Greenback Remains Under Pressure Ahead of Event Risk

MORNING SLICES

Fundys – It has mostly been a session of consolidation with market participants content on taking to the sidelines ahead of the much anticipated event risk this morning in the form of the BoE and ECB rate decisions. While the ECB should generate less attention and is expected to maintain its same line on the outlook for the Eurozone economy, the UK event risk should generate some more volatility, with traders anxiously waiting to see what the MPC does with its quantitative easing measures. Data in the European session was quite mixed, with Swiss SECO impressing, while Swiss CPI was bang on consensus. In the UK, industrial production and manufacturing output were above forecast, while in the Eurozone, retail sales was much weaker. Some pre-release rumors of solid UK industrial production ended up mitigating any of the positive Sterling reaction to the local data. Also in the UK, ex-BOE ultra-dove Blanchflower did not holding back ahead of this morning’s BOE rate decision after saying that the MPC’s “feeble six” needed to shape up and increase QE today by at least GBP50B. Blanchflower has been very critical of the MPC’s decision making and contends that the central bank has not been accommodating enough and has put the economy at risk as a result.     

Relative Performance Versus USD on Thursday (As of 10:15GMT) –

1)    YEN               +0.63%
2)    STERLING    -0.07%
3)    CAD               -0.08%
4)    EURO            -0.11%       
5)    SWISSIE       -0.17%
6)    AUSSIE         -0.27%   
7)    KIWI              -0.64%

So far, Kiwi is the biggest loser on the day with some weaker than expected employment data (9 year high for unemployment rate at 6.5%) fueling additional liquidation of the higher yielding currency, while some very downbeat comments from RBNZ Bollard have not helped matters. The governor has said that the market is not recognizing New Zealand’s dull recovery and that the smaller economy can not be compared to its much more diverse Australian cousin. Meanwhile in Australia, while the headline trade balance numbers were slightly better, market participants were not happy with the downward revision to the previous print and deterioration in the data series. Also weighing on the Australian Dollar was the news that the country plans on imposing a 16% provisional dumping duty on Chinese aluminum extrusions.

Volatility and price action should only pick up from here with the rest of the week loaded with key event risk and economic releases, highlighted with today’s BOE and ECB rate decisions, and Friday’s US NFPs. Looking ahead to the North American session, the BOE and ECB rate decisions kick things off at 12:00GMT and 12:45GMT respectively. Canada building permits (1.6% expected) are due at 13:30GMT, along with US non-farm productivity (6.5% expected), unit labor costs (-4.2% expected), initial jobless claims (522k expected), and continuing claims (5750k expected). Canada is back on the calendar at 15:00GMT with the release of Ivey PMI (58.0 expected). Finally, US chain store sales caps things off at 16:00GMT. US equity futures are pointing to an flat open, while commodities are slightly offered.

Graphic Rewind -

 
Techs - EUR/USD The market has now entered a period of consolidation which we contend to be a bearish consolidation in light of the previous weekly bearish reversal. While we did not expect to see gains extend beyond 1.4860, the recent break above this level has been met with some stiff resistance and the market has failed to close above. This keeps the bearish consolidation prospects intact, in favor of an eventual break back below the 50-Day SMA and key short-term lows at 1.4625. Ultimately, only back above 1.4970 which represents the 78.6% fib retracement off of the 1.5060-1.4625 move, would negate outlook and give reason for re-think. USD/JPY The pair has been unable to gain any upside momentum from the rally out from the 88.00 recent base with the market once again rolling over on Wednesday to put in a very prominent bearish outside day. This now suggests that a lower top is in place by 91.25 ahead of some renewed weakness back towards 88.00 over the coming sessions. A break below 88.00 should then accelerate declines to challenge critical support at 87.15. Only back above 92.30 would negate bearish outlook.  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.  Look for a break below initial support at 1.6400 to accelerate. 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 on the weekly chart. Look for setbacks to now be well supported ahead of 1.0100 in favor of a fresh upside extension back towards 1.0500 over the coming sessions.    
 
Flows – Asian central bank and macro account demand for Eur/Gbp. Heavy cross yen sales from leveraged names. US prime name on the offer in Aud/Usd; model accounts bidding. 

Trade of the Day – No trade for Thursday as of yet, with our book already exposed through Eur/Aud. We will wait for the dust to settle after the markets digest the morning event risk and then see if there are any new opportunities that present. Stay tuned….

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
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