morning slices

Less Hawkish RBA and Deterioration in Financials Triggers Widespread Currency Liquidation

A very wild European session of trade despite the lightened calendar, with weaker than expected UK construction PMI hardly factoring into price action. The market was initially shaken early on in Asia with the much less hawkish than expected RBA statement after the central bank raised rates 25bps as widely anticipated to 3.50%. However, it was some elevated concerns over a deterioration in the financial sector that really got things going.

MORNING SLICES

Fundys – A very wild European session of trade despite the lightened calendar, with weaker than expected UK construction PMI hardly factoring into price action. The market was initially shaken early on in Asia with the much less hawkish than expected RBA statement after the central bank raised rates 25bps as widely anticipated to 3.50%. However, it was some elevated concerns over a deterioration in the financial sector that really got things going. UBS, RBS, Llyods and the Irish banks were all in the news with negative headlines, while overseas equities plunged as a result. EU Almunia did not help matters after saying that Greece has not taken effective action to curb its deficit as had been requested by the EU FinMins. These developments weighed heavily on investor sentiment and led to a massive liquidation in higher yielding and riskier positions in favor of a flight to safety. The much talked about 50-Day SMA in Eur/Usd was finally overcome, with a huge bout of stops tripped up on the break below 1.4660. Commodities were also weighed down materially on similar themes and it seems as though the investor jitters have now returned to the marketplace. Traders should continue to expect volatility in the days ahead in light of the upcoming FOMC and NFP event risk.   

Relative Performance Versus USD on Tuesday (As of 12:00GMT) –

1)    YEN               +0.11%
2)    CAD               -0.60%
3)    STERLING    -0.74%
4)    EURO            -0.91%       
5)    KIWI              -0.96%
6)    SWISSE       -1.07%   
7)    AUSSIE        -1.18%

Looking ahead, US factory orders (0.8% expected) are due at 15:00GMT, while total vehicle sales (9.8M expected) and domestic vehicle sales (7.3M expected) are also due. US equity futures point to a lower open by some 1%, while commodities are well offered. 

RBA REFLECTIONS: We contend that the latest RBA statement is very appropriate and puts the central bank in a much better position in light of the fragile global economic environment. We had questioned the previous rate decision and were even more concerned with what we believed to be an overly hawkish central bank that was not properly protecting itself against the risks for a potential double dip global recession. We now see the RBA in a much better position after pulling back a bit and now leaving the door open for a pause in rates going forward. Arguably, a more hawkish RBA that continued to signal more hikes ahead, would have had a more detrimental impact on the Aussie, with market participants likely to grow concerned that the central bank was starting to lose touch with the reality of the broader global macro environment. This hedged approach should ultimately serve to benefit the Australian economy going forward.

Graphic Rewind -

 
Techs - EUR/USD A close below the 50-Day SMA (1.4660) would be viewed as a significant development with the price action suggesting a material shift in the medium-term structure. A close below 1.4660 should  expose direct retest of 1.4480 further down. USD/JPY The latest rally has stalled out just shy of our initial objective at 92.55 with the market initially well capped by the bottom of the Ichimoku cloud. Daily studies do however still show plenty of room to run, and we maintain our constructive outlook since the pair based out by 88.00. A higher low is now sought above 89.00, to be confirmed on an eventual break back above 92.55. Back under 89.00 however, will negate and put pressure on downside with market participants eying a retest of the critical 87.15 matched trend lows from 2008 and 2009. GBP/USD Is in the process of consolidating the heavy setbacks seen on 23Oct after failing by formidable internal range resistance in the 1.6700 area. Any recovery rallies are now expected to be well capped in the 1.6500-6600’s, with a lower top sought out ahead of a fresh downside extension through next key support at 1.6240.  Monday’s downside break encourages after ending a sequence of consecutive daily higher lows. Ultimately, only back above 1.6480 would now delay and give reason for pause. USD/CHF The market is attempting to recover after posting fresh 2009 lows by 1.0030 and just shy of parity on 23Oct. While the overriding trend is still intensely bearish, we like the idea of looking to buy at current levels, with both shorter-term and medium-term studies showing the need for a healthy rebound. The recent break back above 1.0230 is really encouraging with the market putting in a strong bullish reversal signal. Look for setbacks to now be well supported ahead of 1.0200 in favor of a fresh upside extension back towards 1.0500 over the coming sessions.    
 
Flows – Currencies sold heavily across the board from a variety of accounts. UK clearer and US prime name selling Eur/Usd.  Asian and French accounts bidding Sterling off lows; model funds on the offer. UK clearer on the offer in Aussie.

Trade of the Day – No Trade: Booked profit on Gbp/Usd short from 1.6525 @1.6275. Markets have been very volatile and we prefer to take to the sidelines for now until a clearer opportunity presents.  

P&L Update and Overview: Many of you have been asking for a way to better track trading results and open positions. In response to these requests and in an effort to be fully transparent, a simulated portfolio was created in June to track and mirror all recommendations and trades. Below is a return on equity curve since inception on June 1, 2009, along with an open and closed position tracker. I am hopeful that this will make things easier for you all.

 

Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
If you wish to receive Joel's reports in a more timely fashion, e-mail jskruger@fxcm.com and you will be added to the "distribution" list.

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