Intraday Market Thoughts Archives

Ashraf's BNN INTERVIEW earlier today (11:00 mins) discussing yield differentials, Bank of Canada tightening, Fed outlook, EURUSD, USDCAD, CADJPY, VIX and yen seasonals http://watch.bnn.ca/#clip281466

The impact of interest rate differentials on FX is highlighted by the fact that the correlation between EURUSD and GE-US 10-year yields is now at +0.90, the highest since June 2007. Gold remains under pressure despite improved risk appetite and a retreating USD, which is partially explained by FX traders reluctance to short the metal ahead of next weeks conclusion of Fed MBS purchases. Gold remains below $1,100, while silver unable to regain $17.00, thus, in line with our medium term outlook for and $1,065 and $14.80 respectively. EURUSD testing 10-day resistance of $1.3420, a break above which (weekly close) would call up $1.3460-65. GBPUSD seen capped at $1.4950-55. Interestingly, USD doing better vs CAD and AUD than vs EUR and GBP.

GE-US 10 YIELD SPREAD at 3-YR LOW. Compare these TWO CHARTS:

On February 11, we bolstered our case for $1.32 EURUSD based on this chart http://chart.ly/eqbf3x highlighting our negative outlook for the German-US 10 yield differential, which stood at -0.50%, while EURUSD was at $1.38 at the time. Today, the GE-US spread has worsened to -0.73% http://chart.ly/faea8w and EURUSD dropped to $1.3270. Readers of this website were constantly reminded of our negative outlook for the German yield disadvantage being instrumental in guiding EURUSD towards $1.30 and $1.28. Looking ahead, we expect the spread to reach to -0.90s and help break EURUSD below $1.30.

USD shows shades of 2 days ago when its isolated rally vs. EUR and GBP extended into commodity currencies. Euro is quickly dragged back below $1.33 after failing $1.34, making the preliminary target of $1.3220 viable in Asia. Cable shrugs those strong UK retail sales to get closer towards the $1.4770 and $1.4380. Most significantly is the further waning of once strong negative correlation between equities and euro. thus, although Dow may test 11K, euro is not immune to a sub $1.32 break.

GOVERNMENTS TO THE RESCUE and RENEWED SURGE OF RISK APPETITE deals a fresh blow to JPY and erases some USD gains due to (1) $9.5 billion injection in struggling Dubai World by Dubai Govt; (2) Talk of a 20 billion IMF rescue package to Greece (3) stronger than expected 2.1% increase in UK Feb retail sales. These dynamics drive equities across the board, including a fresh 19-month high in the FTSE-100 above 5700. EURUSD gains to $1.3366 from $1.3280, but is underperforming GBPUSD which regained the $1.4990 level earlier from $1.4855. Euros interim resistance stands at $1.3410, but any subsequent gains are seen capped at $1.3450. Statements from JC Trichet indicating the ECB will extend its emergency collateral rules beyond 2010 may be positive for risk appetite but negative for euro market interest rates and for the German-US yield differential. Surging global bond yields also weighing on JPY (boosting yen crosses). Nonetheless, gold remains below 1100 and the risk-friendly AUDUSD has yet to regain 0.9155.

FX TECHNICAL TRENDING. While we always advocated the importance of paying attention to fundamentals on this website, the past 2 weeks have been dominated by technical trending in FX markets, whereby the US dollar began accumulating strength against EUR, GBP and to a lesser extend commodity currencies, until even risk (Portugal downgrade and disappointing US durable goods) started to weigh in equities and led to broader USD strength against AUD, CAD and NZD.. While our $1.32 EURUSD target for quarter end is now appearing more popular, we lift the probability of $1.28 by mid April to 70%. Fed Chairman Bernankes speech on exit strategy tomorrow to the HOUSE was originally due for Feb 10 but was cancelled due to snow. Thus while the speech may be the same, the Q&A session could shed some new light. Yesterdays GOLD and SILVER HOTCHART is already $17 in the money vs. GOLD and 50 points in the money in SILVER http://bit.ly/dhtUhL

MORE AUSSIE LOSSES seen ahead as AUDUSD is unable to break above its 17-month trend line resistance of 0.9280. The pair sets up for further selling towards 0.8990 (from current 0.9090), followed by 0.8870 next week on a combination of escalating USD strength and AUD weakness potentially occurring from the RBA signalling a pause in its tightening cycle. Todays 100-pip downmove means immediate resistance falls to 0.9150s. AUDNZD extends losses towards 1week trend line support of 1.2930 and is vulnerable to 1.2840.

DUE TO OVERWHELMING DEMAND to my Toronto Presentation (with Colin Cieszynski) this Saturday, we will have TWO PARTS (10 am to 1 pm and 2 pm to 5 pm)

Colin will give his outlook on Technical Analysis on broad equity analysis as well as SECTORAL ANALYSIS and Commodities.

Today's MONTREAL presentation is as planned.

REGISTER HERE: http://bit.ly/acXvOH

JUST WHEN ALL EYES WERE ON GREECE, Fitch Ratings downgraded Portugal's Long-term foreign and local currency Ratings to 'AA-' from 'AA', while affirming Portugal's short-term foreign currency rating. EURUSD extends losses by 170 pips to $1.3333 (since NY Tues evening). The news help BROADEN USD RALLY against commodity currencies as risk aversion emerges, which is further weighing on GOLD and SILVER to $1089 and $16.62 (as per latest HotChart http://bit.ly/dhtUhL ) GBPUSD extends selloff as Chancellor announces the UK Budget projections on net borrowing and makes the case for an Internationally-backed bank tax. US durable goods orders weaker than expected at +0.5%. Our $1.32 EURUSD forecast for from mid February for end of March remains intact, while we reaffirm the case for $1.28 before end of June. Cable eyes $1.4820, followed by $1.45, while the days of +$1.53 are well behind us for at least 6 weeks as the pair makes its way for a preliminary support of $1.4840, followed by $1.45. Any recovery is expected to be limited at $1.5080, with subsequent gains capped at $1.5220. ASHRAF's SEMINAR IN MONTREAL (today) and TORONTO (Saturday) REGISTER HERE: http://bit.ly/acXvOH

EURUSD finally breaks below $1.35 over two consecutive sessions (US and Asia) for the first time since May 2009. CONGESTION STANDS between $1.3415 and $1.3465, with the former being the 61.8% retracement of the 1.2442-1.5129 rally, and the latter (more relevant support) being the 76.4% retracement of the 1.2885-1.5129 rally. Bottom line, traders will eye $1.34 as the next major foundation, before $1.3120. THE USD INDEX is POINTS AWAY FROM A GOLDEN CROSS FORMATION, whereby the 100-day MA 77.92 is to cross above the 200-day MA (78.07) for the first time since July 2009. Recall we ALERTED READERS back on Jan 19 http://bit.ly/8EZTO8 of the DEAD CROSS formation in EURUSD (50-day MA falling below the 100-day MA) 18 hours before it occurred, which triggered a 230pip decline the next day. Much is being said about rumours of an IMF-led deal for Greece, but the technicals suggest any bounce will be short-lived. UK BUGET ANNOUNCEMENT will seek to balance between announcing a reduction in the deficit with a combination of spending cuts and tax hikes (probably in capital gains), which will raise the question as to whether the BoE will be forced into prolonged QE.

Euro increasingly vulnerable to the sub-$1.33 leg down as traders come to terms with the fact that 3 months have elapsed since the last credit downgrade of Greece and no credible solution on how it will obtain 56 billion for its short term obligations. It is now confirmed that German taxpayers oppose any assistance for Greece. Why would traders have hope for this weeks EU Summit when little agreement in the way of concrete resolution emerged over the last 3 weeks? See latest HOTCHART on Gold & Silvers Dead Cat Bounce http://bit.ly/dhtUhL

LATEST FED SPEAK Although the accommodative stance language can be expected to stay in the upcoming FOMC statements, traders are increasingly aware that such language is used as an offset for upcoming hawkish developments such as: i) the termination of the MBS purchases next week; (ii) start of some reverse repos operations (draining liquidity); and (iii) the looming increase in the discount rate. Bear in mind that the Atlanta Feds Lockhart (said last night that extended period phrase must stay) is not a voter at this years FOMC.

GBP FALLS across the board on a combination of a bigger than expected slowdown in inflation and disappointing CBI figures. Feb CPI fell to 3% y/y from 3.5%, supporting the Bank of Englands expectations that the previous rise in inflation would only be temporary before returning to its 2.0% target. CBI index on retail sales volume fell to 13 in March from 23 in Feb vs. expectations of 20. CORRECTION: UK BUDGET is Wednesday not Tuesday). GBPUSD seen retesting $1.4930, followed by $1.4880, while EURGBP shows preliminary signs of a turnaround that could reach 0.8830, followed by 0.8770 later this week.

Bank of Canada Governor Carney to speak on Wednesday and attention will be on whether he will step up the central banks concerns about the escalating loonie. Last weeks release of Feb CPI showed a 2.1% annual rise in core CPI, surpassing the BoCs 2.0% ceiling. CPI would still be 1.9% after removing Olympics-related items such as travel and accommodation. The usually hawkish central bank is expected to raise rates in July by 0.25% to 0.50%, a possibility that is already priced in the rising CAD. Will the BoC agree with the Fed on rate hike by both central banks this summer in order to prevent any overshoot in the loonie? Only a combination of jawboning from the Canadian officials and risk a version would limit the loonies rise. Disappointing Canadian data would be more effective in reversing CAD. But considering the improved conditions in Canadian financial markets and rising inflation, we expect any CAD pullback to be temporary. USDCAD seen capped at 1.07 and gradual declines in AUDCAD towards 0.85 later in Q2. Exercise care when shorting CADJPY. 86.80 remains viable for the week.

INTENSIFYING RISK AVERSION boosting JPY at the top of the ranks in currencies, followed by USD then CHF. We warned in prior IMT that Indias rate hike as well as anticipated tightening from the Fed (discount rate) and China (actual rate hike not reserve requirements) will weigh on risk aversion. EURUSD next immediate target at $1.3390, which is the 76% retracement of the rally from the $1.2860 low to the $1.5126 high. EURJPY seen testing 120.60, while cable seen capped at $1.5070.

The passing of the healthcare reform in the US House of Representatives will largely benefit brandname drugmakers and device makers as the latter avoided deeper price cuts while having fees and rebates delayed to 2011. But global equity markets will be more concerned with Fridays rate hike from the Reserve of Bank of India, Fed Chairman Bernankes Thursday speech about the exit strategy (which may be used to explain a probably discount rate hike on Thursday) and expectations of a Chinese interest rate hikeas the PBOC has yet to increase borrowing costs aside from tightening reserve requirements and limiting new bank lending. GBP EXTENDS SELL-OFF after more members of the BoE mention bumpy recovery and keeping the door open for further asset purchases. Markets turn to Tuesdays UK BUDGET where Chancellor Darling will give details on the BANK TAX as well as announce the govts 2010 and 2011 estimates GDP growth, deficit and unemployment. None of these dynamics are expected to boost cable.