Forex: Euro Halts Three-Day Rally, U.S. Dollar Benefits From Safe-Haven Flows

Talking Points

Japanese Yen: Benefits From Risk Aversion
Pound: BoE Sees “Substantial Headwinds”
Euro: Manufacturing, Services Slows More-Than-Expected
U.S. Dollar: Existing Home Sales, Leading Indicator on Tap

Dismal data coming out of the Euro-Zone pushed the single-currency to a low of 1.3311 during the overnight trade, and the exchange rate may continue to push lower throughout the day as investors scale back their appetite for risk. The EUR/USD halted the three-day rally, with the daily relative strength index pulling back from overbought territory, and we may see the exchange rate fall back towards the 200-Day SMA at 1.3208 going into the end of the week to test for short-term support. As the RSI falls from a high of 74, the downturn in the oscillator suggest that a corrective retracement will unfold going into the following week, and a break below the 200-Day moving average is likely to expose the 38.2% Fibonacci retracement from the 2009 high to the 2010 low around 1.3120-30.

Meanwhile, the economic docket showed manufacturing and service-based activity in the Euro-Zone grew at a slower pace in September, with the composite index falling back to 53.8 from a revised 56.2 in July amid forecasts for a 55.7 print. At the same time, a spokesman for the European Commission talked down fears surrounding Greece and said that there is “no discussion” of providing addition funds to the ailing economy” during a press release in Brussels. The commission went onto say that it expects borrowing rates for Greece to normalize by the end of its three-year program, but the austerity measures taken on by the government is likely to weigh on the recovery as policy makers withdraw fiscal support. As the rebound in economic activity cools, managing the downside risks for the region will certainly become an increasing challenge for the European Central Bank, and the uncertainties surrounding the growth outlook could weigh on the exchange rate over the medium-term as the Governing Council expects to see an “uneven” recovery.

 The British Pound held within the previous day’s range, with the exchange rate rising to 1.5305 during the European trade, and the currency may hold steady throughout the day as price action fails to hold above the 38.2% Fibonacci retracement from the 2009 low to high around 1.5700. As the GBP/USD carves a near-term top, the exchange rate my work its way back towards the lower bounds of its recent range going into the end of the week, which lies around 1.5300. Nevertheless, Bank of England Chief Economist Spencer Dale said the U.K. faces “substantial headwinds” as the banking sector remains fragile, and went onto say that the economic recovery needs to be sustainable during an interview with the Western Mail. As policy makers hold a cautious outlook for the region, we are likely to see the BoE maintain the expansion in monetary policy throughout the remainder of the year, but the stickiness in price growth could spur interest rate expectations as inflation continues to hold above the government’s 3% limit.

The greenback bounces back against most of its major counterparts, while the USD/JPY fell back from a high of 84.66 ahead of the U.S. trade, and the dollar may continue to gain ground throughout the day as it benefits from safe-haven flows. Nevertheless, the economic docket is expected to show existing home sales in the world’s largest economy increase 7.1% in August following the record-pace of contraction during the previous month, while the leading indicator is projected to tip 0.1% for the second consecutive month in August. As risk sentiment continues to dictate price action in the currency market, the data could stoke a rebound in market sentiment as the outlook for future growth improves.

 

 

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Forex: Euro Carves Near-Term Top, U.S. Dollar Benefits From Safe-Haven Flows

Talking Points

Japanese Yen: Strengthens Across the Board
Pound: Remains Range Bound Ahead of BoE Minutes
Euro: ECB Says Rates “Appropriate”
U.S. Dollar: Industrial Production, NAHB Housing Index on Tap

The Euro slipped to a low of 1.3830 during the overnight trade as policy makers in Europe held a cautious outlook for the region, and the single-currency may trend lower throughout the day as investors scale back their appetite for risk. European Central Bank President Jean-Claude Trichet said that the Governing Council remains “cautious” on the recovery during a conference in Marrakech, Morocco, and warned that excess volatility in the currency market could have an adverse effect on economic stability as it bears down on global trade. Mr. Trichet argued that the euro-area needs “more ambitious” reforms as the governments operating under the fixed-exchange rate system struggle to manage their public finances, and went onto say that most members of the ECB agrees with continuing its asset purchase program as the economic outlook remains clouded with uncertainties.

At the same time, Governing Council board member Ewald Nowotny voiced his support to maintain the emergency programs during an interview with an Austrian newspaper and said that the extraordinary measures will help to “correct imbalances in the capital markets” as the global financial system remains fragile. As European policy makers retain a cautious outlook for the region, we may see the ECB maintain the expansion in monetary policy throughout the beginning of 2011, and the soft tone held by the central bank could drag on the exchange rate as investors weigh the outlook for future policy. As the EUR/USD struggles to hold above 1.3900, the 61.8% Fibonacci retracement from the 2009 high to the 2010 low, we may see a corrective retracement unfold this week as the daily relative strength index finally falls back from overbought territory, and the exchange rate may work its way back towards the 50.0% Fib at 1.3500 to test for near-term support.

The British Pound slipped to a low of 1.5837 on Monday to maintain the narrow range from the previous week, and the GBP/USD may continue to trend sideways over the next 24 hours of trading as investors wait for the Bank of England policy meeting minutes due out on Wednesday at 8:30 GMT. We expect to see an 8-1 vote count amongst the MPC as board member Andrew Sentance sees scope to start normalizing monetary policy, but the central bank may hold a dovish tone for future policy given the substantial amount of slack within the real economy. However, a three-way split within the central bank is likely to trigger a selloff in the British Pound as market participants speculate the BoE to expand monetary policy further, and lead the GBP/USD to retrace the advance carried over from the previous month. Nevertheless, the economic docket showed home prices in the U.K. increased at the fastest pace in eight months, with the Rightmove index jumping 3.1% in October following the 1.1% in the previous month, and the stickiness in price growth could lead the BoE to maintain a neutral policy stance going into the following year as it aims to balance the risks for the economy.

The greenback continued to bounce back against most of its major counterparts, while the UJSD/JPY slipped to a low of 81.12 as the Japanese Yen strengthened across the board, and safe-haven flows are likely to dictate price action throughout the day as the economic docket remains fairly light for Monday. Industrial outputs in the world’s largest economy is forecasted to expand 0.2% for the second consecutive month in September, while the NAHB housing market index is projected to increase to 14 in October from 13 in the month prior, but the dollar may show little reaction to the economic developments as risk trends continue to dictate price action in the foreign exchange market.

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Forex: U.S. Dollar Mix On Thin Trading, Euro Holds Tight Range

Talking Points

Japanese Yen: Mixed Against Majors
Pound: U.K. Banks Raise Borrowing Costs
Euro: Holds Narrow Range For Third Day
U.S. Dollar: ECB Trichet, Fed’s Yellen on Tap

 

The Euro fell back from a high of 1.4006 during the overnight trade to maintain the narrow range from the end of the previous week, and the exchange rate may hold steady throughout the day as the economic docket remains fairly light for Monday. The EUR/USD was unphased by the comments from the European Central Bank as price action held within a 90pip range, but the speech by central bank President Jean-Claude Trichet scheduled for 16:00 GMT could spark increased volatility in the exchange rate as investors weigh the outlook for future policy. ECB board member Guy Quaden said the Governing Council may decide to normalize monetary policy further in the first quarter of 2011 as he expects the region to grow at a “slower, more moderate pace,” and went onto say that current policy remains “appropriate” during an interview with Bloomberg News.

 

At the same time, Governing Council member Lorenzo Bini Smaghi held a hawkish tone during an interview with Market News International and said “some inflationary pressures” are becoming apparent, led by higher energy costs, and the central bank may look to reestablish its exit strategy going into the following year as they maintain their one and only mandate to ensure price stability. ECB President Trichet may talk up the likelihood for a rate hike in the beginning of 2011 as the outlook for growth and inflation improves, and hawkish comments from the central bank head could drive the EUR/USD higher going into the end of the year as market participants speculate the Federal Reserve to increase quantitative easing at its next rate decision in November. However, as the recent rally in the euro-dollar remains overbought, with the daily relative strength index holding at 77, a corrective retracement may unfold in the days ahead, which could lead the pair to test 1.3500, the 50.0% Fibonacci retracement from the 2009 high to the 2010 low, for near-term support.

 

The British Pound bounced back from a low of 1.5913 during the European trade, with price action holding above the 10-Day moving average at 1.5850, and the GBP/USD may continue to trend higher over the near-term as it maintains the rally carried over from the previous month. As a result, the pound-dollar may make another run at 1.6000 later today as it retraces the overnight decline, but a shift in market sentiment could push the exchange rate lower as the U.S. dollar appears to be regaining its footing against its major counterparts. Meanwhile, a report by the Bank of England showed commercial lenders in the U.K. raised the cost of two-year fixed mortgage rates with a 25% deposit in September to 3.79% from 3.74% in the previous month, and the central bank is likely to maintain a dovish outlook for future policy as household and businesses continue to face tightening credit conditions. The BoE minutes due out later this month is likely to show the majority of the MPC vote to maintain its current policy in October, but a three-way split within the central bank could trigger a selloff in the British Pound as investors speculate the board to expand QE in the coming months.

 

U.S. dollar price action was slightly mixed overnight, with the USD/JPY slipping to a low of 81.71, and the greenback could face choppy price action throughout Monday’s trade as the U.S. bond market remains closed in observance for Columbus Day. With no scheduled event risks, risk trends are likely to dictate price action as the equities market are set to open their doors, but here could be a shift in market sentiment as members of the Fed are scheduled to speak throughout the day.

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Forex: Bearish U.S. Dollar Sentiment Carries Into October, Euro Extends Rally

Talking Points

Japanese Yen: Losing Ground Against Majors
Pound: Housing Withdrawals Fall Further in 2Q
Euro: Unemployment Pushes Higher in August
U.S. Dollar: Personal Spending, ISM Manufacturing on Tap

The Euro rallied to a high of 1.3763 during the overnight trade, and the single-currency may continue to push higher going into the end of the week as the bearish sentiment behind the U.S. dollar carries into October. After clearing 1.3500, the 50.0% Fibonacci retracement from the 2009 high to the 2010 low, the EUR/USD looks poised to test the 61.8% Fib around 1.3890-1.3900 as it maintains the advance from the previous month. With the 50-Day moving average (1.3011) approaching the 200-Day at 1.3185, a bullish crossover could lead the euro-dollar to retrace the decline from earlier this month as the greenback continues to weaken against its major counterparts. However, as the near-term rally remains overbought, with the daily relative strength index increasing to 77, we may see a corrective retracement play out in the days ahead.

Meanwhile, European Central Bank board member Ewald Nowotny said the Governing Council will purchase government bonds as long as “inefficiencies prevail” in the financial market, and went onto say that the current situation in some areas remain sensitive as the governments operating under the fixed-exchange rate system struggle to manage their public finances. Given the ongoing weakness within the real economy paired with the uncertainties surrounding the future outlook, the ECB may see scope to maintain the expansion in monetary policy throughout the beginning of 2011 as it holds a dovish outlook for inflation. Meanwhile, the economic docket showed unemployment in the Euro-Zone unexpectedly increased to 10.1% in August to mark the highest reading since June 1998, but the single-currency showed little reaction to the data as it benefits from the weakness in the greenback.

The British Pound pared the decline from earlier this week to reach a high of 1.5872 on Friday after closing above the 38.2% Fibonacci retracement from the 2009 low to high at 1.5700 during the previous day, but the GBP/USD may consolidate going into the following week as investors maintain a cautious outlook for the U.K. A report by the Bank of England showed home equity withdrawals tumbled GBP 6.2B in the second quarter after falling a revised GBP 5.3B during the first three-months of the year, and the ongoing weakness in the private sector could lead the MPC to expand monetary policy further in October as it aims to encourage a sustainable recovery. If we see a three-way split within the BoE, speculation for an expansion in quantitative easing would spark a bearish in the British Pound as investors weigh the prospects for future policy.

The greenback continued to weaken against its major counterparts, with the USD/JPY slipping to a low of 83.15, and the dollar may depreciate further in the following as the bearish sentiment carries into October. As market liquidity tends to taper off ahead of the weekend, the greenback may continue to trend lower throughout the day, but the event risk scheduled for the U.S. trade could spark increased volatility in the exchange rate as investors weigh the outlook for the world’s largest economy. Personal incomes are expected to increase 0.3% in August, with market participants forecasting a 0.3% rise in private spending, while the ISM manufacturing index is projected to fall back to 54.5 in September from 56.3 in the previous month. The mixed batch of data could spark choppy price action in the U.S. dollar, but the ISM report is likely to be the biggest market-mover of the day as manufacturing leads the economic recovery in the U.S.

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Forex: Bearish U.S. Dollar Sentiment Gathers Pace, Euro Breaks Narrow Range

Talking Points

Japanese Yen: Mixed Amongst Major Currencies
Pound: BOE’s Posen Sees Scope For Further Easing
Euro: ECB Says Rates ‘Appropriate’
U.S. Dollar: Producer Prices, Trade Balance on Tap

 

The U.S. dollar weakened further against its major currency counterparts, with the EUR/USD rallying to a high of 1.4121 on Thursday, and the bearish momentum behind the greenback may carry into the end of the week as investors expect the Fed to expand monetary policy further. As EUR/USD breaks out of the narrow range from earlier this week, we are likely to see the pair continue to retrace the decline from earlier this year, and euro-dollar looks poised to make a run at 1.4440-50, the 78.6% Fibonacci retracement from the 2009 high to the 2010 low, as price action holds steadily above the 61.8% Fib around 1.3890-1.3900. With the 50-Day moving average (1.3158) approaching the 200-Day SMA at 1.3165, the bullish crossover suggests that the exchange rate will continue to push higher throughout the month, but there could be a corrective retracement in the coming days as the recent rally remains overbought. Given the strong bearish sentiment underlying the greenback, we would need the RSI to fall back below 70 to see a pullback in the exchange rate, and the rally may carry into the following week as the index bounces back to 78.

 

Meanwhile, the European Central Bank reiterated that the interest rate is “appropriate” in its monthly report and went onto say that price growth remains contained as the ongoing slack within the economy bears down on inflation. At the same time, ECB board member Yves Mersch said that the recovery in Europe remains in-line with the central bank’s forecast and that the recent slew of soft data “does not warrant increased pessimism” for the region, but went onto say that it remains “too early to claim victory” as the economic outlook remains clouded with uncertainties. As the Governing Council maintains a neutral outlook for future policy, the ECB may look to reestablish its exit strategy going into 2011, which would instill a bullish outlook for the single-currency in the beginning of the following year as the Fed maintains a dovish stance.

 

The British pound rallied to a fresh monthly high of 1.6066 during the overnight, and the exchange rate is likely to push higher going into the end of the week as carves out a short-term bottom around 1.5700, the 38.2% Fibonacci retracement from the 2009 low to high. As a result, the GBP/USD looks poised to test the 23.6% Fib around 1.6230-40, and the pair may continue to retrace the decline from the beginning of this year as the rally gathers pace. Meanwhile, Bank of England board member Adam Posen said that the global economy needs increased monetary stimulus according to an article in the Handelsblatt newspaper, and Mr. Posen may push to expand policy further in the coming months given the substantial amount of slack within the real economy. As a result, the British Pound is likely to face increased volatility over the following week as the BoE is scheduled to release its policy meeting minutes on Wednesday, and a three-way split within the MPC could spark a sharp selloff in the GBP/USD as market participants see scope for the BoE to expand quantitative easing further over the coming months.

 

The greenback weakened against all of its major counterparts, with the USD/JPY tumbling to a fresh yearly low of 80.88, but the dollar is likely to face increased volatility going into the end of the week as the economic docket is expected to reinforce a mixed outlook for future growth. Producer prices in the world’s largest economy is forecasted to increase at an annualized pace of 3.7% in September after rising 3.1% in the previous month, while the trade deficit is expected to widen to -$44.0B in August from -$42..8B in the month prior. However, market participants may turn a blind eye to the economic developments as they look towards the Fed’s interest rate decision on November 3, and comments from the central bank are likely to play an increased role in dictating price action as investors weigh the prospects for future policy.

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USD Off the Ropes Following Bernanke and Geithner 1-2 Punch Combination

FUNDYS

 

After nearly breaking the intense bullish sequence of 27 consecutive closes higher than the previous daily low on Friday (as we had projected), the Euro finally officially broke the sequence on Monday in dramatic fashion, dropping some 70 points in the final hour of trade. As per our analysis in previous commentary, the break of this sequence could now open a further drop of some 300-400 points before we see any real resumption of Euro buying.

 

Relative Performance Versus USD Tuesday (As of 10:35GMT)

 

EURO-0.14%
AUSSIE -0.17%
SWISSIE-0.19%
YEN-0.26%
KIWI-0.33%
CAD-0.33%
STERLING-0.60%

 

The recovery in the US Dollar over the past few days has been brought on by a scaled back expectation for a second round of quantitative easing from the Fed, which had initially accelerated following the Bernanke speech on Friday. While it is certainly true that the Fed Chair outlined the possibility for another round of quantitative easing, the fact that he did so should not have come as a shock to market participants with the subject of the speech being “Monetary Policy Objectives and Tools in a Low-Inflation Environment.” However, the fact that Bernanke failed to hint at any timing for such measures, or offer any real specifics on the policy, while also reminding investors of the “if necessary” language in the monetary policy statement, was indeed unexpected (not by us), and therefore resulted in some profit taking on USD shorts. This was the set-up for the anticipated reversal and fundamental catalyst for the start to the comeback in the Greenback.

 

So from here, what then would be the next market event to trigger additional USD buying and help build momentum for the current USD rally? Well, that came late Monday when Treasury Secretary Geithner was out with some rather strong language on the US Dollar that we believe should send a clear message to the markets.

 

While it is certainly true that the US has maintained a questionable strong US Dollar policy in light of what appears to be actions on behalf of the government that would be anything but USD positive, to us, it is highly telling that Treasury Secretary Geithner went over and beyond on Monday with regard to the official stance on the US Dollar. Should the Treasury Secretary have wanted to keep things status quo, he simply could have just said that the US maintains a strong USD policy. However, Geithner came out swinging after saying that the USD would remain the reserve currency in our lifetime, the US supported a strong Dollar, and the US would not resort to policy to force a devaluation in the currency.

 

We believe this should send a strong message to the markets that just maybe, the US does really maintain a strong USD policy, and as we have said in previous commentary, the fact that the USD is weaker right now is more a function of loose monetary policy in order to stimulate growth, rather than a specific desire or mandate to weaken the currency in order to rebalance the economy.

 

We need to remind ourselves that the world relies heavily on a stronger US Dollar. The system works because the US is able to consume product from abroad at attractive prices because the US Dollar is stronger and other currencies are happily weaker. Other major economies heavily rely on their export sectors and therefore are encouraged to have a weaker currency in order to promote their product. This is why quantitative easing measures (that devalue currency) in other economies can be more easily justified and why we feel the Fed should be much more sensitive (and we believe they are) to the longer-term impact and inflationary threats from the implementation of additional quantitative easing measures.

 

We acknowledge and commend the Fed for their efforts to this point and feel they have done an excellent job at managing the economy and prioritizing the immediate threats over the longer-term fallout from such policy. However, from here, the risks for any additional QE measures should be weighed heavily, as we fear that if the Fed goes to far, it will pass that hyperinflationary pointof no-return just like Japan did several years back. But in this case, the fallout will be more substantial and threatening to the global economy.

 

In our opinion, US government and Fed officials are very aware of this and have stepped up their efforts to remind us of this fact. Bernanke continues to retain a balanced and cautious approach, only willing to implement additional easing measures “if necessary.” The markets have incorrectly chosen to focus on the other language which outlines such measures, and has for the most part ignored the “if necessary” language. But perhaps these latest remarks from Geithner highlight a coordinated effort to make it all the more apparent that just maybe, another round of quantitative easing is in fact not guaranteed, and even if we do see another round, it will not be anything like what the markets have been pricing in.

 

Geithner’s comments are sending a strong message to us and that message is to not be overly aggressive in selling the Dollar. No economy has ever flourished and prospered as a dominant global power with a weak currency, and we think that the US government is well aware of this fact and ultimately, will do what is necessary to ensure the stability and strength of the Greenback.

 

The technical evidence for a major USD rally is being confirmed on the fundamental front, and while we would not abandon the possibility for renewed USD selling at some point, for now, the risks are for the US Dollar to continue to mount an across the board come back. Our target for the Euro over the coming days comes in by 1.3500-1.3600.

 

Elsewhere, the RBA released the Minutes from the latest central bank decision which were rather balanced after the central bank failed to signal to investors that they would be looking to hike rates at the next meeting. The RBA said that they would need to continue to monitor data and developments before being able to make another decision. The central bank also conceded that the stronger currency helped to offset the need for additional rate rises. We believe that just as QE2 has been incorrectly priced in to the markets, so too has the strength in the Australian Dollar. In our opinion the antipodean is at risk for a major depreciation over the medium and longer-term, with the currency at cyclical highs and the very hot economy at risk for a cooling off.

 

Meanwhile in the Eurozone, data was on the whole quite mixed, with the current account coming in weaker, while the ZEW was much stronger. However, any bids on the back of the stronger Eurozone ZEW, were easily offset by a weaker than expected German ZEW print. Overall, the data hardly factored into price action. Over in the UK, economic data failed to inspire any confidence in the Pound, with CBI business optimism and trends total orders coming in far worse than expected.

 

Looking ahead, US building permits (575k expected) and housing starts (580k expected) are due at 12:30GMT, followed by the Bank of Canada rate decision (on hold at 1.00% expected) at 13:00GMT. The official circuit is stacked with speakers today, and the aggregated comments could very well influence price action. ECB President Trichet speaks on the topic of the economy at 12:30GMT, followed by Fed Evans, Dudley, Lockhart, Fisher, and Kocherlakota, all speaking on the topic of the economy as well, at 13:40GMT, 14:00GMT. 15:30GMT, 16:50GMT, and 17:20GMT respectively. Bank of England Mervyn King then takes his turn on the topic of the economy at 18:50GMT, followed by Fed Chair Bernanke at 20:00GMT. Fed Duke ends the run of speakers at 23:00GMT. US equity futures and commodity prices are tracking lower into the North American open.

 

GRAPHIC REWIND

 

TECHS

 

 

 

 

EUR/USD: The market has finally broken a major bullish sequence of 28 consecutive closes higher than the previous daily low, with the pattern having supported a massive push higher in the Euro over the past several weeks from roughly 1.2600-1.4100. Daily studies have turned down from overbought and the close below 1.3935 on Monday officially negates the sequence and opens the door for deeper setbacks towards 1.3500 over the coming sessions. Any intraday rallies should be very well capped ahead of 1.4000, with a break below 1.3775 to accelerate. The market has also managed a close below the 10-Day SMA for the first time since early September.

 

 

USD/JPY: Daily studies are well oversold and the latest setbacks have stalled out for now just ahead of the record lows by 80.00 from 1995. A bullish hammer close last Thursday and Friday could suggest that the market is finally ready for a short-term correction, but we would need to see a break back above 81.85 to help reaffirm these prospects and officially relieve downside pressures. Back below 80.90 opens the door for a direct test on the critical barriers at 80.00.

 

 

GBP/USD: Rallies have been very well capped above psychological barriers at 1.6000 and the market has since stalled out and reversed course in favor of a bearish resumption. The risk from here is for additional weakness, with a break back below 1.5755 to confirm bearish outlook and accelerate declines. Ultimately, only back above 1.6000 would negate outlook and give reason for pause.

 

 

USD/CHF: Setbacks have most recently managed to extend to fresh record lows by 0.9460 ahead of the latest minor bounce. However, while the overriding trend still remains intensely bearish, we like the idea of a major bottom carving out at current levels, in anticipation of some significant upside over the shorter-term and longer-term. Daily studies have just crossed up from oversold levels, while weekly studies are still well oversold and show plenty of room to run to the upside. As such, we look for a close back above 0.9600 to confirm bias and open a major reversal.

FLOWS

An ACB and corporate demand in Usd/Jpy with heavy offers from Japanese accounts. IMM and model types buying on the way up in Aud/Usd. An ACB is a buyer of Eur/Usd along with real money demand, and an Asian name and German bank are notable sellers in Cable.

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Forex: Euro Under Pressure, U.S. Dollar Benefits From Safe-Haven Flows

Talking Points

Japanese Yen: Slightly Mixed Across the Board
Pound: U.K. Construction Expands At Faster Pace
Euro: Investor Confidence Improves Further
U.S. Dollar: Pending Home Sales, Fed Chairman Bernanke on Tap

As EUR/USD price action holds below the 61.8% Fibonacci retracement from the 2009 high to the 2010 low around 1.3880-90, a corrective retracement could unfold in the days ahead as the rally from the September remains overbought, and the daily relative strength index should fall back below 70 this week if we see the exchange rate work its way back towards the 50.0% Fib around 1.3500. The euro-dollar showed little reaction to the Sentix survey even though the report showed investor confidence increased to a three-year high of 8.8 in October from 7.6 in the previous month, and shift in market sentiment could drive the exchange rate lower throughout the day as risk trends continue to dictate price action in the currency market. However, if the euro-dollar is able to find short-term support around the 50.0% Fib, there could be a phase of consolidation over the coming weeks given the uncertainties surrounding the economic outlook, and the EUR/USD may trend sideways before we see another breakout in the exchange rate.

Meanwhile, Ireland’s central bank lowered its growth forecast for the region and expects GDP to expand 0.2% this year amid an initial forecast for a 0.8% rise, while the growth rate is anticipated to increase 2.4% next year versus earlier projections for a 2.8% expansion. The central bank went onto say that the recovery in Europe remains “uneven” as the rebound in economic activity appears to be tapering off in the second-half of the year, and went onto say that the outlook remains clouded by high uncertainties as the governments operating under the single-currency struggles to manage their public finances. In addition, the economic docket showed producer prices in the Euro-Zone increased at an annual pace of 3.6% in August after expanding 4.0% in the previous month, and the slower pace of inflation paired with the slowing recovery could lead the Governing Council to maintain a dovish policy stance going into 2011 as it aims to balance the risks for the region.

The British Pound bounced back from a low of 1.5748 during the European trade as U.K. policy makers held an improved outlook for the region, but the GBP/USD is likely to trade within the narrow range carried over from the previous week as price action struggles to hold above 1.5900. Chancellor of the Exchequer George Osborne said the economy has “moved out of the danger zone” during an interview with BBC Radio, while former Bank of England Deputy Governor John Gieve talked down speculation for a further expansion in quantitative easing and said interest rates will have to rise going forward according to an article in the Guardian newspaper. As investors mull over the outlook for future policy, the GBP/USD is likely to hold steady ahead of the BoE interest rate decision later this week, but the central bank may refrain for releasing a policy statement like we’ve seen for the past few months.

The greenback bounced back against most of its major counterparts, with the USD/JPY rallying to a high of 83.86 overnight, but the dollar is likely to face increased volatility later today as the economic docket is expected to reinforce a mixed outlook for the world’s largest economy. Pending home sales in the U.S. is forecasted to increase 0.9% in August following the record 20.1% drop in the previous month, while factory orders are projected to fall 0.4% during the same period after tipping 0.1% in July. In addition, Fed Chairman Bernanke is scheduled to speak regarding the economy later today, and comments from the central bank head could shake up the majors as investors weigh the prospects for future policy.

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Euro Dips Continue to Be Used As Formidable Position Building Opportunities

FUNDYS

It has been a tale of 2 sessions on Tuesday, with the USD finding some bids early on, and currencies selling off in Asian trade, before turning around sharply in Europe, with the USD coming back under intense pressure. Some of the notable gainers include the Euro, Swissie and Sterling, with the Euro and Sterling finding some bids on better than expected PMI data, while the Franc remains eternally well bid and has rallied to test the record highs from 2008 (USD/CHF lows). But to truly attribute the latest USD selling to economic data would be foolish (especially in light of significantly weaker Eurozone retail sales and some downbeat comments from ECB Ordonez), with most of the price action more likely originating from the increased likelihood that the Fed will implement a second round of quantitative easing

Relative Performance Versus USD Tuesday (As of 10:45GMT

EURO+0.68%
SWISSIE+0.45%
STERLING+0.28%
CAD+0.26%
KIWI+0.11%
YEN-0.06%
AUSSIE-0.86%

The Australian Dollar on the other hand is by far the weakest currency on the day thus far, and should continue to be for the remainder of the day after the Reserve Bank of Australia surprised markets by leaving rates on hold at 4.50%, while also offering a far less than hawkish accompanying statement. Although the central bank conceded that higher rates would be appropriate at some point in the future, comments that the “financial markets were still uncertain” and “overall credit growth remained subdued” were enough to send chills down the spines of Aussie bulls.

Technically, the pullback in the currency is certainly warranted, with daily studies rolling over from overbought after the antipodean rallied most impressively against the buck over the past 5 weeks. Rallies have stalled about a hundred points off the key multi-year highs from 2008 by 0.9850, but as we have mentioned in our analysis, the Australian Dollar sits by longer-term cycle highs and is at risk for a material pullback over the medium and longer-term. The fundamental catalyst has yet to fully reveal itself, but we anticipate that today’s rate decision could start to paint that picture with an economy that is becoming more aware of just how reliant it is on a shaky global outlook.

One must not overlook some other key developments over the past few hours that only help to reaffirm the case for additional Aussie weakness. On the data front, Australian retail sales have come in softer than expected, while at the same time, China services PMI has dropped in September. Aussie bulls have been very quick to discount problems in the US and Eurozone, on stronger local fundamentals and a very upbeat China outlook, and although it is only one day’s worth of economic data, the results are sure to force some reconsideration of positioning.

Another major development has been the latest Bank of Japan rate decision which had opened some decent selling in the Yen (in Asian trade) after the BOJ also surprised markets by easing monetary policy further, effectively lowering rates to 0.0% (0.0%-0.10%) and concurrently stepping up asset purchases. The BOJ cited a strong Yen and slower global economy as the reasons for the Japanese slowdown and deterioration in corporate sentiment.

There has been a very apparent pattern over the past several days of early USD buying, followed by a reversal and stronger USD selling into the latter half of the day. We have talked about the overbought nature of the Euro and the need for the market to correct, but have also discussed a critical sequence that needs to be broken in order for a full on correction to play out. The key level to watch today comes in by 1.3665, with a daily close below this level required to force a shift in the structure. Otherwise, the bull trend remains intact and eyes next critical topside barriers by 1.4000.

 

Looking ahead, US ISM non-manufacturing data (52.0 expected) due at 14:00GMT is the only major release in North American trade. On the official circuit, Treasury’s Miller speaks at 13:00GMT, while Treasury’s Warren follows a while later at 19:20GMT. US equity futures point to a mildly higher open, while commodities are well bid with gold breaking to yet another record high over $1325. At this point, the moves in gold are well overdone on a short-term basis and would recommend the establishment of a short position by $1325. The daily RSI is above 80 and very overbought.

GRAPHIC REWIND

TECHS

EUR/USD: The pace and intensity of this latest Euro rally that began in early September, has been most impressive, with the currency pushing higher on a daily basis to now close in on next major psychological barriers by 1.4000. However, daily studies are well overbought at this point, and the risk from here is for some form of a corrective pullback before considering a bullish resumption. The key to a reversal is now entirely contingent on the daily close in the major.Although we have seen previous daily higher lows broken to the downside on numerous occasions throughout the rally, we have yet to see a daily close below the previous daily low. The market has now put in a dramatic 19 consecutive closes higher than the previous daily low, and we would therefore need to see a close below the previous daily low to officially trigger the start to a legitimate corrective decline. Monday’s bearish close opens the door for a potential break of this sequence, and we will need t see a close below 1.3665 to officially confirm. Nevertheless, until we can see a close below the previous daily low, the prevailing uptrend remains firmly intact, and a near test of 1.4000 can not be ruled out.

USD/JPY: The latest setbacks have stalled just shy of the recently established multi-year lows by 82.85, with Monday’s break back above 83.60 temporarily relieving downside pressures after ending a sequence of consecutive daily lower highs and a near-2 week decline. From here there is certainly room for additional upside, but ultimately, while the market trades below 86.00, the overall structure still remains intensely bearish and rallies should be met with solid resistance. As such, we remain sidelined and prefer to look to sell into rallies or buy overdone dips towards the record lows by 80.00 from 1995.

GBP/USD: The latest break back above 1.5800 threatens the integrity of the downtrend and potentially exposes a move back towards 1.6000 over the coming sessions. However, the 78.6% fib retrace off of the 1.6000-1.5295 move comes in by 1.5845, and inability to close above this fib could keep alive the possibility for a lower top below 1.6000 ahead of the next major downside extension. Look for a close back below 1.5670 to confirm outlook and likely accelerate declines back towards 1.5500. A close above 1.5845 negates.

 

USD/CHF:(See Below)

FLOWS

 

Japanese investor bids in Usd/Jpy. US commercial bank and US investment bank big buyers of Eur/Usd on dips. Long liquidation seen in Aussie on a break below 0.9550. Local bids in Usd/Cad. Some official interest cited in Usd/Chf below 0.9700.

TRADE OF THE DAY

 

USD/CHF:The market continues to extend declines to fresh yearly lows despite oversold short-term and medium-term studies. From here, the risks are for some more weakness, with a retest of the record lows by 0.9645 seen as the likely target. However, any additional declines below 0.9645 are seen limited and we like the idea of establishing a significant long position on a retest of this level. STRATEGY: BUY @0.9650 FOR AN OPEN OBJECTIVE; STOP 0.9545. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON TUESDAY

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Forex Daily Outlook – October 27th 2009

After weeks of weakness, the US dollar made a strong corrective move, gaining across the board. Today’s CB Consumer Confidence is the main event, and there are lots of other events all over the world. Let’s see what’s up for today:

Australian NAB Quarterly Business Confidence was finally published, and it turned positive, rising to 16 points. This helped the Aussie slightly recover. AUD/USD now trades at 0.9180. The Australian dollar was also hit by yesterday’s disappointing PPI, that rose by only 0.1% last quarter.

For more on the Aussie, read the AUD/USD Forecast.

In Switzerland, the UBS Consumption Indicator is due today. USD/CHF is now getting away from parity. If you’re into the Swissy, check out James Chen’s recent technical analysis for this pair.

In Europe, the M3 Money Supply is expected to grow more slowly, at 2.1%, showing that deflation is still strong. EUR/USD now trades at 1.4895, bouncing off the support line. Read Casey Stubbs’ analysis about the Euro’s corrective move.

For more on the Euro, read the EUR/USD Forecast.

The British Pound is weathering this dollar correction quite well, with GBP/USD currently at 1.6335. CBI Realized Sales are due to double from 3 to 6 points, helping the Pound.

For more on the Pound, read the GBP/USD Forecast.

Moving to the US, the S&P/CS Composite-20 HPI is expected to show a softer fall in prices. An annualized figure of a 11.9% fall is predicted to be reported, better than the 13.3% fall.

The CB Consumer Confidence is expected to show that consumers are a little bit more confident, rising from 53.1 to 53.7 points. Late in the day, Timothy Geithner will be speaking, and he might slip something that will move the markets.

In Canada, BOC governor Mark Carney will start testifying in parliament and will talk about last week’s monetary report. USD/CAD gained from the dollar’s correction, rising above the 1.0625 support line, currently trading at 1.0684.

For more on the loonie, read the USD/CAD Forecast.

Japanese Retail Sales close the day, with an expected annual fall of 1.5%.

That’s it for today. Happy forex trading!

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