Fed in Process of Orchestrating Policy Shift

MORNING SLICES

FUNDYS

While most currencies have been consolidating or tracking lower against the buck on the day, Kiwi stands out and has actually outperformed, with no direct catalyst for the demand other than some pre-RBNZ volatility. Perhaps some earlier comments from FinMin English that the government would end its wholesale funding guarantee for banks, in light of better market conditions, has helped to bolster the currency somewhat. The RBNZ is set to meet later today and while it is widely expected that the central bank will leave rates on hold at 2.5%, it will be interesting to see what the accompanying policy statement has to offer. Early indications seem to be favoring a more hawkish stance.

Relative Performance Versus USD on Wednesday (As of 11:35GMT) –

1)    KIWI              +0.57%
2)    AUSSIE         -0.25%
3)    SWISSIE       -0.01%
4)    EURO            -0.02%       
5)    CAD               -0.03%
6)    STERLING    -0.49%   
7)    YEN                -0.55%

The Australian Dollar also continues to outperform the major currencies, with the antipodean tracking higher on the day despite some discouraging data. While consumer confidence did manage to improve from the previous print, the much weaker than expected home loans data is more than unsettling and could begin to act as a strain on any additional Aussie gains. RBA Lowe was also on the wires talking of the challenge of growing the economy without generating inflation, while also warning of his concerns over a potential deterioration in the housing market. Elsewhere, in Japan, some secondary data including softer machine orders, failed to materially factor into price action. The Yen is the weakest major currency on the day, with the weakness attributed to reports that the BOJ is leaning towards additional easing in their monetary policy.

In European trade, Sterling emerged as the big loser, with some much weaker than expected industrial production and manufacturing numbers, forcing a fresh wave of across the board Pound selling. The single currency has already been under intense pressure in the face of political uncertainty and alarmingly high debt levels. PM Brown has come out with his talk on the economy and has tried to provide some level of comfort after saying that the government has a clear idea of what to do with the country’s debt and expects that Britain will maintain its AAA credit rating.

An article in the WSJ has been attracting a good deal of attention today, with the piece reporting that the Fed is now considering how to alter its language in its monetary policy statement to signal that a change to a more restrictive policy is on the horizon. This issue is apparently at the top of the Fed’s agenda for next Tuesday’s meeting, with the decision to end purchases of MBS also in the cards.

While the major currencies have mostly been consolidating over the past several days, the same is not true with some of the cross rates, as the major/commodity cross rates continue to drive to fresh multi-year lows. While ongoing concerns over the state of both the Eurozone and UK economies has diminished interest for the Euro and Sterling, market participants still find favor with the commodity bloc and continue to buy aggressively, despite severely overextended technical readings. A reversal in these cross rates is certain, and at present the question is only a matter of timing. It will be interesting to see what exactly the catalyst will be for the position adjusting.

Looking ahead, US MBA mortgage applications are due at 12:00GMT, followed by the more closely watched monthly budget statement (-$222B expected) later in the day at 19:00GMT, US equity futures trade flat, while  commodities are tracking moderately higher, led by oil.
 

GRAPHIC REWIND

 
TECHS

EUR/USD: Setbacks have stalled for now ahead of  1.3400 (61.8% fib retrace of the 2008-2009 low-highs), and although the overall structure remains bearish, the market looks as though it may be attempting to carve out a short-term base.  However, it is still too difficult to call and the market could just as easily be in the process of a bearish consolidation ahead of the next major downside extension below 1.3440. A break back below 1.3440 will expose a test by next psychological barriers at 1.3000, while a close back above 1.3700 delays and opens the door for some additional short-term corrective upside.

USD/JPY: Has been very well supported on dips towards 88.00, and we look for the most recent sharp rebound to open additional upside over the coming weeks back above critical medium-term resistance at 93.75. Last Thursday and Friday’s impressive rally reaffirms our outlook and only a close back under 88.00 would ultimately negate and give reason for pause. 

GBP/USD: Although the market remains locked in an intense downtrend, daily studies are in the process of unwinding from oversold levels. The risks from here are for some additional corrective relief, but ultimately, any gains should now be well capped ahead of 1.5200, where a lower top is sought out ahead of the next major drop below 1.4780.

USD/CHF: The rally has finally stalled out for now ahead of 1.0900, with the market in the process of consolidating. The risks from here are for some additional sideways trade to allow for studies to unwind from overbought, ahead of the next major upside extension beyond 1.0900.
 

FLOWS

UK corporate on the offer in Eur/Gbp. Option expiry in Aud/Usd @0.9130 today. Corporate supply in Usd/Jpy. Asian and real money demand for Gbp/Usd on dips. Kiwi generating bids from leveraged accounts.
 

TRADE OF THE DAY

No Trade: No new recommendations at the moment and currently running open positions in Eur/Aud, Eur/Cad, and Gbp/Aud. We booked profit on our Gbp/Jpy long trade on Monday for 330 points.  
 

PORTFOLIO OVERVIEW

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Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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