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Wednesday's FOMC meeting is this week's big event

Per-Erik Karlsson from Avantage Financial GMBH at 01/26/10


Market Comment

The selloff in S&P 500 futures Friday was intense and it wiped out all the gains from the month of December in a few days. We expect to see some buyers to step for a potential bounce now that it reached the -3 sigma level on the daily chart at 1087. Lot of stories out on Greece and the debt problems lately, which has put focus on the challenges the EMU faces due to the different economic cycles of its member countries. The problem is of course that the countries have no way to adjust the monetary policy to the country’s need and problems. So it all ends up with a big compromise that really is not perfect for anyone, which is of course not optimal. We have debated for years that the Euro currency viability and limitations would be tested once the first recession hit the Euro zone, which is now. So now is the time for the Euro to really prove it can be a serious alternative to the reserve currency status of the USD. We expect the debt burden among nations will become more of focus going forward and would not be surprised to see the high debt currencies to struggle going forward as the risk of facing higher funding costs could hurt the budget. 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. In fact this morning the Euro rallied nicely based on news the 5 year issuance from Greece was well received by the market. 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. Also see the news story in today’s Financial Times talking about how the repo market could be affected by the Obama proposed bank levy. (Link listed below) 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 our opinion as liquidity would be reduced and more pricing inefficiency would certainly surface. EURJPY breaking testing the key support at 126.80 Friday and overnight, but bounced back higher rather quickly. We used to have EURJPY as our risk appetite parameter for a long time, but seem like the correlation with the S&P 500 futures have gone totally last few weeks, but it did return Friday 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. The contango is slightly narrower over the last session in Crude, which is a good thing for potential rally. GBP continues to trade strongly this morning on expectations that UK might emerge from recession faster than expected. GBP has been rather sensitive to EUR flows lately as it seems to be support for GBP when the EUR is on the back foot and vice versa, but in general the GBP is supported for now and parity in EURGBP seems very far away now. Wednesday’s FOMC meeting is this week’s big event, but also keep any eye President Obama’s State of the Union address on Wednesday as much focus has been put on the bank levy.

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 Thursday and rallied to close in the region of Thursday’s high Friday that shows buying interest following the Obama bank levy plan and expect to see a test of 1.4216 (former low) now.

Cable: Was rejected above 1.64 level last week, but seems well supported down at the 1.6050 level. Trading inside a triangle on daily chart with rising support coming in at 1.6047 and falling resistance at 1.6419.

USDJPY: We see longer term falling trend line coming in at 93.92, 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: Tested the 1.05 level after breaking 1.03, pretty much as we expected. The 1.05 is rather strong resistance level and have rising interim support at 1.0192 for today, so that are the level to watch for today.

AUDUSD: We see 61.80% Fibonacci of the latest rally from 0.8734 to 0.9325 coming in at 0.8959 and this level have so far held, but the tone has been heavy last few sessions and the Australian PPI disappointed overnight, which saw the RBA rate hike prospects fall slightly, but we still think RBA will hike next month.

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 and Friday, but bounced off this level so far. The correlation between EURJPY and S&P 500 has been totally absent last few weeks, but Friday 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, so we would not be surprised if the correlation between S&P and EURJPY will be inconsistent over next months, maybe even longer.

GBPJPY: GBP sold off heavily on Friday, taking the pair below 145, but seems that players are happy to sell JPY on and decent rally for now. This pair has been largely driven by the direction of the GBP last week’s and probably will continue for the next few sessions as well as UK economic news seems to major market driver for GBP along with M&A flows. Key resistance up at the 151 level.

AUDJPY: Still trading inside the Rising trend channel from 13th of July with support down at 78.83 and overhead resistance at up at 88.87. Have to see a dip closed towards the rising trend line to be interesting for long set up potentially. Would be interesting to look at potential longs if it could test 78.60 level.


Our outlook
PairOur strategy TodayOur medium term forecast
EUROLong on dips above 1.40, looking for test of 1.42161.42 target reached
CableWell supported above 1.61 with resistance up at 1.6280Better 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 1.07Hit 1.02, but failed to break lower, likely to see 1.07 now
EURJPYLooking at potential longs as 126.50 key support held overnightOur 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
GBPJPYLooking for 151 test again153 target hit, stand aside
AUDUSDOur 0.9120 target reached. Bearish for a test of 0.8905Test of 0.9405

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