Forex FunnyMentals

Market Review

Across-the-board dollar dumping continues on two themes, the idea that equity markets are not done with their 3-month rally following a quick turn-around of last weeks pullback, and the FOMC’s latest (April 28/29) minutes where the Fed seems to have considered further monetization of debt.

In the equity front after last weeks pullback in the indices we find ourselves once again poised to see new highs after Tuesday’s sharp bounce. The thinking here is that with financial markets typically front running the real economy by 6 to 12 months we may have seen a bottom and are turning around instead of being in a bear market rally. Consequently, low yielders, ie dollar and yen, are being dump fitting into the role of funding currencies.

Concern over the Fed minutes revolved around the question of further expanding the current $1.75 trillion asset purchase program to spur growth in the economy. While in the end preferring to adopt a wait and see stance the fact that this was under consideration underscores the idea of lingering downside risks to the economy and the policy preference for printing more money that would in the long-run degrade the value of the currency.

While not eliciting much of a response from the market Eurozone numbers continue to underscore how policy makers may have significantly underestimated the severity of economic conditions. This as German PPI figures for April came in -1.4% month-on-month well below the -0.2% consensus and an annualized -2.7% to suggest there could be further scope for policy easing and expanding the money base in the Eurozone should region wide numbers follow the German example.

From Canada economic numbers seems to have been shrugged off, given the general theme of dollar dumping allowing the loonie to gain ground over the greenback. Still we should point out that loonie gains are to be viewed as selective as a -0.1% month-on-month headline read for April CPI and a -1.1% leading indicator puts the Canadian economy in similar straights as that of the US.

In Radar Screens

Thursday will be a long day for the markets with second liner type data coming out from all over but very few in the way of hard hitters. Of the latter attention should be focused on April Retail Sales numbers out of the UK where consensus forecasts points to an 0.5% read month-on-month, a figure that should provide further upside for the rallying Cable.

Trading Filter

Despite the mixed close, proximity to bear rally highs among the equities suggests this should remain as the key barometer of risk taking appetite. With the DAX index already seeing new highs we look forward to the rest of the key European and US indices showing similar moves going into Thursday trade with new highs among them suggesting we stick to and be ambitious about Euro, Cable, Aussy and Loonie objectives.

Technically in a day of trading breakouts of particular interest for the markets will be our EURGBP cross, while previously a dull pair. Action on this over the last six months have seen extreme volatility and we find ourselves again at a possible watershed event. In daily charts EURGBP is poised for a sub 200day ma close taking with it the 50 Fib retracement level for the 10/20/08 to 12/30/08 rally paving the way for a possible return to the ranges of the first half of 2008 in the coming weeks. And further underpinning Cable against the other currencies.

EURUSD

The breakout from our descending wedge continues managing to move beyond the 38.2 Fib level for the sell-off from historic highs. At this point path of least resistance going forward should be for the upside with an immediate swing objective at 1.3965 before the next Fib level at 1.4182. Intraday signals however are mixed the loss of momentum suggesting the need for a pullback particularly given the long wicks we see in the 4H candles.

Preferred scenario: Bottom picking around 1.3693 the 23.6 Fib of the current rally from 5/07 with immediate objective calling for a retest of the 1.3829 highs before 1.3965 with stops under 1.3670.

Alternative view: Buy stops at the break of 1.3829 with immediate objective of 1.3965, stops under 1.3745 (38.2 Fib of the 7/15/08 selloff).

GBPUSD

Cable remains our preferred currency for a position trade as we keep a close eye on the EURGBP cross. A convincing break of the floor on that pair will likely stall the EURUSD rally and allow GBPUSD itself to move quickly towards the next key threshold 38.2 Fib at 1.6413. Currently we are trying to push through a previous high at 1.5738/40 our next resistance likely to be the psychological 1.6000. At the moment intraday charts are presenting a confluence of shorts suggesting a pullback may be imminent with key pullback points for the weeks rally at 1.5532 (38.2 Fib and congestion resistance), minor pullback points may also be seen out of 1.5630 23.6 Fib for the weeks rally.

Preferred scenario: Bottom picking around fib pullback points of 1.5630 (23.6 Fib) and / or 1.5532 (38.2 Fib) with tight stops under these. Immediate objective for such a move will be retest of highs at 1.5789.

Alternative view: Buy stops at the break of 1.5789 highs for a run to the psychological 1.6000.

After a brief surge following a poor open, US equity markets ended in negative territory seeing currency markets sticking to their risk averse tone as investors chew on the implications of the ‘swine virus’ scare that hit the world like wild fire over the weekend. Despite the geographic scale of the virus reach though, with most of the deaths reported confined in Mexico we expect markets will soon forget the negativity with the unpredictable event risks going forward likely to remain the Q1 corporate results with half the companies listed in Deutsche Borse reporting this week. Today in Asia about the only event risk worth noting are March Retail Sales figures with consensus forecasts calling for an annualized -4.9% read following the previous -5.8% contraction. For currency markets this could serve as a good excuse to further risk aversion plays as we keep a close watch on the lows of the likes of  EURJPY (125.49), USDJPY (96.33), AUDJPY (68.03), along with Euro (1.30004) and Aussy (0.7066) violations of which could be seen as triggers for even more weakness in the Asian trade.

The holidays proved a good technical market as traders had few surprise catalyst to worry about and throw a monkey wrench on their plans. With much of Europe still closed for Easter Monday risk takers easily the major higher though losing steam with the open of New York markets where a mixed performances among equity indices also saw us in another range. Despite yesterdays gains going forward we do point out continuing concerns over how the earnings season will turn out and while expectations have been lowered severely that we can get positive surprises the concern here is what businesses outlooks are going to be as we remain in a recession. After all the cost cutting has filtered through to operations businesses can only hope for a real turnaround and the burgeoning claimant count states that we are far from that. For today, the influx of money as we return to normal liquidity will prove a decisive test for yesterdays upside breakouts. We may have seen some very big white candles in our daily charts but hourly suggests we think of pullbacks in the likes of EURUSD, GBPUSD and their Yen crosses as a confluence of short signals begin to emerge.

Surprise, surprise the ECB has just cut its rates a mere 25bps instead of the 50bps markets were looking for. With markets pricing in a more aggressive tightening of the rate premium between the Eurozone and the UK since Monday we now look for a turnaround in the EURGBP sell-off and consequently will shift our focus on EURUSD from the earlier GBPUSD trades. Still we continue to favor the long side of both given the positive talks we are hearing surrounding the much anticipated G20 statement and strong performance of the equity markets.

Today’s well-publicized event risk will be the G20 meetings though how things are going to turn out there is any bodies guess. One thing that is clear, we will not get the kind of global coordination on stimulus efforts that the Americans prefer, as European delegates are likely to stick to their pop-gun approach than massive spending considering guidelines set by the Euro charter. With governments heavily in debt the west may want to spend its way out of a recession but it takes a bold politician to raise the specter. Meanwhile Asian giants will be joining with hopes of raising their international profiles, though the Japanese are likely to be stymied with their worst recession in decades while China is likely to get more things on its direction as already we hear willingness on further strengthening the IMF. A revival of the SDR’s role in global economics to the extent of immediate post-Bretton Woods era though is unlikely, there will be no free lunches and the Chinese would have to allow market forces to dictate the Yuan’s value and be ready for the responsibility if they seek to supplant the dollar with another as a reserve currency. For the markets then expect an even more jittery trading day though lets not forget that we will also be seeing an ECB rate decision with yesterdays action suggesting we are already pricing in a 50bps cut again considering the slide in EURGBP.

EURGBP charts are showing signs of a turnaround from the hammer of 0800GMT suggesting we now look for EURUSD as the likely big gainer of the turnaround in equity indices succeeding triggers for the rally at 1.3253 38.2 Fib of 3/30 rally and key resistances at 1.3340 threshold. Among the releases from Europe most surprising were the Chartered Institute of Purchasing and Supply’s Manufacturing Index for the UK turning out at 39.1 against markets 34.9 consensus though still well below the boom/bust line. Going forward US markets will be seeing some heavy hitters with the ISM Manufacturing PMI expected at 35.8, Pending Home Sales consensus at 0.2% and ADP Non-Farm Employment Change forecasted at -660K.

Asian markets saw low yielders easing off against the likes of Euro, Cable and Aussy following a fresh round of poor economic numbers from Japan suggesting that terrible Q4 GDP results are not unique and we will be seeing more such disappointing numbers going forward. Here we note the Unemployment Rate rising to 4.4% with Personal Income for February down an annualized -2.4% from 1.0% previously as more leading figures such as March PMI came in 33.8, well below the boom/bust line, and Housing Starts contracting -18.7% year-on-year. A poor performance from Asian equity indices however meant that we have no outright reversals for the risk aversion trends in the market though the dragonfly doji in GBPUSD is intriguing should we have prices pushing through the 1.4358 threshold. Moving forward intraday charts continue to look mixed though a strong start in European equity indices have us looking to further ideas of a reversal in the daily sell-off among Euro, Cable, and Aussy. For now the next key test for the markets will be how it weather the Flash Eurozone CPI figures with consensus forecasts at 0.7% annualized though risks point for a strong read which could be a problem when it comes time for the ECB to cut rate again this Thursday.

AUDJPY’s break of 67.20 continues with its sell-off the next price objective at 64.30 the 61.8 Fib for the March rally. Other Yen pairs are also selling off with EURJPY now looking for the 125.81 23.6 Fib from 7/23 as its next key support area previously the breakout point for the March rally. This as GBPJPY having returned under 141.72 should now be looking at 135.30 as its next key support the floor of the four week congestion from late February to March. For the moment it appears retail traders are being blamed for the follow up to the technical breakout with people arguing end of the fiscal year close for Japan providing real impetus though we do point out that real money trades were done Friday with today’s settlement date already for April. Still as of now we have multiple reasons calling for dollar and yen strength while they don’t really sound like logical choices for risk aversion we ask, for the moment what other choice is there besides the Swissy as we have equity markets in Asia ending poorly and now European equities starting weak.