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Obama proposal to limit risk and trading for banks is not good news for the USD

Per-Erik Karlsson from Avantage Financial GMBH at 01/22/10


Market Comment

The background weakness in S&P 500 futures that we have mentioned for many days did materialize yesterday and it traded down toward our 1st correction target of 1106, hit low of 1108.50 overnight. We reiterate our view last few day’s report “The price action following the JP Morgan and Alcoa better than expected might signal as shift in the market sentiment to higher demand from investors of top line growth and not only cost cutting. We believe this will be very important going forward and we will focus more attention to the top line numbers and the companies forward looking statements than the actual earnings number.” The Greece issue is still hurting Euro and market seems much focused on the debt problems of Greece and other Euro zone member that might face downgrades. We actually think the increasing public debt will become an issue sooner or later this year and we expect this to be more reflective in the exchange rates. Countries that catch our attention are: Japan with the highest public debt in the G-10, UK and USA. The Obama proposal to limit risk and trading for banks is not good news for the USD and the view is that this could limit investment inflows into the US. We are very surprised to say the least the Obama is going against the banks in such an anti capitalistic way, which would do no good in out opinion as liquidity would be reduced and more pricing inefficiency would certainly surface. EURJPY breaking testing the key support at 126.80 overnight, but bounced back higher rather quickly. We used to have EURJPY as our risk appetite parameter for a long time, but seems like the correlation with the S&P 500 futures have gone totally last few weeks, but it did return yesterday when the S&P sold off. There is still a pretty wide gap in correlation, which we will follow closely to see if it will be closed or if the correlation will fade for a longer period of time. (See EURJPY vs. S&P 500 chart next page). Crude was rejected towards 84 once again last week and back into the 67 to 84.33 range seen for the last 6 months. Seems to be e mix of risk appetite and political tension in Middle East driving prices up and large inventories and oversupply driving prices down on the other end. Last few days the risk appetite card has been taken out for the bulls and thereby Crude has fallen quick. Actually the DOE inventory numbers were not so bearish in our opinion, but the reduction in risk appetite is taking center stage for now.

EURJPY vs. S&P 500 futures, see how the correlation has been totally off the last few months, but returned yesterday on the drop in the S&P.

FX Implied Volatility updated this morning:

Some interesting news stories:


Euro: Held the 1.40 key support level yesterday and bounced higher overnight. Would not be surprised to see a test of 1.4216 (former low) now.

Cable: Traded above the 1.6410 resistance level earlier this week, but fell back towards the close and closed at the lower end of the daily range, nearly 100 pips off the high. Looks like an up trust on the daily chart now, so would be a bit careful today to evaluate how strong that up trust really was. In general we expect the GBP to do relatively well compare to Euro for as long as the Euro trades with a bearish momentum, therefore we think selling EURUSD is a better alternative to get long USD. Seems to be well supported on dips towards 1.61 to downside.

USDJPY: We see longer term falling trend line coming in at 94.06, which is still the key level to break to open for a stronger run higher. We expect sellers to use this level to look for a correction on the strong run from the 85 at 27th of Nov 09. We have 50% Fibonacci of the move from 84.83 to 93.76 coming in at 89.29 and we expect buyers to step in towards this level. Longer term we still expect JPY to underperform due to high public debt, weak demographics and tougher export markets due to slower growth going forward.

Swissy: Broke out of the triangle on the daily chart when it traded above the 1.03 level, looks likely to test 1.05 next.

AUDUSD: Broke the interim rising support line overnight and recent uptrend is broken with 89.05 as the next support major level now. Watch S&P for direction in this pair.

USDCAD: Break above 1.04 today confirms a short term bottom has been put in place at 1.02 and we expect to see a move towards 1.07.

EURJPY: Tested the 126.80 key support overnight, but bounced off this level so far. The correlation between EURJPY and S&P 500 has been totally absent last few weeks, but yesterday when the S&P traded lower it was back in full force. However we still expect JPY to struggle later on in the year as the public debt and slow growth will be a problem.

GBPJPY : Dipped briefly below 146 overnight, looks like a 145.80 to 151 range for now.

AUDJPY: Still trading inside the Rising trend channel from 13th of July with support down at 78.54 and overhead resistance at up at 88.58. Have to see a dip closed towards the rising trend line to be interesting for long set up potentially.


Our outlook
PairOur strategy TodayOur medium term forecast
EUROLong on dips above 1.40 1.42 target reached
CableExpect to see 1.6100 to 1.6300 range todayBetter econ data for GBP opens for rally to 1.67
USDJPYProfit taking as 94.35 level held, 89.30 should provide support and looking enter long down there if possibleTest of 94.42
USDCADBreak above 1.04 opens for a run to 1.07 Hit 1.02, but failed to break lower, likely to see 1.07 now
EURJPYLooking at potential longs as 126.80 key support held overnight Our 133.70 target reached
AUDJPYExpect more JPY weakness and AUDJPY should head higher, but need lower levels to be attractive for longsLooking to get long at lower levels
GBPJPYBullish above 146, looking for 151 test again 153 target hit, stand aside
AUDUSDOur 0.9120 target reached. Bearish for a test of 0.8905Test of 0.9405

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