Above, the next level is the range ceiling 1.2930 and pretty formidable resistance at 1.3000-10; the latter being noteworthy not only due to its psychological importance, but also because it currently coincides with the back of our former 2-month uptrend.

GbpUsd Yesterday saw a sharp squeeze higher in GBPUSD off trendline support just below 1.5300, but the 2-week downtrend channel remains in charge of the overall price action, and despite a brief puncture of that ceiling at 1.5525 during the NY session, we have since pared back towards 1.5400. With focus pointed downwards, the next obvious target is the 1.5300 seen late on Tuesday and then the trendline support now seen at 1.5270. If the move extends beyond there, next level is eyed at 1.5235, before major support kicks in at 1.5115-25 (50% fibonacci level and 21 Jul lows). For the bulls to buck the trend, they will first need to conquer trendline resistance now at 1.5515, then 1.5580 (23.6% fibonacci retracement of 1.4229 – 1.6000), but then the way is clear for a test of major resistance at 1.5715.

UsdJpy USDJPY’s dip below critical support at 83.60 yesterday has frustratingly proved to be a false break, so our short punt on that move has since been stopped out for a small loss around 83.90. The short squeeze, although annoying, has not led to an emphatic reversal higher, and indeed the pair still looks sluggish to us. As such, we remain willing to re-enter this short-strategy should we get another break below 83.60 in the coming days. As discussed earlier in the week, we believe that the break below 83.60 would activate a descending triangle pattern on the hourly chart with a target of 81.35. There remains weak 2-month downtrend support at 82.55, but considering the enormous significance of this plunge into territory not seen since 1995, only aggressive and imminent BoJ intervention will be able to salvage the pair from another ugly plunge lower. The 14-day RSI is not yet in oversold territory at 36.5 (although we’d like to see some fresh lows in that during the coming sessions to rule out the possibility of RSI-divergence), so our short-to-medium term target remains the 79.75 – 80.00 area where the pair bottomed out 15 years ago (the last time we were down here). On the topside the key levels of note are the 85.22 peak from last Friday, major resistance at 85.90 and 86.50 (5 Aug high).

UsdChf Potentially an interesting development in USDCHF this morning as the lack of directional impetus lower has unwittingly led to a break of 1-month downtrend resistance; which in our view leaves the pair vulnerable to a correction higher. Whether this downtrend break has the capacity to lead to an all-out reversal remains to be seen, but 1.0185 resistance is an altogether realistic target in the circumstances. The key level for the bulls to tackle will be 1.0240 where the last rally came to an abrupt halt on 3 Sep. Extended rallies likely to be blocked by 1.0550 (13 Aug high), 1.0640 (27 Jul high), and 1.0677 (200-day moving average). From here, immediate support is expected at 1.0100 where the back side of the former downtrend comes in, then 1.0065 low from 1 Sep. Despite the rally this morning, we still think that a return to parity is inevitable; indeed our technical analysis can only offer a few remaining supports at 0.9960 (3 Dec 2009 low) and 0.9920 (26 Nov 2009 low) before USDCHF enters new territory and much greater scope for further CHF strength.

Resistance and Support:

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