Forex - Growth fears Leads to Broad Sell-off

Forex News and Events:

Trading is getting nasty. Yesterday's move to safe-haven trades highlights that the markets are unconvinced that the solution being proposed by US and EU policymakers have any real problem solving capabilities. There has been steady buying of safe haven, with the EURCHF going into free fall to 1.10127, while USDCHF dropped to 0.7731, both new all time lows. JPY has also seen heavy supply entering the market, pushing USDJPY to 77.18. Equity markets were sold off across the board with the S&P falling -0.41% and Asia regional indices followed the trend with Shanghai down 1.25% today. Implied Vols. in FX have risen in many funding currencies, all but killing the fragile carry trade. Interestingly, it seems that the market is focused on deteriorating growth, rather than pure debt concerns which before were directing trading. The US House of Representatives easily passed the bill to raise the debt ceiling $2.1trn by a comfortable margin of 269-161. Washington has settled on a deal that increased the debt ceiling until after the November 2012 elections (great news for Obama's re-election chances), and chops the deficit initially by $900bn, with triggers that would add another $1.2-$1.5trn of reductions. Traders are now watching the senate vote at noon (est), although the democratic lead senate is unlike to throw us a curveball. Prior to the vote, Moody?s stated that they were likely to re-affirm the US prized AAA debt rating if the debt ceiling was raised. Given the news flow which removed most of the uncertainly prior to the vote, the market reaction was muted. What really pushed traders to dump the EURUSD was the shockingly weak ISM report. While the index does not directly point to another recession, it does clearly indicate that GDP growth has slipped into a soft patch and is more likely to evolve into a sustained slowdown. The really concerning issue is that when economy heading into a cyclical downturn gets hit with a shock the trough become much lower. With slowdowns and fiscal contraction in many of the major western economies, this clearly would be categorized as a shock to the system. In response, Crude wti fell nearly $5 to $93.59bll and Baltic Dry continued to trend lower.

But problems are not contained to just the US, singes of Europe are equally concerning. It is becoming progressively clearer that peripheral economies will struggle to manage their massive budget deficit targets, as growth continues to erode. And with the EU Summit?s New Greek bailout package lacking the comprehensive nature to halt contagion, the futures looks very bleak. Peripheral yield spreads were blown out yesterday, with Italy yields now trading at levels not seen since the inception of the EMU (Italy 10yr at 6.16%). I guess the convergence trade is now officially dead. The EUR and USD are locked in the worst of kind battle, so we don?t expect any breakout of the 1.400-1.4600 range

In Japan, the verbal wrangling continues to intensify as the JPY appreciates. Financial Minister Noda re-iterated that FX movements would be closely monitored. In addition, the BoJ has suggested that they might ease monetary policy even if there is not a FX intervention. We are highly skeptical of a solo Japanese intervention, merely in the fact that it won?t work, they know it and the market knows it.

The shockingly strong Swiss retail sales and PMI manufacturing data released today clearly indicates that the story of the ?Aggressively Strong CHF? is not so clear cut. The quality of Swiss brand and stability of domestic market has relatively isolated the economy from much of the predicted devastating effect of the CHF. The data should be good news for the SNB which can point to these numbers as evidence that sitting on the side can work. Retails sales specifically saw sturdy rebounds across the board and breaks a string of disappointing reads. While the PMI data was slightly less convincing especially in the quantity of purchases and backlog of orders, the data did momentarily halt a downward slide. Despite the aggressively strong CHF, and cries of hardship & demand of FX intervention from Swiss business leaders, spillover into the broader economy has been mild. There are signs of cooling but nowhere are there signs of a cataclysmic demise that many had predicted, as Switzerland?s primary trading partners (Europe) growth falters. We suspect that the moderately adjusting Swiss economy actually highlights the economic buoyancy and silences predictions for a economic collapse. With a greater security in the resilience of the economy, mid and long term trades will continue to value the CHF safe-haven status and will continue to accumulate CHF against both the USD and CHF.

Today's Key Issues (time in GMT):

07:00 NOK PMI sa (Jul) index
07:15 CHF Retail Sales (Real) (Jun)
07:30 CHF PMI Manufacturing (Jul) index
08:30 GBP PMI Construction (Jul) index
12:00 USD Senate vote on debt ceiling agreement
12:30 USD Personal Income (Jun)
12:30 USD Personal Spending (Jun)
12:30 USD PCE Core (Jun)

The Risk Today:

EurUsd Last week?s & yesterdays aggressive pullback from 1.4500 was a blow to the growing confidence of EURUSD bulls. Initial resistance still stands at 1.4282 (intraday high), 1.4454 (1st Aug high), then 1.4510 (bullish downtrend ceiling). We view first support to be located at 1.4139 (21st July low), 1.3950 (13th July low), then 1.3843 (long term bullish trend floor).

GbpUsd Completely whipsawed on this pair. Recent pattern of breakout, consolidation breakout etc means we should see some consolidation before the next move higher. The break of resistance at 1.6442 (14th June high), has triggered a move to 1.6558 (31st May high). We should see buyers stepping in around 1.6238 (1st Aug low), 1.6120 (21st July low), 1.6067 (8th July high) then not much noise till 1.5949 (12th July high).

UsdJpy Chatter regarding a solo Japanese intervention has become repetitive but the downside should be taken cautiously. Yesterdays aggressive selling pushed the pair to a 76.30 low with just the boxed Noda comment in response. We would be looking to sell into rallies, as the support is now located at 76.30, then all time lows at 76.25 (17th March low). After that, the situation becomes difficult. While we don?t expect an outright MoF intervention we remain of shorts. Resistance area is located at 77.87 (1st Aug high), 78.17 (27th July high), 79.03 (21st July high), then 80.38 (12th July high).

UsdChf It seems like every day we get a new low, and yesterday it was 0.7731. As we had expected the unwinding of USDCHF short position after of the EU summit was short lived. We remain bearish on the USDCHF and look for opportunity to sell on rallies. Initial support is now located at 0.7831. After that???? Minor resistance can be seen at 0.8000 (psychological resistance), 0.8070 (26th July high), 0.8278 (19th June high), then 0.8331 (13th July high), 0.8404 (long term bearish downtrend ceiling), stronger 0.8551/53 (15th & 16th June high)

Resistance and Support:

1.6600	79.05	0.8278
1.6558	78.70	0.8070
1.6496	78.15	0.8000
1.6288	77.36	0.7790
1.6238	76.25	0.7731
1.6120	76.00	0.7700
1.6070	75.00	0.7600

S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot

Source: http://www.fxstreet.com/technical/market-view/daily-forex-news/2011-08-02.html

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