Forex Signals: Yesterday we expected T-Notes to stay in a range on light volume

S&P 500 (Sep 11) INTRADAY

Review Up until yesterday US equities had managed to remain remarkably resilient in the face of the on-going deadlock in Washington. However, yesterday?s session finally saw risk aversion hit hard with the E-mini S&P losing over 2% to post it second worst day of 2011. The session got off on a bad note following comments from the German Fin Min questioning the use of the EFSF with respect to Greece?s second bailout package and the E-mini S&P drifted down to test Monday?s low at 1322. Worse than expected Durable Goods orders then led to a break of this level as negative sentiment gathered momentum. A rally at the cash open took the market briefly back to our entry short at 1322 before then the debt crisis nerves began to weigh on the index heavily throughout the afternoon with a big move down to S2 support at 1307. The Beige book release at 19.00BST added further weight triggering a move down below 1300 with the market closing down 2.02% at 1299.50.

Strategy Sentiment remains very negative this morning with the Euro losing a lot of ground and the German Bund making new 3 week highs as we see the Eurozone crisis escalate once more with Italian banks and bond yields in focus. We have a potentially crucial vote in the House of Representatives today with the Republican fiscal adjustment plan expected to pass the vote albeit with a tight margin. The US debt situation will take the baton from the Eurozone in terms of being the main focus for this afternoon and we watch developments very closely. We continue to favour the downside for equities in the face of continued debt uncertainty and look for an entry short at 1307.25.

Alternative Any positive developments in Washington can trigger a strong rally as this uncertainty is removed from the market. A break above resistance at 1315 may lead to a further break of key resistance at 1322.00.

EUR/USD INTRADAY

Review The EURUSD topped out at $1.4536 before selling off yesterday as Eurozone debt concerns and the stalemate in US debt talks dampened market sentiment. The euro was hit particularly hard as periphery concerns crept back into the market off negative comments from the German finance minister on the EFSF?s powers to buy distressed bonds in the secondary market. The dollar strengthened in a broad risk aversion play as a weaker than expected Durable Goods Orders, a lack of progress on the debt ceiling and a soft Fed Beige Book report added to the negative sentiment. The currency pair fell over 200 pips to reverse all of Tuesday?s gains.

Strategy This morning has seen further heavy losses for the Euro as the Eurozone debt crisis continues to deteriorate. We have heard rumours that the Italian Finance Minster is to resign (rumours have been denied) and concern that Cyprus may be the next economy to require external funding. The Euro weakness is overshadowing dollar weakness with respect to the US debt negotiation stalemate in Washington but this afternoon this may change as the Republican fiscal consolidation plan goes to the vote in the House of representatives. We still favour the downside for the currency pair looking to take advantage of a strong downward trend, which is a strategy that has worked well this morning. This afternoon we look to get short on a pullback to 1.4324.

Alternative Scenario If the Republican plan fails to get voted through the House this afternoon then dollar weakness will take over which may lead to a break back above 1.4377 may lead to a test of resistance at 1.4438.

US 10Y T-Note (Sep 11) INTRADAY

Review Yesterday we expected T-Notes to stay in a range on light volume as investors remained cautious over the debt ceiling discussions in the US. This was highlighted by the significant risk off shown in other markets not being reflected by a move into ?safe haven? Treasuries. Our entry short at 124.200 once again capped the upside before T-Notes pushed lower in the afternoon reaching 124.010 at 19:00 BST. This morning T-Notes trade almost at exactly midpoint of this range as the markets still remain uncertain over any agreement in the US and Cyprus joins the blacklist in Europe as the next nation to potentially receive a bailout. In fact the pivot level today is exactly the same as yesterday?s.

Strategy T-Notes still remain buffered between being supported by a risk off sentiment and pressured by uncertainty over an agreement in Congress. We expect events to remain dominated by politics although US Initial Jobless Claims at 13:30 BST may disappoint and support Treasuries. On the wires we have Fed?s Evans, Lacker and Williams speaking and obviously we will be keen to learn any developments on the debt ceiling discussion. The market still believes this is too an important an issue for a plan not to be agreed, at least temporarily, which may support T-Notes. In the current risk off environment and with bunds making new highs for the day at 10:40 BST we believe T-Notes can find support at the bottom of the recent range at look for a long at Tues-day?s low of 123.250.

Alternative Scenario A return to risk appetite in equities or indeed further failure for a US agreement can both weigh on T-Notes today which may break the week?s trend pushing T-Notes below 123.195.

Crude Oil (Sept 11) INTRADAY

Review Nymex crude up until yesterday had remained resilient to the growing concern regarding the US debt negotiation dead-lock in the same way as the equity markets. However, a broad based risk-off trade finally gripped the markets during yesterday?s session as negative sentiment grew with the help of a further escalation of the concern surrounding Greece?s second bailout pack-age. Add to this further bearish inventory numbers from the DOE and the result was a 2.2% decline for Nymerx crude prices. The correlation between stocks and commodities was strong as the market had a two stage sell off. The first came following the worse than expected economic data and the bearish inventory numbers that took oil down to within touching distance of the 1st July low at 97.20. The second wave came following the Beige book release at 19.00 that saw oil prices trade all the way down to S1 support at 96.53 overnight.

Strategy This morning has seen mixed price action with a solid bounce off the overnight lows taking crude back up to test resistance at $97.76 before another risk aversion sell off took prices briefly back under the $97 handle. Oil prices continue to be dominated by overall market sentiment and this afternoon?s activity will be controlled by events in Washington where the Republican fiscal adjustment plan gets voted on in the House. We continue to favour the downside and look to get short at Tuesday?s low of $97.76 with a tight stop.

Alternative Scenario Any positive developments in Washington can trigger a rally as this uncertainty is removed from the market. However, the rally may be capped by a strengthening USD. A break of resistance at $98.01 may lead to a test of Friday?s low at $98.43.