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Euro Bounces Back As Policy Makers Prepare For Bailout, Shows Muted Reaction To 3Q GD

Talking Points

* Japanese Yen: Weakens Across the Board
* British Pound: Maintains Upward Trend From May
* Euro: 3Q GDP Falls Short of Expectations
* U.S. Dollar: U. of Michigan Confidence Survey on Tap

The Euro showed little reaction to the weaker-than-expected 3Q GDP reading as the exchange rate rallied to a high of 1.3745, and the single-currency may continue to push higher going into the end of the week as European policy makers stand ready to bailout Ireland. During the G20 Summit in South Korea, German Chancellor Angela Merkel said “preparations are in place” to aid members of the European Union as the governments in the region struggle to manage their public finances, while a spokesman for Ms. Merkel announced that a joint statement will be issued later today as fears surrounding the European debt crisis intensifies. At the same time, the EU released a statement saying that Ireland has yet to request, but speculation for a bailout may intensify over the near-term as global investors see a risk of Ireland defaulting on its obligations.

As European policy makers try to restore investor confidence, the EUR/USD may stay afloat throughout the day as price action holds above the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500, but a shift in market sentiment could drag on the exchange rate as risk trends continue to dictate price action in the currency market. Nevertheless, economic activity in the Euro-Zone increased 0.4% in the third quarter amid forecasts for a 0.5% expansion in GDP, while the growth rate rose at an annualized pace of 1.9% for the second consecutive quarter. A separate report showed industrial outputs in the region unexpectedly slipped 0.9% in September, and the slew of dismal data could lead the European Central Bank to maintain the expansion in monetary policy throughout the beginning of 2011 as the recovery tapers off. As the ECB aims to encourage a sustainable recovery, the instability in the financial system paired with the ongoing weakness in the private sector could lead the Governing Council to keep its exit strategy on hold, and speculation surrounding the outlook for future policy is likely to play an increased role in driving price action for the euro as we head into the end of the year.

The British Pound bounced back from a low of 1.5985 during the European trade to maintain the upward trend from May, and the exchange rate may push higher going into the following week as investors expect the Bank of England to maintain its current policy throughout the remainder of the year. As the BoE is scheduled to release its policy meeting on November 17, comments from the central bank is likely to spark increased volatility in the exchange rate, but market participants may show little reaction to the statement as the BoE dropped to dovish tone during the quarterly inflation report earlier this week. Nevertheless, we expect to see a 7-1-1 vote count as MPC board member Andrew Sentance pushes for a 25bp rate hike while Adam Posen sees scope to expand monetary policy further, but there could be a growing split within the central bank as policy makers expect inflation to hold above target throughout 2011. If additional members of the MPC join Mr. Sentance and vote to start normalizing monetary policy, a rise in interest rate expectations could lead the recent rally in the GBP/USD to gather pace, which should lead the exchange rate to make another run at 1.6300.

U.S. dollar price action was mixed overnight, with the USD/JPY halting the three-day advanced, and risk developments could dictate price action throughout the North American trade as the economic docket remains fairly light for Friday. Nevertheless, the U. of Michigan consumer confidence survey due out at 14:55 GMT is expected to show a rebound in household sentiment as market participants forecast the index to increase to 69.0 in November from 67.7 in the previous month, and the data could spark a bullish reaction in the greenback as the outlook for future growth improves. However, as market sentiment continues to dictate price action in the foreign exchange market, the data could fuel a rise in risk appetite and ultimately lead to U.S. dollar weakness as investors move into higher-yielding currencies.


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U.S. Retail Sales Jump 1.2 Percent in October, Empire Manufacturing Enters Negative T

Advanced retail sales in the world’s largest economy rose 1.2 percent in October after climbing 0.7 percent the month prior amid expectations of 0.7 percent. At the same time, empire manufacturing in November entered negative territory for the first time since July 2009. Subsequent to the reports, the U.S. dollar lost ground against most of its major counterparts.

The rise in retail sales were led by climbing auto sales. Outside of autos, non-store retailers gained 0.8 percent, while electronics and appliances pared the increase as figures slid 0.7 percent. The report is of great importance due to the fact that stronger retail sales show stronger consumer demand and economic growth. However, despite the upbeat report, the slump in empire manufacturing lead the buck to pare some of its overnight advances as the report entered negative territory for the first time since July 2009. Taking a look at the breakdown of the release, prices paid slid to 22.08 in November from 30.00 the month prior, while the number of employees slid to the lowest level since July of this year. At the same time, new orders and shipments fell at an alarming rate. The report does not bode well for the U.S. economy as it suggests that the industry that once lead the region out of the recession is now tapering off.

GBPUSD Daily Chart

Source: Intellicharts – Prepared by Michael Wright

Taking a look at the currency markets, the GBPUSD has halted its three day advance, but has pared most of its intraday losses ahead of the U.K. consumer prices report. It is worth noting that the MACD continues to point to further gains, while downside risks are capped by the 20-day moving average. At the same time, the bullish trend dating back to May of this year remains intact, thus, I do not rule out a test towards 1.6200 in the near term. All in all, I will remain long this pair ad my bias remains to the upside.

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FOREX TREND MONITOR: US Dollar Strikes Back

Major Currencies vs. US Dollar (% change)

08 Nov 2010 – 12 Nov 2010

General Comment: US Dollar Strikes Back

The bruised and beaten US Dollar has launched a vigorous counter-attack against the major currencies as the four-month surge in risk appetite suddenly found itself without fuel to continue. That advance had largely owed to expectations of renewed quantitative easing (QE) from the Federal Reserve, a possibility initially floated at the Jackson Hole central bankers’ summit in August. When Ben Bernanke and company made good on the rumors in early November, they delivered just about what the markets had priced in over the preceding months, leaving asset prices wanting of a reason to continue higher and opening the door for a much-needed retracement. Indeed, in the first week following the QE announcement, the greenback rose while the MSCI World Stock Index tumbled, both by the largest margin since the five days ending August 13. With the end of the year drawing closer, more of the same is likely ahead as traders take profits off the table and settle in for the holiday season.

EURUSD: Euro Under Fire on Risk Aversion, Sovereign Turmoil

The Euro continues to track broad trends in risk appetite, with prices still showing a strong correlation with the MSCI World Stock Index on 20-day percent change studies. Needless to say, amounts to a direct threat to the single currency as risky assets correct lower. The sudden return of sovereign turmoil on Euroland’s periphery doesn’t help matters, with 5-year Spanish, Irish, and Portuguese credit-default swap (CDS) spreads hitting record highslast week. Although Ireland has cancelled its bond auctions for November, Greece and Portugal will tap the markets this week, offering 300 million and 1.25 billion euro respectively in short-term debt. These will be closely watched for signs of contagion, with poor uptake likely to weigh heavily on the European unit. On the economic data front, the release of the ZEW Survey of investor confidence and the final revision of Euro Zone CPI figures headline the docket. We have entered short EURUSD.

Source: Bloomberg

GBPUSD: Fading QE Bets Supportive as Risk Appetite Falters

Sentiment remains an important driver for the British Pound and should keep the currency under pressure amid a broad return to risk aversion, but monetary policy considerations remain important with the Bank of England set to release minutes from November’s policy meeting. The Quarterly Inflation Report published last week proved more hawkish than expected, which ought to prove supportive particularly as October’s Consumer Price Index figures put the annualized inflation rate above 3 percent once again, dimming the likelihood that the BOE will follow the Fed down the path of renewed QE. Jobless Claims figures are also on tap, with expectations suggesting the 3-month Unemployment Rate held steady at 7.7 percent in September.

Source: Bloomberg

USDJPY: Dollar to Gain as Yield Spreads Mirror Post-QE Reversal

Curiously, USDJPY has carved out a significant inverse correlation with the MSCI World Stock Index, hinting the pair is likely to rise in the event of continued risk aversion. This seems related to the pair’s well-established link with the spread between US and Japanese bond yields. Indeed, the pair sank to 15-year lows over recent months as the premium to owning US debt over its Japanese counterpart shriveled on expectations of renewed Fed stimulus. Once those bets materialized, the selloff was due for a corrective rebound in the same fashion as risky assets were set up for a pullback. Indeed, the US-Japan 2-year yield spread put in a low on the very same day as the FOMC made its November policy announcement and has moved by close to 17bps in favor of the greenback since. On balance, assuming the unwinding of QE-linked bets continued, USDJPY upside is likely ahead. We have entered long USDJPY.

Source: Bloomberg

USDCAD, AUDUSD, NZDUSDeeper Losses Ahead as Profit-Taking Continues

Risk trends remain firmly in control of the commodity bloc, putting the spotlight on the post-QE correction underway across financial markets. The domestic calendar offers a light helping of second-tier releases which are unlikely to prove market-moving. The developing vine disease breakout in New Zealand threateningthe kiwifruit industry merits attention however after the government said the situation is becoming “increasingly difficult”, with the containment and eradication effort likely to come at a “significant cost”.

Source: Bloomberg

Source: Bloomberg

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Source: Bloomberg

 

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FXCM Continues to Add Enhancements to the MarketScope Charting Package

New York, November 17, 2010—FXCM Holdings LLC (www.fxcm.com), a global online forex and CFD broker,* has released new updates to its free MarketScope charting package. Free for all FXCM account holders on www.fxcm.com/trading-from-charts.

New Market Scope Features Include:
1. Custom Technical Indicators: More than 600 custom technical indicators are available for download for use with FXCM Marketscope charts. Popular custom indicators include the Awesome Oscillator, breakout indicator, trading session indicator, and the Alligator indicator.

2. Signal Notification via E-mail: Traders can now have custom technical indicator or price alerts sent from the trading station to them via e-mail. To set a signal, use the Strategies menu in the Marketscope charts. When setting Strategy Properties, set "Send e-mail" to "True", and then enter the destination e-mail address in the next line.

3. Chart Templates, Layouts, and Snapshots: It is now easier to manage chart layouts and snapshots. In the “File” menu in the Marketscope charts, traders will find the ability to easily manage them. Templates allow traders to save a particular set of technical indicators and settings, and then apply them to other charts with just a few clicks of the mouse.

4. Tick Volume Indicator: Traders can now add tick volume to charts by right-clicking on the chart. This shows how many price ticks were shown on the trading station during the chart´s time interval.

5. Custom Unique Skins: Choose from multiple unique skins to set the background and color palette.
To test the new features on FXCM’s free MarketScope charts open a free FXCM demo account today: Open a Forex Trading Practice Account

About FXCM Holdings LLC

FXCM Holdings LLC (FXCM) is a global forex and CFD broker* that caters to both retail and institutional markets. Founded in 1999, FXCM is regulated by several of the world’s most respected financial authorities.

At the heart of FXCM’s client offering is No Dealing Desk forex trading. Clients have market access to FXCM’s large network of forex liquidity providers that enables FXCM to offer clients spreads as low as 1 pip on major crosses. Clients also have the benefits of mobile trading, one-click order execution, and trading from real-time charts. FXCM’s UK subsidiary, Forex Capital Markets Limited, offers CFD products with no re-quote trading and allows traders to trade oil, gold, silver, and stock indices, along with forex on one platform. In addition to currency and CFD trading, FXCM offers educational courses on forex trading, and provides free news and research through DailyFX.com.

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Any opinions, analyses, or other information contained is provided as general market commentary, and does not constitute investment advice. Read full risk disclaimer.

* Please be advised that CFD accounts are not available to residents of the US or its territories. Additionally, Forex Capital Markets Limited offers spread betting exclusively to UK residents. Residents of other countries are NOT eligible.

 

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Euro, Risk Appetite Climb As Ireland Intimates It Will Tap Funds Offer

The euro spiked higher as Ireland’s central bank Governor said that he expects Ireland to ask for assistance from the EU and IMF. He said that the figure could run into the tens of billions of euros and he acknowledges that banks must hold additional capital. Speculation has been rife that Ireland will ask for aid since early in the Asia session and the confirmation has seen the euro spike to fresh highs as concerns over Ireland’s ability to handle its debt alone are finally put to rest.

In recent days the euro has been under significant pressure with Irish obstinacy to requesting funds said to have made ECB President Trichet “mad” (Irish Times).Irish officials had said that funding is available through 2011 and it is fully capable of handling higher borrowing costs. In an abrupt U-turn a deal now seems to be in the offing, Ireland’s central bank Governor stressed that getting the terms and getting conditions of any assistance right is essential. Adding that if an agreement is reached it will be a loan and not a bailout, noting that he is confident a package will be agreed upon as officials would not have arrived in Dublin if there was no hope for consensus. The government initially wanted a clear distinction between an emergency bank aid and financial help for the State, there is now a reluctant acceptance that the former will have to be drawn by the government on behalf of the institutions.


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Eur/Usd Sell Failed to Trigger Thursday;Will Look to Sell Higher Up On Friday

FUNDYS

Fed Chair Bernanke has been under some intense scrutiny over the past several days, with pressure and criticisms on the latest injection of liquidity into the system coming both domestically and internationally. Most recently, a letter from the Republicans calling into question the current ultra-accommodative policy has been getting a lot of attention, and the Fed has been forced to step up and defend its actions. The Fed has released the prepared text of a speech the Fed Chair is set to deliver at the European Central Bank conference in Frankfurt today, and the message is clear. The central bank will continue with the current policy as it is the only way to help the economy recovery from the latest crisis. There are two key takeaways from the speech. The first is that the central bank will continue to lower long-term rates, and the second is that foreign central banks are interfering with the Fed’s current policy through intervention efforts to weaken their own currencies.

Relative Performance Versus USD Friday (As of 9:15GMT)

1. SWISSIE+0.56%
2. EURO +0.50%
3. YEN+0.38%
4. STERLING+0.31%
5. CAD+0.21%
6. KIWI+0.05%
7. YEN-0.02%

The net takeaway from the speech is very USD bearish, and we would expect the buck to come under some more pressure on Friday once market participants take time to fully digest the text of the Fed speech. We have written in recent commentary of the likelihood for some broad based USD selling following the latest rally in the buck, and this should help to put more pressure on the Greenback into the weekend. However, we have still not given up on the buck, and feel that the USD will once again find bids into the early stages of next week.

On the surface, the tone of the speech is certainly very USD bearish, but the speech is also more likely than not in reaction to criticisms of current policy decisions that would only provoke a necessary defense from the Fed of such policy. It therefore stands to reason that the Fed would not come out and make a statement that calls into question their current efforts as that would only serve to undermine their decision making. But we do believe that there is another side to the Fed that is very much concerned with the longer-term threats of current monetary policy actions, and is looking for signs to start to reverse policy and rein in QE. Unfortunately, the Fed believes that current market conditions still do not warrant a reversal in policy, with the recovery still too fragile, and the priority still needing to be on the shorter-term threats to the economy. But irrespective of this latest speech, we have seen signs of a more balanced and reserved central bank in recent weeks. After all, the Fed only pumped in what they felt was necessary despite pressures from the markets to pump in more, and they also made it clear that they could rein in these measures at any time.

In the end, the latest speech is very USD bearish on the surface and we believe should open more USD selling on Friday. At the same time, we believe that the speech should be taken into the proper context as its intention is to highlight and defend current policy efforts. There clearly is another side to the Fed (not included in this speech) that is also very aware of the threat of current policy and looking to see more signs of recovery in the US economy so that it can begin to reverse policy. Economic data over the coming weeks in the US will be critical and this ultimately will determine what direction that Fed takes going forward. We believe that data will continue to show signs of improvement and this will allow the Fed to begin the long, slow and steady path of reversing policy, which should ultimately narrow yield differentials back in favor of the Greenback.

Elsewhere, it is worth noting that the Australian and New Zealand Dollars have been relatively underperforming Friday on the back of the latest moves by China to rise its banks' reserve requirments by 50 basis points to a record high 18.0%. Meanwhile, as the USD comes under pressures, concerns over the state of Ireland and other beleaguered Eurozone economies have faded into the background.

Looking ahead, the economic calendar on Friday is basically non-existent, and the key focus will be the many central bankers that are slated to speak throughout the day, with many coming from the ECB conference in Frankfurt. US equity futures are trading flat into the European open, while commodities are mixed.

GRAPHIC REWIND

TECHS

EUR/USDSee below)

USD/JPY: The market has been in recovery mode over the past several days since confirming a double bottom on the break above neckline resistance at 82.00. However, the risks for additional upside should now be limited to the 100-Day SMA by 84.35, and any rallies into this longer-term SMA should be sold in anticipation of a resumption of the broader underlying downtrend. The focus is still on a retest and break of the record lows by 79.75 from 1995, and only a sustained break back above the 100-Day SMA would negate this outlook.

GBP/USD: Overall, price action has been quite choppy, with the market unwilling to commit in either direction at present. However, the clearest trend over the past few months has been on the constructive side, and a fresh higher low could be in place by 1.5840 ahead of the next upside extension beyond 1.6300 over the coming days. In the interim, we remain sidelined and await a clearer signal. Back below 1.5840 would be required to negate and open the door for deeper setbacks towards 1.5650. Above 1.6300 exposes critical psychological barriers by 1.6500.

USD/CHF: We contend that the market is in the process of carving a material base by 0.9460, and any setbacks should be very well supported in favor of a sustained recovery. A fresh higher low has now been confirmed by 0.9550 following the latest break back above 0.9975, and the market should now accelerate beyond parity towards our next key topside objective at 1.0300 over the coming sessions. Any intraday setbacks are expected to be well supported ahead of 0.9700.

FLOWS

Good two way flows in Cable, a Middle East account lifting the pair to fresh highs but a US prime name is attempting to cap ahead of 1.6100. A German name has been an aggressive seller in Aud/Usd with a European name on the bid in dips, bids said to lie lower down from a Japanese account and UK name. Buying from a NZ exporter and Asian name lifted Nzd/Usd however selling from private clients and an Asian fund keeps things in check, added weight coming from sales in Nzd/Jpy from a major Japanese security house.

TRADE OF THE DAY

EUR/USD: The correction out from the recent 1.3450 lows has begun to accelerate and there is plenty of room for gains to extend back towards the 20-Day SMA before considering the possibility for a bearish resumption. However, any gains beyond the 20-Day SMA on Friday are likely to be well capped with the broader short-term structure now on the bearish side since the market broke back below 1.3695 in the previous week. As such, we like the idea of fading overdone intraday rallies and our sell entry by the 20-Day SMA is well above the projected daily average true range. If the 20-Day SMA is tested, the hourly RSI is also expected to be through the roof and most probably closer to the 80 area, which will further strengthen the prospects for some form of a sharp reversal. STRATEGY: SELL @1.3820 FOR AN OPEN OBJECTIVE; STOP 1.3920. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE ON FRIDAY.


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Euro, British Pound To Face Headwinds As Risks For Contagion Intensify

Talking Points

* Japanese Yen: Higher Against Most Majors
* British Pound: Stands Ready To Aid Ireland
* Euro: Risks For Contagion Gathers Pace
* U.S. Dollar: Chicago Fed Index on Tap

The Euro fell back from a high of 1.3785 during the overnight trade as Ireland opted to seek a bailout from the EU, and the single-currency may face increased headwinds going into the North American trade as the risks for contagion intensify. In response to the bailout, Moody’s Investor Services said that Ireland is likely to face a “multi-notch” downgrade, while European policy makers argued that it’s still premature to speculate on the size of the rescue package. In an effort to stem the risks for contagion, the EU announced that Portugal’s banking system is healthy and resilient, but went onto say that the euro-area continues to face an uneven recovery as the governments operating under the fixed-exchange rate system struggle to manage their public finances.

At the same time, European Union Economic and Monetary Commissioner Olli Rehn said that the issues Portugal faces are “very different” than Ireland’s as the country “has taken very bold decisions concerning fiscal consolidation and continuing its structural reforms,” but the risks for contagion could lead the European Central Bank to support the economy going into 2011 as it aims to balance the risks for the region. As fears surrounding the debt crisis exacerbates, the ECB may put its primary mandate on the line as it aims to restore financial stability, and speculation surrounding the outlook for monetary policy could play an increased role in driving price action for the euro as the central bank talks of reestablishing its exit strategy in the coming months. As the EUR/USD continues to hold below the 20-Day SMA at 1.3810, the euro-dollar may pare the rebound from the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3490-1.3500, which could lead to a test of the August high (1.3333) in the coming days.

The British Pound pared the overnight rally to 1.6083 as the U.K. pledged to assist Ireland, and fears surrounding the European debt crisis could drag on the exchange rate as Britain struggles to manage its own public finances. U.K. Chancellor of the Exchequer George Osborne said that he stands ready to help the “friend in need” while speaking on the BBC radio, and went onto say that the U.K. has made “a commitment for a bilateral loan” in an effort to ease the turmoil in the European financial system. As the U.K. aims to curb its budget deficit and tightens fiscal policy, there could be increased pressures on the Bank of England to support the economy in 2011, but the stickiness in price growth could spur an increased split within the MPC as policy makers expect inflation to hold above target throughout the following year. As the economic outlook remains clouded with uncertainties, the GBP/USD may work its way back towards the 50-Day SMA (1.5874) to test for near-term support, but we should see the exchange rate push higher throughout the remainder of the year as it maintains the upward trend from May.

U.S. dollar price action was mixed overnight, with the USD/JPY bouncing back to reach a high of 83.56 on Monday, and we may see a clear trend develop during the North American trade as equity futures point to a lower open for the U.S. market. As the economic docket remains fairly light for Monday, risk sentiment is likely to dictate price action in the currency market, and we may see little reaction to the Chicago Fed’s National Activity index, which is expected to increase to -0.24 in October from -0.58 in the previous month, as speculation surrounding Ireland’s bailout takes center stage.

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[FXCM-PR Rep]

Major Currencies vs. US Dollar (% change)

15 Nov 2010 – 19 Nov 2010​

Last week’s price action proved indecisive as global equities and the US Dollar – the benchmarks for their respective sides of the “risk on” vs. “risk off” argument – closed little changed on Friday. A tug of war between conflicting forces made for choppy price action, with supportivecues from Ireland as the debt fiasco inched toward resolution and a fierce defense of QE by Ben Bernanke being offset by news that China will step up efforts cool inflation (and thereby economic growth), raising reserve ratios by 50bps by the end of the month.

Looking past recent headlines, the balance of competing catalysts driving price action is likely to tip the scales in favor of renewed risk aversion. Indeed, risky assets have retraced less than a quarter of the rally built around Fed QE expectations since August that started to unravel after the central bank delivered just about what had already been priced in at the beginning of this month, leaving the advance without the impetus to continue. This leaves plenty of room for a deeper correction, with the proximity of the winter holiday season making it all the more likely that traders will resume taking profit on QE-linked bets in the weeks ahead.

EURUSD: Euro to Resume Decline as Risk Trends Dominate

The correlation between the Euro and underlying risk appetite faded a bit from last week after the Irish debt fiasco obscured the relationship, but sentiment remains the most dominant driver of price action. To that end, we expect recent gains to prove corrective within the context of larger down move as risk aversion makes its come-back in the final weeks of the year. Preliminary Euro Zone Consumer Confidence and PMI figures for November headline the economic calendar as traders size up private demand amid a lurch toward fiscal austerity across the region. The final revision of third-quarter German Gross Domestic Product figures as well as the November’s IFO Survey of business confidence is also of note. We remain short EURUSD.

Source: Bloomberg

GBPUSD: Pound to Track Risk Sentiment Amid Profit-Taking

Risk sentiment has tightened its grip over British Pound price action, hinting the UK unit is heading lower against the US Dollar should risk aversion return as expected. On the economic calendar, the second revision of third-quarter Gross Domestic Product figures takes the spotlight, with traders most concerned to see the breakdown in contributions to overall growth as the outlook on monetary policy continues to be torn between an inflation rate stuck stubbornly above 3 percent and the need for support as the onset of an ambitious austerity plan draws ever closer.

Source: Bloomberg

USDJPY:Yen to Fall as Yields Continue Post-QE Correction

Relative borrowing costs remain in focus, with USDJPY continuing to track the spread between US and Japanese 2-year treasury yields. On balance, this likely amounts to Japanese Yen weakness as US yields – depressed over recent months on the very same QE expectations that drove risky assets higher – stage their own correction. October’s Trade Balance and Consumer Price Index figures stand out on the economic calendar. We are long USDJPY.

Source: Bloomberg

USDCAD, AUDUSD, NZDUSD:Commodity Bloc Likely to Underperform

Risk trends remain firmly in control of the commodity Dollars, keeping the spotlight on the post-QE correction likely to resume across financial markets. Indeed, the relatively higher yields offered by these currencies that made them greater beneficiaries of the pro-risk environment in recent months may also prove to see them underperform the other majors against the greenback. Canadian economic data offers the only bit of event risk, with October’s Consumer Price Index figures as well as September’s Retail Sales report on tap.

Source: Bloomberg

Source: Bloomberg

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Euro or Greenback…..Both Hurt….But Which Hurts the Least

FUNDYS

After breaking to fresh multi-day lows below 1.3300, the Euro has bounced, with the market managing to establish back above 1.3300. The initial selling in the major had been brought on by a continued wave of risk aversion and fear over the possible contagion in the Eurozone. Comments from Germany’s Merkel outlining the severity of the situation and potential threats had not done anything to help the Euro’s cause, and the market traded down to 1.3285 before bouncing. Also seen weighing on the Euro were comments from Iceland’s President who questioned the adoption of the Euro given the current crisis, and IFO’s Abberger who warned that EMU peripheral contagion was a major risk.

Relative Performance Versus USD Wednesday (As of 12:30GMT)

1. CAD+0.56%
2. AUSSIE +0.53%
3. KIWI+0.32%
4. STERLING+0.17%
5. SWISSIE+0.13%
6. EURO-0.10%
7. YEN-0.18%


However, there have been a number of officials out in recent trade attempting to downplay the severity of the Eurozone debt situation, and their reassurances seem to have been helping to inspire this latest minor bounce in the currency. While economic data has failed to materially influence price action over the past several sessions, the German IFO, which was the strongest on record and better than expectation, could also not be ignored, and this too was seen helping to keep the single currency propped for the time being.

Technically, there is some very solid support in Eur/Usd in the 1.3300’s, and while 1.3300 figure has been breached on Wednesday, we will only become convinced of a fresh downside extension in the major should we manage to close below the 1.3300 figure. The levels of support in the 1.3300-1.3400 area include; the 38.2% fib retrace off of the 2010 low-high move, some previous resistance turned support from early August, and the 100-Day SMA. As such, we would not at all be surprised to see some form of a bounce from current levels, with bulls looking to reassert.

Additionally, talk of USD diversification has once again resurfaced and this could also serve to attract fresh USD shorts. The release of Tuesday’s Fed Minutes should also not be overlooked in these hectic markets, with the Fed downgrading their outlook for the economy and continuing to sound quite dovish. Elsewhere, UK GDP data came in as expected despite earlier rumors of a weaker number, and in the end, the release failed to materially factor into price action.

A few weeks ago, there seemed to be no good reason to be owning US Dollars given the ultra accommodative Fed policy, and now it seems like there is also no good reason to be holding Euros in light of the escalation in the Eurozone debt crisis. The currency that stands to benefit going forward will therefore be the currency which is will hurt the least, rather than benefit the most. While our core bias is for longer-term USD appreciation, at current levels, we would also not rule out the potential for a bounce in the Euro.

Looking ahead, Wednesday’s economic calendar in the US is super stacked ahead of the Thanksgiving holiday, with US durable goods (0.1% expected), personal income (0.4% expected), personal spending (0.5% expected), and personal consumption all due at 13:30GMT, along with initial jobless claims (435k expected) and continuing claims (4275k expected). University of Michigan confidence (69.5 expected) is then out at 14:55GMT, followed by the house price index (0.0% expected) and new home sales (1.6% expected) at 15:00GMT. Oil and gas inventory data then caps things off at 15:30GMT. US equity futures and oil prices are marginally bid, while gold trades flat. It is worth noting that Wednesday will be the last real trading day of the week in terms of liquidity given the US holiday.

GRAPHIC REWIND

TECHS

EUR/USD: The latest drop below 1.3445 has confirmed a lower top by 1.3785 and opened a fresh downside extension, with the market accelerating below 1.3335 and the 100-Day SMA by 1.3300 before finally stalling out. Next key support now comes in by the 200-Day SMA at 1.3135 and while we would not rule out a test of this longer-term SMA over the coming days, at this point, the risks from here are for some form of a bounce before considering the possibility of bearish resumption, possibly back towards the 1.3600 area. For now we remain on the sidelines and will look for an opportunity to sell into rallies.

USD/JPY: The market has been in recovery mode over the past several days since confirming a double bottom on the break above neckline resistance at 82.00. However, the risks for additional upside should now be limited to the 100-Day SMA by 84.20, and any rallies into this longer-term SMA should be sold in anticipation of a resumption of the broader underlying downtrend. The focus is still on a retest and break of the record lows by 79.75 from 1995, and only a sustained break back above the 100-Day SMA would negate this outlook.

GBP/USD: Overall, price action has been quite choppy, with the market unwilling to commit in either direction at present. The market has been trending lower since reaching 1.6300 several days back, but at the same time has fallen back into some multi-day rising trend-line support. As such, the preferred strategy is to remain on the sidelines and look for a sustained break back above 1.6300 or below 1.5650 for clearer directional bias.

USD/CHF: We contend that the market is in the process of carving a material base by 0.9460, and any setbacks should be very well supported in favor of a sustained recovery. A fresh higher low has now been confirmed by 0.9550 following the latest break back above 0.9975, and the market should now accelerate beyond parity towards our next key topside objective at 1.0300 over the coming sessions. Any intraday setbacks are expected to be well supported ahead of 0.9700.

FLOWS

Hedge fund and real money sellers in Eur/Sek have helped push the pair out of recent ranges. Dip buying in Cable from corporate and Russian accounts.

 

[FXCM-PR Rep]

Euro Extends Decline as EU Holds Cautious Tone, U.S. Dollar Benefits From Flight..

Talking Points

* Japanese Yen: Mixed Across the Board
* British Pound: U.K. Raises 2010 GDP, Cuts 2011 Growth Forecast
* Euro: EU Maintains Growth Projection For 2010, 2011
* U.S. Dollar: Dallas Fed Manufacturing on Tap

The U.S. dollar advanced against its major counterparts during the overnight session, and the near-term rally in the greenback may pick up pace going into the North American trade as fears surrounding the European debt crisis continue to weigh on market sentiment. The EUR/USD tumbled to a low of 1.3136 as the European Union held a cautious outlook for the region and expects the austerity measures to bear down on the economic recovery in the following year. Although, the group maintained its growth forecast for the euro-area as it sees GDP expanding 1.7% this year and 1.5% in 2011, but went onto say that the fundamental outlook remains clouded with high uncertainty as the governments operating under the fixed-exchange rate system struggle to manage their public finances.

As a result, EU Economic and Monetary Affairs Commissioner Olli Rehn said Portugal and Italy may have to take additional steps to meet their fiscal targets as their budget-cutting proposals remain “very ambitious,’ but said that the risks to the economic outlook are broadly balanced while speaking at a news conference in Brussels. The bearish sentiment underlying the single-currency may intensify going into December as European policy makers struggle to restore investor confidence, and the ongoing turmoil in the financial markets could lead the European Central Bank to keep its exit strategy on hold throughout the coming months as it aims to balance the risks for the region. As the exchange rate falls back towards the 38.2%% Fibonacci retracement from the 2009 high to the 2010 low around 1.3100-20, the euro-dollar may continue to retrace the advance from December, but the pair may consolidate in the days ahead as price action holds above the 200-Day SMA at 1.3130.

The British Pound fell back from a high of 1.5648 as investors scaled back their appetite for risk, and the flight to safety may continue to drag on the exchange rate as risk trends dictate price action in the currency market. As the GBP/USD breaks out of the upward trend from May, the pound-dollar may trend lower in the days ahead as it searches for support, but the pair could consolidate in the days as price action holds above the April highs around 1.5500. Meanwhile, the U.K. Office for Budget Responsibility sees GDP expanding 1.8% this year versus an initial forecast for 1.6% rise in GDP, while the group expects the growth rate to rise 2.1% in 2011 amid earlier projections for a 2.3% expansion next year. As policy makers in the U.K. see a risk for a slower recovery in the following year, the Bank of England may look to maintain the expansion in monetary policy throughout the beginning of 2011, but the stickiness in price growth could spur a growing split within the MPC as the central bank expects inflation to hold above target next year. As we head into December, speculation surrounding the outlook for future policy should play an increased role in driving price action for the GBP/USD, and the pair may trend sideways over the coming weeks as we expect to see another three-way split at the December 9 interest rate decision.

The greenback rallied against most of its currency counterparts, with the USD/JPY advancing to a high of 84.25, and the dollar may appreciate further as equity futures foreshadow a lower open for the U.S. market. As the economic docket remains fairly light for Monday, we should see risk sentiment continue to dictate price action for the major currencies, but there could be a small reaction to the Dallas Fed Manufacturing Activity index due out at 15:30 GMT as investors weigh the outlook for future growth. The gauge for manufacturing is expected to increase to 4.5 in November from 2.6 in the previous month, which would be the highest reading since April, and the data could spur a shift in market sentiment as the data encourages an improved outlook for the world’s largest economy.