USD Finding Bids on Position Adjusting Ahead of FOMC Event Risk

FUNDYS

The Euro eyes next key short-term support below by 1.3115, while Cable has already broken its key short-term support by 1.5820 to trigger the formation of a double top on the daily chart. Meanwhile, Swissie weakness has been less impressive on its flight to safety bid status, while the Yen is the only major currency to track higher (albeit marginally) against the USD on similar risk aversion themes.

Relative Performance Versus USD on Tuesday (As of 10:30GMT)

1. YEN+0.02%
2. SWISSIE-0.45%
3. EURO-0.53%
4. AUSSIE-0.63%
5. CAD-0.69%
6. STERLING-0.87%
7. KIWI-0.92%

Technical studies have been warning of the need for a major USD reversal and we have felt that for this to occur, the Greenback will need to mount a recovery rally against all currencies at the same time. Today, we are finally seeing this play out, with the commodity bloc also coming under pressure.

All eyes are therefore keenly focused on the upcoming Fed rate decision, and we contend that the risks are for a less dovish accompanying statement than the markets are pricing in. At this point, the notion of implementing additional QE measures is premature and while we do not expect the statement to be upbeat, it could very well be the case that doves will be sorely disappointed. This should therefore continue to benefit the USD has interest rate differentials post the event risk narrow back in favor of the Greenback.

In the interim, we look for more position adjusting ahead of the Fed and we do not expect to see the USD come under any realintense pressure on Tuesday. Technically, the buck could be looking to carve out a meaningful base, but we would need to see a daily close back above 81.00 in the USD Index at a minimum to encourage this outlook.

On the data front, the Bank of Japan left rates unchanged at 0.10% as was widely expected and offered no real change to their accompanying monetary policy statement, with the usual line of the necessity to watch FX having no impact on price action. Elsewhere, New Zealand card spending contracted unexpectedly, Aussie business conditions were noticeably weaker, while Swiss SECO consumer confidence was a bit softer, and German inflation data was pretty much in line with consensus forecasts. Meanwhile, Sterling is one of the weakest currencies on the day despite a narrower trade balance and slightly better DCLG house prices, with the single currency weighed down by the earlier Asian session releases of discouraging RICS houseprices and BRC retail sales.

Looking ahead to North American trade, Canada housing starts (184k expected) and the new house price index (0.2% expected) are due at 12:30GMT along with US non-farm productivity (0.1% expected), and unit labor costs (1.3% expected). US IBD/TIPP economic optimism (45.5 expected) and wholesale inventories (0.4% expected) are then out at 14:00GMT, followed by some oil and gas inventory data at 16:00GMT. Volatility is then expected to pick up dramatically at 18:15GMT when the Fed announces its rate decision (unchanged at 0.25% widely expected) and comes out with the all important monetary policystatement. US equity futures point to a lower open by some 0.50%, while oil is under pressure to trade off by over 1.0%. Gold has surprisingly been unable to find any bids despite the broader price action, trading off by 0.50%.

GRAPHIC REWIND

TECHS

EUR/USD: Could finally be showing signs of a short-term top at a minimum, with the market stalling out above 1.3300 and rolling back over. However, at this point it is too difficult to call and we want to see a break and close below 1.3115 at a minimum for confirmation of a shift in the structure. A break below 1.3115 should accelerate declines back towards 1.3000, below which then opens a more meaningful drop into the 1.2700’s. Back above 1.3335 negates and opens a test of the 200-Day SMA just over 1.3500.

USD/JPY: Daily studies are still not quite oversold and there is still room for additional downside from here below next critical support by 84.80. However, any additional declines below 84.80 are not seen as sustainable, with the greater likelihood for a major upside reversal from there. As such, we would be looking for opportunities to buy the market on a dip towards 84.00 over the coming sessions.

GBP/USD: Waiting for a daily close on Tuesday for clear bias, but the latest break below 1.5820 has triggered a double top on the daily chart that suggests that some form of a high is now in place by 1.6000. Look for the latest break to now open a measured move downside extension back towards previous resistance now turned support by the 200-Day SMA just over 1.5500 over the coming sessions.

USD/CHF: Continues to chop around after being very well supported on dips in the 1.0300’s. However, it appears as though the fresh multi-day lows on Friday could now open some additional declines towards 1.0100 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

Offers ahead of and above 86.00 in Usd/Jpy; large stops below 84.80. Models and leveraged funds on the offer in Eur/Usd. Macro funds starting to liquidate long commodity currency positions.

PORTFOLIO OVERVIEW

The model portfolio has been reset as of August 2010 with a starting equity of $10,000. Please note that we still have some positions open that will not be tracked in this portfolio. We are currently Long Eur/Aud, Short Eur/Chf, Short Eur/Gbp, and LongUsd/Cad. However, we will continue to update these positions as they progress.

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

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