Currencies in Holding Pattern Ahead of NFPs

FUNDYS

The Euro and Pound closed marginally higher on the day, while both the Yen and Swissie rallied more impressively. The one ray of light came from some relative weakness in the commodity currencies, with Aussie finally showing some exhaustion, Kiwi getting whacked and Cad selling off sharply into the latter half of the day after standing out as a gross outperformer early on. Fundamentally, data in the US was soft and this did not help the Greenback’s cause, with the currency’s reactions now more positively correlated to the economic data.

Relative Performance Versus the USD on Friday (as of 09:30GMT) –

1. CAD +0.01%
2. SWISSIE -0.01%
3. EURO -0.05%
4. AUSSIE -0.08%
5. STERLING -0.24%
6. YEN -0.27%
7. KIWI -0.34%

Since then in over-night trade and this morning in Europe all has been quiet with traders sitting on their hands ahead of US employment data due later. Eur/Usd has remained in tight range despite the raft of Euro-zone data that has been released this morning as traders refuse to take new positions out of fear of being wrong-footed by a surprise NFP reading.

Sterling is has been dramatically underperforming on the back of a much softer than expected industrial production reading as well as PPI and manufacturing production coming in mostly below consensus. Today’s data kicked off a crucial two-week period for domestic data and events that could reignite calls for more QE or cement expectations that the BoE will have to push back thoughts of tightening well into 2011.

Elsewhere, the Russia ban on wheat exports yesterday is generating a lot of attention this morning with some papers mulling the gloomy scenario of a full blown food crisis like that seen in 2007-8. Wheat futures shot up yesterday some 8% and have added another 7% in over-night electronic trading. Further bans, which are expected from Ukraine and Kazakhstan, could spark panic buying and government hoarding across the globe triggering sharp price rises in everyday food prices.

Meanwhile, more jaw-boning over the yen has been playing out in Japan. First, ex-BoJ Taya was out saying the BoJ may ease monetary policy only if the headline drops below the 80 level and even then is unlikely to intervene unless the dollar moves by 3 or 4 yen in one day. Followed by the chair of Japan’s business lobby who said that despite yen strength advanced nations, like Japan, don’t intervene in their currencies.

On the data front, Swiss unemployment fell once again in line with expectations as the job market continues to recover. French finances came in better than expected returning to a narrowing trend after blowing out in May. Italian industrial production was softer than expected and GDP came out in line with forecasts. UK data on the whole came in softer, with industrial production contracting sharply amid expectations of a modest expansion, manufacturing production was weaker and PPI input contracted more than expected.

Looking ahead, German industrial production (0.5% expected) is due at 10:00GMT followed by Canadian unemployment rate (7.9% expected) at 11:00GMT.Before attention turns to the US employment data due out at 12:30GMT and forecasts for Non-farmpayrolls looking for a 65K drop. Later in the session is Canadian Ivey PMI (55.5 expected) at 14:00GMT wrapping things up for the session. US equity futures and commodities are trading flat.

GRAPHIC REWIND

TECHS

EUR/USD: Looks to have finally stalled out to end a sequence of 9 consecutive daily higher lows after the market failed to extend to fresh multi-day highs beyond 1.3260 and reversed sharply back below Tuesday’s low. The daily RSI has now crossed down from overbought and deeper setbacks are now favored into initial support by the 10-Day SMA and rising trend-line support by 1.3100 at a minimum with an acceleration seen on a sustained break below towards 1.2700. Only back above 1.3260 negates and gives reason for pause.

USD/JPY: Setbacks have finally stalled out just shy of the critical multi-year lows by 84.80, with the market putting in a solid positive close on Wednesday trade. However, the pressure still remains on the downside, and at this point we would be surprised to not see the 84.80 level taken out. Our medium-term and longer-term view is net bullish so once this level is take out we would recommend looking to be buyers. In the interim, a break back above 87.00 would be required at a minimum to relieve downside pressures.

GBP/USD: The daily RSI is looking to cross down from overbought readings and a bearish reversal day on Wednesday following 9 consecutive positive closes helps to strengthen the likelihood for some additional corrective declines over the coming sessions. There is no real support until the 1.5685-1.5710 area, and we would expect to see this area tested at a minimum before even considering the prospects for bullish continuation. However, it is also possible that a material top is now being carved out ahead of a much more significant decline. Ultimately, only a break back above 1.5970 would delay outlook.

USD/CHF: Continues to chop around after being very well supported on dips into the mid 1.0300’s. Wednesday’s bullish price action strengthens basing prospects and could open additional upside back towards 1.0640-80 over the coming sessions. Ultimately, the overall structure is still net bearish and a break back above 1.0680 would be required to relieve downside pressures.

FLOWS

Swiss name on the bid in Cable and a German bank on the offer. An ACB and local accounts buying Usd/Cad on the dips.

Written by Joel Kruger and Jonathan Granby

If you wish to receive Joel’s reports in a more timely fashion, email jskruger@fxcm.com and you will be added to the distribution list.

If you wish to discuss this or any other topic feel free to visit our Forum Page.