Germany weighs the odds

Forex News and Events:

Today looks like it’s a calm trading day with major currency pair fluctuating in tight ranges. The situation is the same as it has been for the past two weeks and no major economic data are expected for the day.
European leaders continue to deal with Greece’s request to extend its budget deficit deadline by two more years with French press leaning strongly in favor. However, triple-A rate sovereigns such as Germany, Austria and Finland and the Netherlands political opinion only tilting slightly towards an amicable resolution. As a matter of fact, Assmussen noted a Greek exit wouldn’t trigger a doomsday scenario but that it would still not be preferable. Juncker clarified his remarks over the same topic admitting he “did say an exit would be manageable. What I meant is that it is technically manageable but politically it is not manageable and it would be linked to unforeseeable risks”. Germany’s FinMin Schaeuble also said that if the Euro zone were to break up, Germany would pay the highest price. Many studies have addressed this issue of the debt burden over Germany should the monetary bloc remain intact or split up. Germany is the largest contributor to the financing of the several bailouts put in place so far and a Greek exit would increase the debt to GDP ratio substantially. As to the sovereign yield crisis for the EMU’s third and fourth largest economies Spain and Italy, Mario Draghi had said that the ECB would assist the rescue funds through secondary market buying of government bonds with no restriction over duration risk or balance sheet risks as the rise in yields would disrupt monetary transmission to the real economy, which fits within the mandate of the central bank.
Today the Bundesbank reiterated its opposition to renewed ECB bond buying saying it sees “significant” risks in the plan. From the announcement, the Bundesbank is probably thinking of balance sheet risk as the program “could be unlimited” under the bank’s capacity to print more money. The German monetary authority didn’t stop its criticism at the bond buying program but also commented on the capacity of the ECB to accomplish oversight of European banks saying it also carried some risks. The EUR erased its gains against the USD at this news moving into red territory and trading at the flattening 18-day EMA around which it has been evolving for the past week. EURUSD has been moving horizontally since August 10th, exhibiting light fluctuations and we expect it to continue with this pattern unless some major political decision is taken, seen as the whole week is light on EUR economic data.

Today's Key Issues (time in GMT):

2012-08-20T12:30:00 USD US Chicago Fed National Activity
2012-08-20T13:00:00 EUR FR 12-Month BTF Auction
2012-08-20T15:30:00 USD US 6-Month Bill Auction

The Risk Today:

EURUSD EURUSD traded last week within the sideways 1.2256-1.2286 range, staying within the upper 20-day Bollinger channel. With markets anticipating another slow news week, we should see EURUSD drift higher, however, we doubt the can bulls can muster the bids to seriously challenge 1.2446, so watch for intraday trend reversals. We continue to believe that a clean break below 1.2241 would be considered a bearish move, However, till then we will remain on the side lines. Next levels of supply located at 1.2386 (14th & 17th Aug high), 1.2241 (10th Aug low), 1.2160 (13th July low), 1.2046 (25th July low), 1.2000 (psychological support) then 1.1870 (7th June low). The first levels of resistance lie at 1.2446 (7th Aug high), 1.2598 (fibo retracement from Feb/July), 1.2685 (June 19th high & June 20th low), 1.2754 (June 20th high), 1.2826 (22nd May high), 1.2906 (support turned resistance), 1.3066 (8th May high).

GBPUSD GBPUSD has gradually inched to fresh highs of 1.5744 last week, but the rate at which we have been climbing higher since the start of August clearly slowed down a bit (with gains reversing on Friday short of new highs). Despite recent worse than expected economic data driving the pair to make violent downward moves, corrections seem to be short lived and the pair continues to trade within a clearly upward channel well within the upper 20-day Bollinger channel (1.5776). A solid break above this level will probably drive the pair to May 22nd high at 1.5845. The next resistances is located at 1.5776 (27th July high), 1.5845 (22nd May high), 1.5954 (1st Mar pivot high). Supply zone is located at 1.5702 (15th Aug high), 1.5564 (8th Aug low), 1.5656 (intraday low),1.5458 (26th July low), 1.5405 (8th June low), 1.5390 (6th June low), then 1.5266 (13th Jan low).

USDJPY After retrying to break above the support of the upward channel in formation since April, USDCHF failed to break the 0.9810 resistance yesterday, and CHF bears drove the pair towards last week’s lows.
Despite multiple efforts to breakout higher, the prevailing downtrend seem to be weight on any upside momentum. Momentum indicator MACD is showing that negative price action failed to dissipate and is growing stronger again. Rebounds are likely to meet resistance at 0.9810 (10th Aug high & uptrend channel), 0.9900 (2nd Aug high), 1.0000 (psychological resistance), 1.0070 (1st Dec 11’ pivot high), 1.0149 (2010 pivot), then 1.0294 (10th Sept 10’ high). The first levels of support should be located at 0.9657 (key support), 0.9584 (5th July close, 6th July opening), 0.9419 (17th June low), 0.9369 (21st May Support), then 0.9183 (7th & 11th May low).

USDCHF After retrying to break above the support of the upward channel in formation since April, USDCHF failed to break the 0.9810 resistance yesterday, and CHF bulls drove the pair towards last week’s lows.
Momentum indicator MACD is showing that negative price action failed to dissipate and is growing stronger again. Rebounds are likely to meet resistance at 0.9810 (10th Aug high & uptrend channel), 0.9900 (2nd Aug high), 1.0000 (psychological resistance), 1.0070 (1st Dec 11’ pivot high), 1.0149 (2010 pivot), then 1.0294 (10th Sept 10’ high). The first levels of support should be located at 0.9657 (key support), 0.9584 (5th July close, 6th July opening), 0.9419 (17th June low), 0.9369 (21st May Support), then 0.9183 (7th & 11th May low).

Resistance and Support: