Daily Video Recap (9/2): Markets Consolidate, ECB to Continue to Support Banks, US Data Surprises


Currency markets mainly consolidated ahead of tomorrow’s non-farm payroll report. The ECB extended its unlimited cash to banks throughout this year, an attempt to not take away special liquidity measure when financial markets remain fragile. US data showed labor productivity slid in the 2nd quarter – a sign companies may have to start hiring, while a measure of pending home sales surprised on the upside – a rare positive release for the US housing market.

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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