ACM Forex
11-01-2010, 07:14 AM
Huge week for financial markets as several Central Banks will be having their meetings along with elections in the US – some leading economic data is also due out this week (just in case you have not heard). All together, the week should make for some directionless volatility. We suspect that the highlight of the week, the FOMC meeting, will underwhelm the market regarding the size and scope of QE2.
While the initial injection will likely fall short of expectations, incremental future asset purchases are going to remain data dependent and thus further easing will be even more conditional. Given this base scenario we expect a slight rally in USD following the FOMC meeting, however we doubt any strong directional move.
FX markets are seeing a slow erosion of USD positioning this morning ahead of the upcoming FOMC meeting and today’s better than expected Chinese PMI. USDJPY fell to 80.21 as US treasury yields fell on Friday on the back of increased QE expectations and the pair played catch-up this morning throughout the Asian sessions. A strange aggressive spike in USDJPY around the Asian open fueled rumors that the Japanese Ministry of Finance was testing intervention, however Japanese officials have been quick to issue denials and the lack of interbank confirmations has left traders scratching their heads.
Rumors that a rogue algorithm or fat finger combined with a market already-on-alert for official intervention seemed to have satisfied the market’s curiosity. In addition, the MoF’s monthly disclosure confirms that no intervention took place between Sept 29th and Oct 27th - squashing speculation that Japanese officials have been protecting the USDJPY downside.
The BoJ has moved up the date of their meeting to right after the FOMC meeting, suggesting that they are extremely concerned about further USD weakness. While the Japanese response is anyone’s guess, a coordinated easing response or straight-out physical intervention could result. Forex traders must be aware that tangible event risk is surrounding the FOMC meeting, especially in the USDJPY.
In China, manufacturing PMI rallied to 54.7 vs. 53.8 expected - giving risk appetite a boost and sending the Shanghai composite up 2.52%. Despite concerns that China will try to step on the brakes, we still suspect that GDP growth will reach 10% in 2011 and demand for regional assets will remain high.
The RBA is also meeting this week, although no change is expected in rates tomorrow. Even if there is a small rally in USD and given the softer-than-expected US Q3 GDP data, the AUD still remains firm fundamentally against the Greenback. Chinese growth and demand for commodities will continue to support the AUD in the near-to-mid term.
For today, the market will be watching US manufacturing ISM data. US data remains mixed as GDP came in soft while Chicago’s PMI beat expectations. Estimations for the initial size of the Fed’s QE2 program are still in relative flux and any surprises in data ahead of the meeting will have the markets adjusting USD positioning. Translation – the USD will be hyper-sensitive to any surprises in US data leading up to the FOMC meeting.
http://files.ac-markets.com/Newsletter/2010-11-01/Chart01Nov10_0000.gif
Today's Key Issues (time in GMT):
00:00 SEK France All Saints' Day holiday.
07:30 NOK Oct PMI mfg index, 60.9 exp; prior 63.3.
08:00 CHF Oct PMI mfg index, 53.0 exp; prior 52.8.
08:30 GBP Oct PMI mfg index, 60.0 exp; prior 59.7.
09:28 USD Oct PMI mfg index, 53.0 exp; prior 53.4.
12:30 USD Sep personal income, +0.1% m/m exp; prior +0.5%.
12:30 USD Sep personal consumption expenditures, +0.3% m/m exp; prior +0.4%.
12:30 USD Sep core PCE deflator, +0.1% m/m exp; prior +0.1%.
14:00 USD Oct ISM index, 54.0 exp; prior 54.0.
14:00 Construction spending, %m/m -0.6 exp. 0.4 prior
The Risk Today:
EurUsd EURUSD has opened higher this week as the market waits anxiously for tomorrow’s crucial FOMC meeting. The prevailing range between 1.3700 and 1.4080 is still very much being obeyed however, so expect the sellers to start materializing above 1.4050. Arguably, the range ceiling could be higher up at 1.4158 (15 Oct high) rather than the 1.4080 level (25 Oct high) that we have suggested, so we would not get carried away with shorting this pair on the first peek above 1.4050. Instead, bears would be prudent to scale into longs between 1.4050 and 1.4150; using the 25 Jan high 1.4195 as a guide for stops. Should the bulls get the momentum to break higher, then 1.4195 is really the last barrier before we have a clear and open run towards 1.4414 (19 Jan high). If tomorrow’s anticipated QE announcement does not turn out to be the hugely USD-negative event that the market has priced in, then we could see a very rapid liquidation of EURUSD longs. We still eye 1.3750 as a decent level to re-load longs, protected by the 27 Oct low 1.3734 and range floor at 1.3700. Below there we also eye support at 1.3635 (5 Oct low) and 1.3560 (30 Sep low).
GbpUsd The bullish flag pattern on the hourly chart looks to have been activated by a break above 1.5960 on Friday, and as discussed in our last report, the theoretical target for such a pattern is in the region of 1.6160. Admittedly, there was a slightly sketchy moment for this pattern before it became activated where the bears managed to push the price down through the lower edge of the flag to a low of 1.5875, so we are still cautious that this may not me a bona fide flag pattern in play. The bulls however do have some good omens on their side –for one thing, the former downtrend channel has repelled a break back inside it (which suggests a reversal may be due) and in addition, GBPUSD remains comfortably above its 200-day moving average 1.5330. From here, the level to watch on the topside is the 15 Oct high 1.6105, as above there we have no discernible pockets of supply until 1.6275 (26 Jan high). On the downside the nearest support is Friday’s lows 1.5875, then 1.5730 (27 Oct low), 1.5691 (50-day moving average), 1.5650 (20 & 22 Oct high), and 1.5600 (22 Sep low).
UsdJpy Very choppy price action on the open as USDJPY slumped quickly to fresh 15-year lows of 80.21 before squeezing aggressively higher on a suspected miss-hit. The ugly spike was sufficient to trigger our trailed stops above 80.90 for a modest profit, but for others who managed to set wider stops and weather the volatility, the pair has obediently collapsed back down below 80.50. This is still a very interesting time for USDJPY traders as the all-time low of 79.76 last seen in 1995 is not far away, and should the pair break below there then we could be in for a formidable sell-off into unchartered waters. Even if the BoJ were to try facing off with the market down there, the sheer size of the market and significance of new all-time lows would make it very difficult –if not impossible –to prevent a lot more downside. Above us, weak trendline resistance is eyed at 81.30, then that 82.00-35 zone remains a major hurdle for any rallies (82.00 has been unconquerable since mid October despite a number of attacks, 82.35 is the 12 Oct high).
UsdChf Looks like a period of indecision for USDCHF as the pair has continued to oscillate between 0.9805 support and 0.9930 resistance –but making very little headway within its 2-week uptrend channel. We still feel that the parity barrier above us will be too formidable for the bulls to overcome in the current backdrop, sostill anticipate offers around 0.9920 (the last rally highs on 27 Oct),then the upper edge of the 2-week uptrend at 0.9995. On the downside, expect former resistance at 0.9800 to now represent support, and below there 0.9780 (lower edge of 2-week uptrend channel), 0.9665 (25 Oct low), 0.9570 (20 Oct low) and 0.9540 (18 Oct low).
While the initial injection will likely fall short of expectations, incremental future asset purchases are going to remain data dependent and thus further easing will be even more conditional. Given this base scenario we expect a slight rally in USD following the FOMC meeting, however we doubt any strong directional move.
FX markets are seeing a slow erosion of USD positioning this morning ahead of the upcoming FOMC meeting and today’s better than expected Chinese PMI. USDJPY fell to 80.21 as US treasury yields fell on Friday on the back of increased QE expectations and the pair played catch-up this morning throughout the Asian sessions. A strange aggressive spike in USDJPY around the Asian open fueled rumors that the Japanese Ministry of Finance was testing intervention, however Japanese officials have been quick to issue denials and the lack of interbank confirmations has left traders scratching their heads.
Rumors that a rogue algorithm or fat finger combined with a market already-on-alert for official intervention seemed to have satisfied the market’s curiosity. In addition, the MoF’s monthly disclosure confirms that no intervention took place between Sept 29th and Oct 27th - squashing speculation that Japanese officials have been protecting the USDJPY downside.
The BoJ has moved up the date of their meeting to right after the FOMC meeting, suggesting that they are extremely concerned about further USD weakness. While the Japanese response is anyone’s guess, a coordinated easing response or straight-out physical intervention could result. Forex traders must be aware that tangible event risk is surrounding the FOMC meeting, especially in the USDJPY.
In China, manufacturing PMI rallied to 54.7 vs. 53.8 expected - giving risk appetite a boost and sending the Shanghai composite up 2.52%. Despite concerns that China will try to step on the brakes, we still suspect that GDP growth will reach 10% in 2011 and demand for regional assets will remain high.
The RBA is also meeting this week, although no change is expected in rates tomorrow. Even if there is a small rally in USD and given the softer-than-expected US Q3 GDP data, the AUD still remains firm fundamentally against the Greenback. Chinese growth and demand for commodities will continue to support the AUD in the near-to-mid term.
For today, the market will be watching US manufacturing ISM data. US data remains mixed as GDP came in soft while Chicago’s PMI beat expectations. Estimations for the initial size of the Fed’s QE2 program are still in relative flux and any surprises in data ahead of the meeting will have the markets adjusting USD positioning. Translation – the USD will be hyper-sensitive to any surprises in US data leading up to the FOMC meeting.
http://files.ac-markets.com/Newsletter/2010-11-01/Chart01Nov10_0000.gif
Today's Key Issues (time in GMT):
00:00 SEK France All Saints' Day holiday.
07:30 NOK Oct PMI mfg index, 60.9 exp; prior 63.3.
08:00 CHF Oct PMI mfg index, 53.0 exp; prior 52.8.
08:30 GBP Oct PMI mfg index, 60.0 exp; prior 59.7.
09:28 USD Oct PMI mfg index, 53.0 exp; prior 53.4.
12:30 USD Sep personal income, +0.1% m/m exp; prior +0.5%.
12:30 USD Sep personal consumption expenditures, +0.3% m/m exp; prior +0.4%.
12:30 USD Sep core PCE deflator, +0.1% m/m exp; prior +0.1%.
14:00 USD Oct ISM index, 54.0 exp; prior 54.0.
14:00 Construction spending, %m/m -0.6 exp. 0.4 prior
The Risk Today:
EurUsd EURUSD has opened higher this week as the market waits anxiously for tomorrow’s crucial FOMC meeting. The prevailing range between 1.3700 and 1.4080 is still very much being obeyed however, so expect the sellers to start materializing above 1.4050. Arguably, the range ceiling could be higher up at 1.4158 (15 Oct high) rather than the 1.4080 level (25 Oct high) that we have suggested, so we would not get carried away with shorting this pair on the first peek above 1.4050. Instead, bears would be prudent to scale into longs between 1.4050 and 1.4150; using the 25 Jan high 1.4195 as a guide for stops. Should the bulls get the momentum to break higher, then 1.4195 is really the last barrier before we have a clear and open run towards 1.4414 (19 Jan high). If tomorrow’s anticipated QE announcement does not turn out to be the hugely USD-negative event that the market has priced in, then we could see a very rapid liquidation of EURUSD longs. We still eye 1.3750 as a decent level to re-load longs, protected by the 27 Oct low 1.3734 and range floor at 1.3700. Below there we also eye support at 1.3635 (5 Oct low) and 1.3560 (30 Sep low).
GbpUsd The bullish flag pattern on the hourly chart looks to have been activated by a break above 1.5960 on Friday, and as discussed in our last report, the theoretical target for such a pattern is in the region of 1.6160. Admittedly, there was a slightly sketchy moment for this pattern before it became activated where the bears managed to push the price down through the lower edge of the flag to a low of 1.5875, so we are still cautious that this may not me a bona fide flag pattern in play. The bulls however do have some good omens on their side –for one thing, the former downtrend channel has repelled a break back inside it (which suggests a reversal may be due) and in addition, GBPUSD remains comfortably above its 200-day moving average 1.5330. From here, the level to watch on the topside is the 15 Oct high 1.6105, as above there we have no discernible pockets of supply until 1.6275 (26 Jan high). On the downside the nearest support is Friday’s lows 1.5875, then 1.5730 (27 Oct low), 1.5691 (50-day moving average), 1.5650 (20 & 22 Oct high), and 1.5600 (22 Sep low).
UsdJpy Very choppy price action on the open as USDJPY slumped quickly to fresh 15-year lows of 80.21 before squeezing aggressively higher on a suspected miss-hit. The ugly spike was sufficient to trigger our trailed stops above 80.90 for a modest profit, but for others who managed to set wider stops and weather the volatility, the pair has obediently collapsed back down below 80.50. This is still a very interesting time for USDJPY traders as the all-time low of 79.76 last seen in 1995 is not far away, and should the pair break below there then we could be in for a formidable sell-off into unchartered waters. Even if the BoJ were to try facing off with the market down there, the sheer size of the market and significance of new all-time lows would make it very difficult –if not impossible –to prevent a lot more downside. Above us, weak trendline resistance is eyed at 81.30, then that 82.00-35 zone remains a major hurdle for any rallies (82.00 has been unconquerable since mid October despite a number of attacks, 82.35 is the 12 Oct high).
UsdChf Looks like a period of indecision for USDCHF as the pair has continued to oscillate between 0.9805 support and 0.9930 resistance –but making very little headway within its 2-week uptrend channel. We still feel that the parity barrier above us will be too formidable for the bulls to overcome in the current backdrop, sostill anticipate offers around 0.9920 (the last rally highs on 27 Oct),then the upper edge of the 2-week uptrend at 0.9995. On the downside, expect former resistance at 0.9800 to now represent support, and below there 0.9780 (lower edge of 2-week uptrend channel), 0.9665 (25 Oct low), 0.9570 (20 Oct low) and 0.9540 (18 Oct low).