Markets Rally on Spanish Debt News

Forex News and Events:

It was another light news day, so traders singled out anything that came down the wires. Risky assets picked up a bid in the late European session as a few positives helped push investors back into the markets. From Germany the wires reported that lawmakers has stated that they were open to Spain seeking a precautionary credit line from the ESM. The statement was made by Michael Meister & Norbert Barthle, potentially a reversal of Finance Minister Wolfgang Schaeuble’s longstanding position that Germany is against a full sovereign rescue for Spain. This came right on the back of ZEW economic sentiment index which advanced more than expected (to -11.5 from -18.2). However, the optimism was tempted by current situation numbers which printed at 10.0 from 12.6 prior (11.8 exp). Out of Greece FM Stournaras stated that his country needs a two-year extension to meet its bailout targets (auction of 13-week Treasury bills came in at 4.24%). In the US, Industrial production jumped to 0.4% vs. 0.2% exp ( -1.4% revised prior read). And this number was aided by GS release of better than expected corporate earnings. From there equity indices had entrench themselves in the green. EURUSD clearly caught wind of the feel good news flow and rallied up to 1.3060 before retracting slightly. Gold, which has been maligned in recent sessions recovered to $1747. Interestingly US Sept. CPI 0.6% vs. 0.5% exp, last 0.6%, led by higher energy but Core CPI up rose marginally 0.1% vs. 0.2% exp. The highlight of the week remains the EU summit on October 18-19 and the speculation that Spain might request a bailout from the EU (activating the OMT). While the market view drifted from expectations that Spanish president Rajoy would take the next step (causing erosion in EUR), the suggestion that Germany would allow a credit line has reinforced the risk backstop. Our view is that Spain will not request assistance, based on the fact that while supervisory union is planned for discussion, the subject of direct capitalization of weak banks is currently not on the agenda. While Europe is critical, it’s important not to lose sight of the other critical events in China. Tomorrow we have a slew of critical data including GDP.
The mild recovery in property investment and solid bounce in exports has fueled expectations that we have seen the bottom of economic activity. A good result will lower the prospects of additional official stimulus (risk negative) but will support a stable natural recovery (risk positive). We will be watching the key barometer--the Shanghai composite for direction. 

Today's Key Issues (time in GMT):

2012-10-17T08:30:00 GBP BoE Minutes
2012-10-17T09:00:00 CHF ZEW Survey (Expectations)
2012-10-17T12:30:00 USD Housing Starts

The Risk Today:

EURUSD EURUSD has bulls have staged another strong rally which hit a high of 1.3124 easily clearing triangle pattern top. EURUSD is still managing to find willing bidders above 1.3100 today, but we have still not seen enough steady upward momentum to challenge the next major resistance level at 1.3172. That said, indictors are now significantly bullish and we expect a challenge to the upside resistance in the near term. The first level of resistance are located at 1.3172 (5th Oct high), and 1.3283 (1st May high). Next levels of support located at 1.2808/29 (1st Oct low & 200d MA), 1.2754 (10th & 11th Sept low), 1.2507 (100d MA), 1.2463 (31st Aug low), 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).

GBPUSD GBPUSD has stage a solid recovery rally, taking us back towards the 1.6109 level, reasserting the bullish bias in the short- to medium- term. However, there is still the 1-month bearish channel in play that could prevent the pair rallying much further. The support zone is located at 1.5979 (9th Oct low), 1.5920/40 (18d MA & uptrend), 1.5745/53 (30th July pivot & 100d MA), 1.5665 (uptrend channel floor), 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). Above 1.6067, watch for next resistance to come into play at 1.6143 (downtrend top, 20th April & 11th May high), 1.6236 (30th April high) and 1.6454 (29th Aug ’11 top).

USDJPY USDJPY has been fanned higher by the recent uptick in risk sentiment, but today we have seen a sudden reversal back to symmetrical triangle top (78.62). While today's break is a bullish signal we remain wary of piling into long and will wait on the sideline till we find clarity. On the downside, some support is eyed at 78.60 (triangle top now support), 77.94(Symmetrical triangle floor), 77.12 (13th Feb low) then 76.03 (3rd & 17th Jan low). Above us, resistance remains at 78.69 (Symmetrical triangle top), 79.00 (6th Sept high), 79.67 (20th Aug high), 80.11 (reversal), 80.62 (2nd May high), 81.60 (failed corrective rally), 82.56 (6th April high), 82.99 (3rd April high), trigger resistance at 83.40.

USDCHF USDCHF extended its sell-off to 0.9215 lows today, but since that point we have managed to consolidate a little higher. Nevertheless, the current trend remains bearish, so we anticipate the next leg for the pair will be lower. The next levels of resistance are located at 0.9421/30 (13th Sept, 1st Oct & 10th Oct high), 0.9580 (7th Sept high), 0.9661 (22nd Aug high), 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 0.9194 (7th & 11th May low) and 0.9300 (11th May high).

Resistance and Support: