Intraday Market Thoughts Archives

USDJPY hovers between 101.40 and 101.70s still failing to breach 102. GBPJPY, EURJPY have yet to test major resistance levels at 185 and 144 yen. Option expiration is fuelling the intraday swings. Stock indices are finally staging an up week after 8 consecutive weekly declines. Yet this was the week markets had been expected to stage a recovery after last weeks rate cuts and collective government packages to buy back bank debt and equity stakes.

Market news Intl talks of reports about banks being told to kick

up lending pushing down rates to 3.95%, while central banks continue to intervene in interbank market via their agent commercial banks. The news wire service also talks of the Fed urging banks participating in TARP to start lending out instead of using it for cushion. NY Times also had an encouraging article by Warren Buffett calling for getting greedy in times of fear and being fearful in times of greed, which is said to be helping risk appetite at the expense of the low yielders.

US housing starts fell 6.3% to 817K, the lowest in over 17 years (not 45 yrs as mentioned earlier), while permits for future construction collapsed 8.3% to a 26-year low of 786K. The rebound in USDJPY from last weeks 99.26 low dissipated at 101.81, in line with the latest note alerting the intermediate top to emerge at 102 as seen in the chart below. Considering the deepening erosion in the real economy echoing across the different sectors, traders are to remain reluctant in picking up in risk appetite past the 103 level, which presents the 61.8% retracement of the decline from 106.11 high to the 97.84 low. A break below 100.50 is to make way for 100.10 and 99.60.

FX is still all about risk. VIX surges to new record of 77 as stocks sink back to negative territory. Despite the plunge of October Philadelphia Fed index to 18-year lows, I told CMC clients earlier this morning I expect EURUSD to take its negative queues from a downturn in risk appetite, as traders test the $1.34 figure and set their sights on $1.3360. I expect EURUSD to test a fresh 1 1/2 year low under $1.32 and onto $1.3170 before month end.

The dollar holds firm despite the 41-point plunge in the October Philadelphia Fed survey to an 18-year low of -37.5, and the worst reading in industrial production in 34 years, which confirm the evident slump in US manufacturing. Stocks are driven back down by the data realities as US industrial production fell 2.8% in September, which was the third consecutive monthly drop, accompanied by sizable declines in capacity utilization and output across the board. The benign inflation report showing no change in September reflected plummeting energy prices and slowing demand, thus, raising the risk of deflation being the greater danger for the US economy.

Oil prices drop to $72 per barrel, shedding 50% off their July highs, while gold slips to $838 per ounce, thus, further boosting the gold/oil ratio to 11.6 from the 5.8 lows of this summer, which is consistent with the notion of an incoming "global recession" as a result of notable bounces in the gold/oil ratio. SEE LAST MONTH's ARTICLE on the topic. The latest GLOBAL YIELD CURVE charts in the website show sharp steepening in the US, EU and UK curves, suggesting further central bank rate cuts ahead, another positive for gold.

Risk aversion surges as stock indices drop 5% following the biggest decline in retail sales in 3 years and the worst NY Fed Manufacturing Index on record. CURRENCIES move in line with our morning piece (USDJPY drops to 100.45 from 101.70, EUR hits $1.35 down from $1.3650 and GBPUSD slumps below $1.7380, while GBPJPY breaks below 176 (see previous Intraday Thought). Prolonged losses in Wall St imply a considerable erasing of gains in Asian equities, thereby, further unwinding of carry plays in Forex.

The 1.2% decline in US September retail sales (expected -0.7%) reflects deterioration in demand for clothes, food and durables drives back attention towards poor economic fundamentals, prompting renewed declines in US equity indices and a pull back in yen crosses. US Empire state manufacturing index drops to -24.6 in October from -7.4, the worst level on record. New orders tumble to -21 from 4.4. The sales report carries negative implications for September retail jobs, whch have now been in the red longer than in the last recession. USDJPY tests below 101 yen, eyeing 100 later in the session, while GBPJPY, having already fallen below our projected support of 176 to test as low as 175. Bernanke's speech at noon on the economic outlook to further indicate macroeconomic weakness and open the door for rates to drop as low as 1.00% before year-end.

I mentioned the falling yen crosses in the latest headline (3pm EST). you can consider hedging against these longs by being short NZDJPY and USDJPY. Looks like GBPJPY will test 176 yen and cable targets $1.73. This is a very volatile market. Better to have money on both sides of the carry trades. Either what I mentioned above, or go long AUDJPY, GBPJPY, NZDUSD and short GBPUSD and USDJPY. The latter pair is best to short as the 103 resistance still holds.

Just as last weeks violent in equities was characterized by forced selling resulting from hedge fund redemptions and margin calls, Monday's buying spree also resulted from hasty buying aimed at booking short-term profits in a bear market rally. US indices are down 2% and the aggressive buying in high yielders is now retreating. Escalating volatility is a typical characteristic of bear markets --even when markets rally by more than 5%. This was typical during the bear market years of 2001 and 2002. With this information on hand, forex traders can anticipate plenty more opportunities of unwinding carry trades and money flowing into JPY and CHF. I mentioned to CMC clients yesterday that 103 constituted a major resistance. Today's failure at 103 is triggered 101.50. 101.20 acts as interim support. GBPUSD remains favored than GBPJPY as long as equity selling is less than -3%.

USDJPY's 3 yen approaches the 103.00 resistance, which is the 305 retracement of the decline from the August high. Further gains are seen dissipating near the 103.50 obstacle, which marks the lows of September 16 and 29. Having noted that the accumulation of risk appetite may be largely caused by forced short-term buying in a bear market, care is urged as we attain key levels of 103.50 and 104.28. GBPJPY attempts to retest the 181.20s for a breach of the important 182 yen resistance, marked by the trend line extending from the Sep 30 high, and coinciding with the October 30 high. A breach of 182.30 may trigger a reverse head and shoulder pattern, which could allow the rally to escalate towards 184.60.

On the BULLISH SIDE, GBP will have more to ride on in the event of a strong CPI as the combination of already improved risk appetite (sterling positive) and escalated inflation could prove a powerful combination for extending gains towards $1.7530, which is not only the 38% retracement of the September high to last weeks 5-year low, but also the previous support from mid September.

GBP FOCUS. Although data releases have taken a back seat to credit markets activity and the latest measures by G-8 governments to alleviate their banks, Tuesdays release of UK Sep inflation may trigger marked reaction. The report is expected to show a 5.0% annual increase in Sep after a 4.7% increase in August, further confirming the inflationary deterioration. Weaker than expected to confirm softening price pressures in the medium term and lend more credence to the notion that the BoE's more serious battle is recession rather than inflation, thus bolstering the probability last weeks BoE rate cut would be followed by further easing next month and cap sterlings gains. ... CONTINUED IN NEXT HEADLINE...

GBPUSD rallies nearly 5 cents to $1.7440 in line with surging risk appetite, facing key resistance at $1.7530 as long as US equities maintain their bullish tone for the day. Although the pair may not accumulate gains towards $1.7730 today, traders could target the $1.7650s, especially as Japanese markets are expected to open sharply higher on Tuesday following Mondays holiday. EURUSD is also considered as high yielding pair relative to the USD, soared to as high as $1.3680 before retreating to $1.35. Failure of global equities to follow up once markets are fully operational on Tuesday could drag the pair back towards $1.34.

High yielding FX rallying against the lower yielding dollar and yen as European and US equities advance more than 4.00% following announcements from Fed, ECB, BoE and SNB to inject unlimited amounts of liquidity to credit markets. It may be without question that Monday will see the beginning of a positive week in the financial markets, but the duration of the rally remains in doubt. We reiterate what we said on Friday about "USDJPYs recovery off the 98.59 low to 101 may run into temporary resistance at 101.50, but we expect momentum to be fortified next week into the 103.30 target, which is the 61.8% retracement of the decline from the Oct 3 high. We continue to expect a retest of the 98.50 low, followed by the 13-year lows of 95.73 reached in March. Traders must not confound corrective recoveries in risk appetite and USDJPY, which could extend to as high as 105.