European FX Surge vs. Commodity FX

by Ashraf Laidi
Jan 8, 2009 14:14 | 9 Comments

The following has been sent to CMC Markets clients right after today's Bank of England rate announcement.

Sterling has already knived through our projected resistance of $1.5150, making yesterdays $1.5280 high a less challenging target, especially amid potentially negative US jobs data ahead (weekly claims and payrolls). GBP likely to demonstrate the usual pattern of tempering current gains going into the US opening bell before rebounding later in NY trading. $1.5350 appears a viable target based on retracement/recoveries of the past 5 sessions.
Shifting onto the US session, Obama's speech comes one day after the Congressional Budget Office did the inevitable and revised up its 2009 budget deficit estimate to $1.2 trillion, fuelling the imbalance to 8.0% of GDP from the last $438 billion estimate (3.0% of GDP). The FY2010 estimate was revised to $703 billion from $438 billion.

European FX Surge vs. Commodity FX - GBCADEURUSD Jan 8 (Chart 1)

Commodity currencies took a back seat in Wednesday trade after the higher than expected crude stock builds and news of Israels acceptance of the principles of truce in Gaza. As crudes Feb contract fell by more than $7 to below $44 pp, CAD and AUD followed suit, even against the broadly weaker USD. EURCAD and GBPCAD are making notable advances, exploiting oils retreat, which may extend towards $40, according to the daily stochastics. And with the BoE opting for the smaller option of -50 bps, GBPCAD may well accumulates gains towards 1.83 and onto 1.85. EURCAD reflects both the euros broad recovery and loonies broad pullback, setting sight onto the 1.6650 trend line resistance. AUDUSDs 2-day decline tests a 2-week trend line support of 0.6950, which is backed by a clearer foundation of 0.6861.8% retracement of the 0.6070-0.7268 rise. Recovery now targets 100-day MA of 0.7170.

Euro Struggles to Ride GBPs
Climb EURUSD attempts to cling on GBPUSDs gains but latest German factory orders and poor Eurozone sentiment figures support the case for a possible 75-bp cut to next week from the ECB, which would bring rates to 1.75% vs 1.50% for BoE and reduce the differential from 50-bps to 25-bps. Such a scenario could provide renewed short-term selling interest in EUR, but the ECB is wary of excessive currency weakness regardless of falling inflation and would be the first to express itself via pronoucements on monetary policy. EURUSD drops below 100-day MA facing interim support at $1.35, followed by $1.3420. The breach of 1,37 resistance follows onto staunch trend line resistance of $1.3830.

JPY Yen Still Has USD to Knock Around
USDJPY at 94.50, S&P500 at 945 and VIX at 35 were all limits of the recent bout of risk appetite projected in previous research notes for end of Dec . The 35 support in the VIX was our most convincing signal representing the 200-day MA, a tech level not breached since September. The 94.50 yen level was the 100-day MA, which was also last breached in September. Such are the manifestations of intermarket analysis dictating risk appetite through currencies and equities. USDJPY seen extending losses below 91 towards 90.70, but Fridays NFP may provide a case of relief if the unemployment rate remains below 7.0%. A breach above 7.0% and a payroll loss of more than 550K is expected to drag the USD towards 89.80s.

Comments (Showing latest 9 of 9) View All Comments
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jan 14, 2009 15:43
Rob,

Yes, I think the latest deterioration in stocks could take down USDJPY towards 86.50 and 86. I still think there's a 80% chance USDJPY drops below 80 and onto 75 later this year.

Ashraf
Rob
New York, United States
Posted Anonymously
11 years ago
Jan 14, 2009 14:14
Hi Ashraf,

With retail sales plunging more so in Dec. than Nov., should we still expect risk aversion to remain strong - fueling the USD/JPY past the Neckline to as low as 86 as originally mentioned in your article on 1/12?

Thanks
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jan 12, 2009 19:20
Hi Rob,

$1.3250 is the next key support in EURUSD. A break below it may be supported at $1.28. But Im not too sure whether the next bout of risk aversion will be necessarily as negative for EURUSD as it was in H2 2008.

Ashraf
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jan 9, 2009 11:15
Brendan, I agree with your buy signal for EURUSD but as my latest piece mentions, EUR and GBP were rallying against commodity currencies. AUD is a commodity currency. Now this may change after NFP.

Ashraf
Brendan
www.forexandbinary.com, Great Britain
Posted Anonymously
11 years ago
Jan 9, 2009 8:47
My system has signal up for EURUSD (European currency) but signal down for AUDUSD (Commdity currency). Quite strange to me as they often move in the same direction. Do you see that happening?
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jan 9, 2009 7:32
Hi Waqar, better than expected PPi will undoubtedly be positive for cable but those gains will likely quickly dissipate around the end of the morning London session ahead of NFP. Also watch UK industrial production where the m/m figure seen falling by less than the prior month -0.5% from -1.7%. Some are now talking about NFP possibly being -1 MILLION jobs. but unemp rate is crucial. $1.53800 remains good sell for a 100 pip gain.

Ashraf
Waqar
Lahore, Pakistan
Posted Anonymously
11 years ago
Jan 8, 2009 22:26
Hi Ashraf,

Once again a great call in Cable.If we get better than expected UK PPI numbers tomorrow,how do you expect cable to perform especially since it has closed above its 50 day moving average for the first time since Dec 17th.

Would also appreciate your thoughts on USD/CAD going into tomorrows canadian/US numbers.

Thanks.
Ashraf Laidi
London, UK
Posts: 0
11 years ago
Jan 8, 2009 17:19
Hi Dave,

Yes, the correlation is explained via risk appetite. Do not confound those commodities rallies that are boosted by improved risk appetite and those by global growth. The former is less sustainable. But today gold is up due to broad USD selloff and equities are just showing relief rally on Obama's tax cuts.

Watch not only payrolls tomorrow but also the unemployment rate and it breaks above 7%.

Ashraf
dave
Singapore
Posted Anonymously
11 years ago
Jan 8, 2009 14:41
Hi Ashraf,
do you expect the equities to continue its rally?
I noticed that gold would move up each time there is a rally in equities market. is there correlation here?

thanks!