Bank of Canada Takes Center Stage in North American Session

MORNING SLICES

FUNDYS

Fed Bernanke’s comments on Monday have once again indirectly put pressure on the USD after the Fed Chair mitigated the latest impressive round of US employment data and reiterated that rates would remain low for an extended period of time. While the data was encouraging, there are still a number of hurdles that need to be overcome before the Fed can confidently look to remove stimulus and begin to reverse monetary policy. The market reaction has seen currencies well bid and gold once again rallying well off of its spike lows from Monday.  The rally in gold comes despite comments from Korea that the surge in the yellow metal has been an illusion and that most central banks are not buying the commodity.

Relative Performance Versus USD on Tuesday (As of 11:00GMT) –

1)    YEN              +0.97%
2)    KIWI             +0.22%
3)    AUSSIE        +0.14%
4)    SWISSIE     +0.13%       
5)    EURO           +0.11%
6)    CAD              +0.08%   
7)    STERLING    -0.64%

A lot of attention in Asia has been centered around the unveiling of Japan’s stimulus package, with the government approving a Yen7.2T set of fiscal spending measures to support the local economy. The Japanese government has also included a warning in its stimulus statement that excessive fluctuations and disorderly FX moves are a negative for the economy, and that it will continue to carefully monitor moves in the currency market. On the data front, Japan’s economic indicators continue to show improvement with a rebound in exports and output. Elsewhere, Australian business confidence data rose to a seven year high overnight, while business conditions slipped back from their 2009 highs set in November. Moodys has been on the wires shaking things up a bit after saying that the US and UK must shrink their ballooning deficits or risk a downgrade to their triple-A credit ratings.

In European trade, currencies have continued to extend gains against the buck, with the exception of Sterling, which is the only currency that trades lower against the Greenback on Tuesday thus far. Although UK Halifax HPI and CBI industrial trends were better than expected, a combination of a weaker industrial production, along with the Moodys credit warnings have been seen weighing on the single currency. In the Eurozone, German industrial production came in on the softer side of expectation. Elsewhere, the ongoing saga in Dubai continues to generate attention, with Dubai World finding some support from the government to help ensure that the beleaguered company stays afloat. Australian central banker Stevens was on the wires talking rates and helped to prop the higher yielding antipodean after saying that strong growth may push up rates even further. 

Looking ahead, Canada takes center stage in the North American session, with housing starts (156k expected) kicking things off at 13:15GMT, followed by the more heavily watched Bank of Canada rate decision (unchanged 0.25% expected) at 14:00GMT. In the US, IBD/TIPP economic optimism (48.8 expected) is due at 15:00GMT, followed by some oil, gas and distillate data at 21:30GMT. US equity futures point to a slightly firmer open, while commodities are mixed with oil higher and gold mildly lower.
 

GRAPHIC REWIND
 
 

TECHS
 

EUR/USD For several weeks we have been writing that a close below the 50-Day SMA would be required to force a shift in the structure. We have finally now seen this play out on Friday, after the market pulled back sharply to close below the medium-term SMA. Next key support comes in by Monday’s 1.4755 lows, and we would expect this level to be easily taken out over the coming sessions ahead of a retest of major support by 1.4625. For now, look for any intraday rallies to be well capped ahead of 1.5000.

USD/JPY The corrective rally out from the recent 84.80 multi-year lows appears to be stalling out, and a fresh lower top is now sought out below 92.35, ideally by 90.80, ahead of an eventual retest and break below 84.80. The overriding trend is still intensely bearish and market participants should look to take advantage of any overdone rallies to build on short positions. Only back above 92.35 would give reason for concern and delay structure.  

GBP/USD Our outlook for the pair remains well intact with the market adhering to the multi-month consolidation after failing ahead of 1.7000 and rolling back over into the well defined range. Look for an eventual break below 1.6250 to open the door for some deeper setbacks over the coming weeks towards next key medium-term support by 1.5705. In the interim, below 1.6250 will expose initial previous resistance turned support by 1.6130. Rallies should now be well capped ahead of 1.6700, with only a clear break back above this psychological barrier to delay outlook.

USD/CHF Our core bullish bias is still intact, with the market unable to establish itself on a two-day close basis below parity, ahead of the latest sharp topside reversal. This puts our major bottoming scenario back in play, with a closer look at the weekly chart more clearly defining the reversal formation. The neckline for the base doesn't come in until 1.0340, and a break above this level will be required to confirm and accelerate gains back into the 1.0700's. Ultimately, only a close back under 0.9915 would negate outlook and give reason for pause. For now, look for any intraday setbacks to be well supported ahead of 1.0050.
 

FLOWS
 

Russian accounts selling Gbp/Usd. US investment house and Middle Eastern bids in Eur/Usd. Macro funds and oil importers bidding Usd/Jpy off lows. Model funds bidding Aussie and Kiwi on dips. Local accounts buying Usd/Cad.

TRADE OF THE DAY
 

Gbp/Aud: In the process of a multi-day consolidation since rallying out from the recent multi-year lows set by 1.7330 in October. Any dips have been very well supported in the 1.7800’s of late, and we would expect to see this area continue to support, with a medium-term higher low now sought out by 1.7695 ahead of the next major upside extension beyond 1.8370.  Longer-term studies certainly confirm our constructive outlook, with the market looking very stretched and due for additional strength over the coming weeks and months. We contend that a major bottom is now in the process of carving out and do not expect to see a retest of 1.7330 anytime soon. STRATEGY: BUY @1.7850 FOR AN OPEN OBJECTIVE; STOP 1.7650. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON TUESDAY. 3X LEVERAGE.

PORTFOLIO OVERVIEW

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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