Focus on the Second Round of LTRO

Forex News and Events:

The risk sentiment did not show improvement since the release of the hawkish FOMC minutes yesterday. For the end of the week, the focus shifts to Europe as ECB gives details on the second round of LTRO repayments and the Italian elections is scheduled on Sunday.

In Japan, Yen weakened overnight as the Japanese PM Abe meets Obama in Washington today. The enthusiasm remained limited as the market is now holding its breath to see how supportive the US will be for a further weakening in Yen.

Second Round of LTRO

Today, the key event is the second round of the LTRO repayments. The markets expect the repayments to some up to EUR125bn. While further liquidity is to be breathed in, we remain skeptical on the downside risks of such drain on the fragile Euro-Zone economy.

The German GDP remained stable in the fourth quarter, perfectly in line with the market expectations.
According to IFO, the business climate, the current assessment and the expectations showed improvement in February. In Italy, the January CPI numbers came in as forecasted. However, EU cut the Euro-Area 2013 GDP forecast to -0.3% from 0.1%, while Spain 2012 budget deficit reached 10.2%, the highest in three years as reported by EU. ECB’s Hansson said that he didn’t see the exchange rate impact on price stability. However, the recent revision on growth forecasts to not tell the same story.

The average directional index indicates that the recent bullish trend in Euro is losing strength. We remain negative on Euro, but trade carefully as the LTRO repayments take out liquidity, and this can push the Euro upwards in the short-run. We highlight that the high volume of speculative positions on Euro increase the risk of a sizeable correction.

GBP Failed to Extend Gains

In Asia, GBP made an attempt to consolidate from its 2.5-year lows seen yesterday over the combination of dovish BoE and hawkish FOMC minutes. GBPUSD rallied to 1.5321 early in the session on short-covering bids, yet failed to defend its strength above 1.53. BoE’s Miles said that he sees additional QE up to GBP175bn to bring the UK growth up to 3% per annum for 3 years. On the back of the dovish policy outlook, we believe that GBP has more room to further lows. RSI is now at 25.8%, while the bearish trend remains strong.

JPY Holding its Breath

Yen lost against all of its major counterparts before Abe-Obama meeting in Washington today. In February, Yen traded in 92 – 94.50 range, and failed to break higher despite the announcement of the early exit of the BoJ’s Shirakawa and the green light out of G20 meeting. Now, the market seeks support from US to push the Yen weakness further. We remain bearish on Yen, and do not expect exaggerated moves for the end of the week.

Today's Key Issues (time in GMT):

2013-02-22T13:30:00 CAD Jan CPI m/m, exp. 0.2%, last -0.6%
2013-02-22T13:30:00 CAD Jan CPI y/y, exp. 0.6%, last 0.8%
2013-02-22T13:30:00 CAD Bank of Canada Jan CPI Core m/m, exp. 0.2%, last -0.6%
2013-02-22T13:30:00 CAD Bank of Canada Jan CPI Core y/y, exp. 1.0%, last 1.1%
2013-02-22T13:30:00 CAD Dec Retail Sales m/m, exp. -0.3%, last 0.2%
2013-02-22T13:30:00 CAD Dec Retail Sales Less Auto m/m, exp. 0.2%, last -0.3%

The Risk Today:

EURUSD EURUSD has sold-off to 1.3167 low (our target) and along the way violating key uptrend channel (further bearish signal). With momentum indicators pointing towards a deeper correction into bearish territory and short term downtrend still in play, the next logical targets on the downside are likely to be 1.3047 but first need a clean break of current support. There is considerable risk on the horizon for the single currency including this weekend Italian election. The next support is located at 1.3160 (21st Feb low), 1.3047 (10th Jan low),1.2931 (11th Dec low), 1.2878 (7th Nov reaction high). The first level of resistance remains at 1.3460 (14th Feb high), 1.3578 (7th Feb high), 1.3690 / 1.3710 (27th Sept high) then 1.3868 (9th Dec high).

GBPUSD GBPUSD’s has rallied off the lows to 1.5323 high after a aggressive sell-off. Currently indictors are slightly overstretched which could force a further relief rally, however any buying will likely be short lived. Unlike the Fed, expectation for the BoE is more QE which should equal further erosion in GBP. The support levels from here are thin with 1.5119 (9th July 10’ low), then 1.4950 (8th July 10’ low).Watch for next resistance to come into play at 1.5553 (15th Feb high), 1.5689 (13th Feb high), 1.5850 (8th Feb high), 1.5891 (200d MA & 21st Jan high), 1.6007 (18th Jan high), 1.5921 (200d MA), 1.6180 (10th Jan high), 1.6340 (2nd Jan high) and 1.6454 (29th Aug ’11 top).

USDJPY Not much has changed on the tech, except for the appearance of a long legged doji, on Wednesday, suggesting an reversal of trend, on the daily. In broader terms, the cross of momentum indicator suggest an end to the consolidation phase (development of asymmetrical triangle). Any further pullback would be support by the 21d MA at 92.63 and chance to reload long positions for an extension of broader bull trend to 95.00 (supported by US 10s on offer).Above us, minor resistance remains 93.80 (13th Feb high), 94.98 (6th May high) 95.00 (psychological level), 96.00 (11th June), then 97.75 (7th Aug high). On the downside, support is eyed at 92.63 (21d MA), 91.93 (5th Feb low), 91.00 / 22 (25th Jan base top), 89.35 (11th Jan high), 88.10 (23rd Jan low), 87.60 (16th Jan low), 86.64 (27th Dec high), 85.54 (5th April high), 84.23 (15th March high) 81.50/69 (15th Nov. high & 28th Nov. low), 81.00 (16th April pivot), 79.06 (9th Nov low), then 78.75 (8th Oct high).

USDCHF USDCHF has rallied to 0.9321 peak but since has mildly dipped lower. As the pair was finally able to break above resistance around 0.9293 the move should opened the path to another strong surge to highs of 0.9385. The next levels of resistance are located 0.9385 (18th Jan high), 0.9457 (21st Sept high), 0.9515 (13th Nov high & uptrend top), 0.9610 / 20 (26th Aug high), 0.9810 (10th Aug high & uptrend channel), 0.9900 (2nd Aug high), and 1.0000 (psychological resistance). The first levels of support remains at 0.9180 (21d MA), 0.9085 (20th Dec low) , 0.9041 (1st May low) then 0.8928 (Feb 12’ low).

Resistance and Support: