Forex News and Events:
The Euro took a massive hit in confidence yesterdays as news that Germany’s bund auction technically was a failure. If anyone needed further evidence that the crisis in European peripherals was spreading into the core, well this was clearly it. European yield spreads actually contracted, however for the wrong reasons, as Germany yields climbed well above the US bonds (following a trend of weakness in AAA rated European sovereigns). In fact, the spread between the US and German 10yr yields has not been this wide since 2009. The selling was not just isolated to bonds as equities were also under pressure illustrating a broad liquidation of all assets Eurozone related. Reaction to the failed auction hit the wires attempting some level of damage control. The German debt management agency stated the weakest auction in German history was caused by a technical glitch and nervous market rather than lack of demand. ECB Governing Board member Constancio stated the episode should not generate any questions about Germany’s access to capital markets. However, ECBs Nowotny commented the auction results were ‘alarming’. The EUR was also affected by mounting concerns over rescue efforts for Dexia as talks between France and Belgium don’t seem to be going smoothly. Credit rating agency Fitch warned that intensification of the crisis in Europe could put Frances AAA rating in jeopardy.
There are other signs that the European crisis is spiraling out of control, moving well out of the grasp of policy makers. First is the series of weak European economic data. Even today’s slightly strong German IFO survey (Business climate 106.6 vs. 105.2 exp) will do little to offset concerning PMI reads. Secondly, here has been a broad shift in sentiment for Western European banks to tighten controls on their banks and limit exposure to southern and eastern banks. Austria officially restricted it banks from lending to eastern European subsidiaries on Monday. This is just part of a concerning trend that could lead to the freezing of credit markets. And while the market was digesting what investors lack of interest in German AAA paper actually meant, comments from Greece reinforced the collapse in EU confidence. “We must step up the pace, not just to reach our goals but to make up for lost ground,” Greek central bank Governor George Provopoulos said in Athens, according to reports of his statements. “What is at stake is very great: it is Greece remaining a member of the euro.” Unfortunately Greece has been the boy who cried wolf and markets are unsure if this recent statement is an honest warning or more calculated rhetoric aimed at forcing the Trioka to release the 6th tranche. The Euro has held up relatively well, all things considered, until yesterday. Political rhetoric, new government in Italy, Greece and Spain, central banks action and repatriations, have all contributed to the EUR resiliency, however it looks like these supports are now coming to an end.
In the US, durable goods orders dropped 0.7% mom in Oct, but were slightly better than the expected fall of 1.2%. An increase in vehicle orders more the offset the decline in core capital goods and nondefense aircraft. This number combined without the personal spending, suggests that optimistic GDP forecast of 3.0% should be tuned down to a more realistic 2.5%. While the number slightly deflates, the positive trend of US data compared to some of its developed peers, shows the nation is currently avoiding a potential recessionary dip. In addition, the US limited exposure to trade links and capital markets from Europe, specifically peripheral nations should keep it somewhat isolated currently. However, should the single currency break up, it’s unclear the effect it would have on the US. In anticipation of this rising tail risk, the US Fed plans to stress test six larger domestic banks, again hypothetical market shock include further deterioration of the European credit crisis.
As for today, trading actively should be limited to the European session as the US celebrates the Thanksgiving holiday. Trading volumes have been thin in Asia and risk correlated FX trades have been able to rally slightly. EURUSD has been able to climb off the 1.3341 floor to 1.3402 while USDJPY moved off 77.01 low to 77.34. But with little news flow we see this rally on the back of higher stock prices as merely consolidation before another leg lower. In fact we would be surprised if risk appetite didn’t diminish the closer we get to the long weekend, as trader positions themselves in safe havens.
Today’s Key Issues (time in GMT):
00:00 EUR Portugal General strike
00:00 USD Market closed in observance of Thanksgiving
07:00 EUR Germany: GDP-2nd release
08:15 SEK Consumer confidence,
08:15 SEK Manufacturing confidence
08:15 SEK Economic tendency indicator
09:00 EUR Germany: IFO business climate,
09:00 EUR Germany: IFO current assessment,
09:00 EUR Germany: IFO business expectations,
09:30 GBP GDP-2nd release,
11:00 GBP CBI industrial trends, total orders Nov
12:40 EUR ECB Praet
18:30 EUR ECB Páramo
23:30 JPY Tokyo CPI
23:30 JPY Tokyo CPI ex. Perishables
23:30 JPY Tokyo CPI ex. Food and Energy,
23:30 JPY Nationwide CPI,
23:30 JPY Nationwide CPI ex. Perishables,
23:30 JPY Nationwide CPI ex. Food and Energy,
23:50 JPY Corporate services price index
The Risk Today:
EurUsd Well we didn’t have to wait long for our expected drop in the EURUSD and are currently suffering through a holiday inspired consolidation pattern. We remain sceptical over the sustainability of any rally and would fade short-term corrections. Demand remains thin with support located at 1.3333 (23rd Nov low), 1.3200 (psychological lvl), 1.3146 (4th Oct low). On the topside, resistance stands at 1.3422 (descending triangle base), 1.3513 (bearish trendline), 1.3672 (14th Nov high) then 1.3856 (9th Nov high).
GbpUsd Fall in EUR pulled the cable down as well. Given the pairs correlation to risk we remain bearish on the pair. Next level of demand will come into play at 1.5495 (24th Oct low), 1.5423 (7th Oct low), 1.5272 (6th Oct low). Resistance should kick-in at 1.5656 (bearish trendline), 1.5889 (18th Nov high), 1.5932 (15th Nov high), and 1.6096 (14th Nov high).
UsdJpy Despite the pair’s recent bullish direction, the broader contraction in range is putting us to sleep. Traders are getting comfortable below 77.00 as verbal intervention is landing on deaf ears. The fear of further MoF action should keep downside difficult but not halting. Initial support will come into play at 76.90 (daily cloud top), 76.11 (22nd Sept high), then 75.35 (31st Oct low). Resistance can be seen at 77.58 (24th Nov high), 79.53 (31st Oct intervention high), 80.24 (prior intervention high) then 81.48 (8th July high).
UsdChf The forming symmetrical triangle suggests a lack of conviction in either direction. Selling in EURCHF has neutralized buyers in USDCHF. In our mind the break of directional trigger at 0.9151 (14th Nov high) now exposes 0.9316 (6th Oct high) with initial resistance at 0.9237 (17th Nov high). Next support is located 0.9128 (23rd Nov low), 0.9079 (15th Nov low), 0.8963 (14th Nov low), then 0.8923 (8th Nov low).
Resistance and Support:
S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot
