Intraday Market Thoughts Archives

How to reconcile a possible weekly bullish engulfing candle in EURUSD against soaring Portuguese bond yields? And how will traders position ahead of next Wednesday's Bernanke testimony? Will the Chairman put on display his latest balancing between dovish insistence to require further improvement in labour markets, and the hawkish certainty of a 2013 tapering of asset purchases? The confusion is helping EURUSD to retest the triple confluence of 55, 100 and 200 day moving averages.  Traders must be able to distinguish between brief spikes and the start of longer-term moves. And part of that answer is the realisation that ECB's Draghi has laid out his forward guidance for interest rates to remain low for an extended period of time.  Does this argue for selling the bounce? And don't forget that the People's Bank of China may come up with an interest rate cut in the RRR, which could magnify the rally in global equities.  We issued 2 trades in EURUSD today, following yesterday's USDJPY and 2 GBPUSD trades, which were charted alongside weekly and monthly technicals in the stochastics of the UK-US 10-year spreads. All these trades and charts are in the latest Premium Insights.

The main message from last night's Bernanke speech is that a trimming of asset purchases later this year can be achieved without significantly boosting bond yields. “Tapering is far from Tightening”. Full Charts & Analysis here

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Bernanke's dalliance with a more hawkish stance was short-lived as he sank the US dollar with a dovish speech. Early in Asian trading, EUR/USD is trading close to 1.3000 from 1.2775 a day earlier. The Australian jobs report is the next main event on the calendar. New trades have been issued on EURUSD, USDJPY, EURGBP and USDCHF. All the latest charts and trades are found in the Latest Premium Insights.

The FOMC minutes left traders scratching their heads on mixed signals but dovish comments from Bernanke sparked an abrupt dollar selloff.

The initial reaction to the Minutes was a dollar decline as the newswire headlines highlighted that many on the FOMC wanted to see jobs gains before tapering. The reaction reversed as traders uncovered a line in the economic projections saying “about half” of the FOMC indicated that it likely would be appropriate to end asset purchases late this year. The consensus in markets is that the taper will begin sometime this year but few believed purchases would end until 2014. As a result, the dollar recovered its losses.

Soon afterwards Bernanke delivered an academic speech but in a Q&A afterwards he warned about deflation, said the unemployment rate understates weakness and that the mandate argues for accommodation. EUR/USD ripped more than a cent higher on the comments, hitting 1.2996. Cable broke 1.5000 to 1.5044 and it was much the same throughout the market.

The Australian dollar was especially volatile on the day, ranging between 0.9100 and 0.9200 several times on the day. We have emphasized the resilience of AUD to bad news but with the terrible Chinese trade numbers overnight, the Aussie is in a precarious spot.

The market is pricing a 61% chance of a rate cut at the upcoming RBA meeting but it will jump much closer to 100% on a soft employment report. The numbers at 2130 GMT are expected to show no job creation and a tick higher in unemployment to 5.6%. As always, the full/part-time jobs breakdown will be an important consideration. This is one of those times where the data will determine the path of the currency and it's best to hang on for the ride.

Markets await another seemingly explosive release from the FOMC minutes (14:00 Eastern Time, 19:00 British Summer Time) from the June 19^th  meeting, when Chairman Bernanke said the tapering of asset purchases could start this year and all purchases would end by June of next year. Bernanke's speech at 15:10 ET, 20:10 BST is about “The First 100 Years of the Fed”, which could involve questions about his future and raise speculations about his replacement. Today's release of the FOMC minutes may contain new evidence of expressed opinions backing the need to taper (reduce) asset purchases from the current monthly round of $85 bn, which may ultimately trigger fresh euro selling. $1.2740s in EURUSD is being stated as a support as it matches the year lows from 3 months ago. But this may not necessarily be the case as the yields situation backing USD is playing a vital role in broadening USD longs. The 8-year trendline in USDX charted in today's Premium Insights alongside the new trades on EURUSD, USDJPY, USDCHF (weekly chart) and existing USDCAD and AUDUSD can be seen in the latest Premium Insights.

The euro fell below 1.28 as a central bank hawk turned dove and S&P dpwngraded Italy. Cable also fell to the lowest since 2010. Chinese trade data coming up next.ECB governing council hawk Jorg Asmussen knocked the euro nearly a cent lower after saying he would not rule out a new LTRO and that the ECB's forward guidance stretches beyond 12 months. A second blow for the euro came as S&P downgraded Italy one notch to BBB, just two levels above junk.The lone long in EURGBP hit its final target at 0.8640 after USDJPY filled the final limit at 101.20. EURUSD shorts await fill, while USDCHF and USDCAD longs await. Full details are found in the latest Premium Insights.

EUR/USD was trading at 1.2860 before Asmussen and the downgraded and as low as 1.2757 afterwards. Along the way, it took out support at the May low of 1.2797. Focus now moves to the 2013 low of 1.2745.

The pound was already falling on soft industrial production and trade data when the breakdown of the euro sparked a broader rush into dollars. Earlier in the day the March low of 1.4832 held but it broke on a second try and stops tripped down to 1.4813. There was little initial follow-through, however, and the pair bounced back to 1.4861.

We wrote about the resilience in the Australian dollar yesterday and that was the case once again. AUD/USD was hit by a global growth downgrade from the IMF, which now sees a 3.1% expansion this year compared to 3.3% in its April forecasts. The kneejerk reaction was to sell AUD down to 0.9135 from 0.9200. This broke the European low but there was no follow-through selling.

The focus tomorrow will be the Australian employment report but today's data is focused on Japan and China. At 2350 GMT, Japan's corporate goods price Index for June is expected to rise 1.2% y/y in a test of pipeline inflation.

The main event is at 0200 GMT when Chinese trade balance numbers are released. Don't focus on the surplus, instead look at the rise in imports/exports. They are forecast to climb 3.7% y/y and 6.0% y/y, respectively. Less would be a negative sign for China and commodities currencies.

How did markets fare when the Fed shifted from easing to a neutral stance? And what does it mean when the Fed starts to taper? Full Charts & Analysis

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The furious dollar rally late last week unwound a classic day of consolidation. The antipodean currencies were the top performers while the dollar lagged. Weekly CFTC positioning data showed speculators back in euro shorts. The lone long in EURGBP hit its final target at 0.8640 after USDJPY filled the final limit at 101.20. EURUSD shorts await fill, while USDCHF and USDCAD longs await. Full details are found in the latest Premium Insights.

A light calendar led to a lack of focus on Monday so traders took profits on US dollar longs. EUR/USD rose close to the 38.2% retracement of the post-ECB decline. That level comes in at 1.2887 and is the primary resistance on the short term chart. Cable posted a similar bounce while AUD/USD rebounded strongly from 0.9000 once again, hitting as high as 0.9144.

Ultimately, different stances from central banks in the US and the rest of the developed world will promote further US dollar gains so it's a matter of determining when the bounces will stall. We could be close to that point already but the extended weakness recently in AUD/USD and cable could fuel a further retracement.

It's especially impressive that the Australian dollar rallied Monday because Chinese stock markets were hit hard after officials announced more measures to tighten credit. When a currency doesn't respond negatively to bad news, beware of a bounce.

The focus remains on China in Asian trading with CPI figures to be released at 0230 GMT. Prices are expected to rise 2.5% y/y compared to 2.1% previously.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -16K vs +17K prior JPY -70K vs -61K prior GBP -31K vs -19K prior AUD -70K vs -61K prior CAD -16K vs -11K prior NZD -1K vs -1K prior CHF 0K vs +2K prior US Dollar Index longs at 15K vs 31K prior

Normally, a flip in positioning from long to short is a sell signal but the speculative market has been repeatedly whipsawed in euro trading this year so we're cautious. Also note the extremely one-sided AUD market, which is another reason to be fearful of a bounce.

Bond yield differentials do not always matter in currencies. But when the divergences grows out of control, the implications for FX are formidable. As ECB's Draghi gives guidance that rates shall remain low for an extended period of time and Fed's Bernanke signals a reduction in the rate of asset purchases, such contrast in Fed & ECB assessement is rare but sufficient for guiding EURUSD traders. Full Charts & Analysis here