FX Weekly Preview – Oct 2 – 7, 2011

There are a number of economic releases and events occurring this week, all expected to create higher volatility in the markets.  On the global front, there are 4 Central Banks that will release rate decisions this week (RBA, BOJ, BOE and ECB).  Other than the Japan, whose rates are already near zero, the market is expecting at least dovish comments from the other central banks and signs of cuts in the near future, if not at 25bps from the ECB in Trichet’s last meeting in charge.  All that is to say that these are further indications that the markets are expecting further slowing in the global economy.

The issues in Greece continue to be at the forefront of the news.  There is an Ecofin meeting of the European finance ministers today and tomorrow as they discuss plans to resolve the crisis in the Eurozone, but typically very little substance has come out of these meetings in the past.  Greece is working on a budget that will appease the EU/IMF, in hopes of getting another found of bailout funds, however, their efforts have not reached the benchmarks set by the Troika.  Currently, Greece’s 2011 budget deficit has reached 8.5% of GDP, much higher than the 7.6% they anticipated earlier in the year.  Further, their 2012 budget is showing it to be 6.8% of GDP, higher than the targeted 6.5% set by the Troika.  In our opinion, we do not see how Greece can do enough and implement enough austerity measures to reach these goals, especially when they are staring in the face of an economic slowdown, and in no way is the government going to be able to raise taxes and increase revenues in the middle of this.  The “powers that be” may “fold” and release the next round of bailout funds despite Greece not meeting the stated standards, but whether they do so or not cannot be good for the currency.

In the U.S., Bernanke will testify in front of a joint Congressional Economic Committee on Tuesday, we will get ADP Employment Change on Wednesday, and the NFP and Unemployment rate on Friday.  The market expectations are for a 53k increase in NFP, as compared to the previous months ZERO print.  This market seems rather fragile at this moment, with those long risk are searching for anything to grab hold of and run prices higher, but with a bad news seemingly always coming out, there is an increased risk to the down side.  Thus, any print in NFP varying much from the expectation should lead to a big push for the last trading session of the week.

Another interesting story coming out of Washington is the Senate’s Chinese currency bill.  A story in Reuters comments on the aim of the bill:

The Currency Exchange Rate Oversight Reform Act of 2011 instructs the Commerce Department, at the request of a company, to investigate whether a foreign government is subsidizing its companies by undervaluing its currency.

The bill would make it easier for firms to persuade the department to impose countervailing duties against exports from countries with misaligned currencies on a case-by-case basis. It also requires that currency undervaluation be considered for determining anti-dumping duties.

In a provision aimed at China, it requires Treasury to designate certain countries for priority action if they have engaged in “protracted, large-scale intervention” in the currency exchange market or have engaged in “excessive and prolonged” accumulation of foreign exchange reserves.

Federal purchases of goods and services from the country would be prohibited unless the country is a member of the World Trade Organization’s Government Procurement Agreement — a pact China has yet to join.

This of course begs so many questions.  But primarily, what does China think about this?  They rank 3rd in the list of our largest exporting partners.   Now, I have not done too much research into the matter, nor am I an American History buff, but this sounds an awful lot like a plan for a tariff, and it sounds to me eerily similar to the Hawley-Smoot tariff in 1930, which many claim is the cause, or at least a trigger, for the Great Depression.  Is this really something we want to stir up now?

Below are the upcoming major economic releases for the larger economies, as well as a brief comment as to sentiment in those markets.

USD:

• Mon – ISM Manufacturing PMI, Construction Spending, ISM Manufacturing Price, Vehicle Sales
• Tues – Fed Gov. Raskin speaks, Bernanke testifies in front of Joint Congressional Committee, Factory Orders
• Wed – ADP Employment Change, ISM Non-manufacturing
• Thur – Unemployment Claims
• Fri – Non-farm Payrolls, Unemployment Rate

We mentioned most of the goings on in the US above, and all eyes will be on Friday’s NFP and Unemployment numbers.  While things are not looking very bright at the moment in the U.S., the USD is the safe-haven currency of choice at the moment, and with a flight to liquidity that is taking place in the market now, we should see the USD ultimately strengthen over the coming weeks, if not through the end of the year.  We are expecting risk-off flows to continue, and that alone with strengthen the dollar. 

EUR:

• Mon – German Bank Holiday
• Tues – Ecofin meetings, Trichet speaks
• Wed – EZ Retail Sales, Final GDP
• Thur – German Factory Orders, ECB Rate Decision
• Fri – German Industrial Production

The focus for the week is on the ECB Rate Decision and Trichet’s last meeting as head of the bank, as well as the Greek debt situation.  The market is expecting a 25bps cut in rates this meeting and dovish comments from Trichet, but he may remain steadfast in his more hawkish leaning agenda.  Either way, it seems to me that the market will quickly move past this once the press conference following the rate decision is complete, and focus solely on Greece.  I have read somewhere that October 13th is the “deadline day” for the Eurozone decision on Greece and the announcement regarding if Greece will receive the next bailout tranche.  Over the last few weeks, it seems that the euro has weakened against the dollar going into the weekend, and unless we hear something substantial before mid-day Friday, I would expect the same.  If we are not already short the EUR/USD by the weekend, Friday could be a time to at least get in for a short time frame into the market close.

CHF:

• Mon – Retail Sales
• Thur – CPI

There is nothing really new to say about the swiss franc.  The SNB’s intervention weeks ago, pegged the currency to the EUR at a rate of 1.20.  My only thoughts are how long will the SNB be able to maintain this peg, and if the EUR crashes, and EUR/USD breaks 1.3000, headed toward 1.2500, and the US economic picture remains bleak, will the Franc return to its once safe-have status again?

AUD:

• Sun – Bank Holiday, Chinese Bank Holiday all week
• Mon – Building Approvals, Trade Balance, RBA Rate Decision
• Tues – Retail Sales

The market is not expecting a rate cut from the RBA this week, but is looking for dovish comments coming post the decision.  However, the market is waiting for these comments as it is expecting rate cuts before year-end.  It seems there is risk to an AUD rally on the heels of a more hawkish RBA, but being a “commodity currency”, the AUD will more than likely continue to trend lower with the broader markets.  Post RBA decision could provide an opportunity to short into a rally.

NZD:

• Mon – NZIER Business Confidence

We mentioned last week, and will mention again, that the kiwi is highly correlated to the AUD, but the economy doesn’t seem to have been hit as hard as the Aussies have. However, they still have risk to the global economy and its trade partners.  There was speculation that the kiwi’s might raise rates sometime in the near future, but that seems to have been taken of the table recently with the RBNZ seeming more dovish than expected.  

JPY:

• Sun – Tankan Manufacturing Index
• Mon – Average Cash Earnings
• Thur – Monetary Policy Statement
• Fri – BOJ press conference

There is not much in the way of event risk until Thursday in Japan with the Monetary Policy Statement, but intervention is always in the backs of people’s minds with the yen continuing to strengthen as a safe-haven currency. 

GBP:

• Mon – Halifax HPI, Manufacturing PMI
• Tues – Construction PMI
• Wed – Current Account, Services PMI, Final GDP
• Thur – Asset Purchase Facility, BOE Rate Decision
• Fri – PPI Input

The UK continues to face headwinds, but inflation is still high.  However, there is much speculation of some sort of stimulus being added to the market.  We’ll repeat what we said last week, as conditions haven’t changed much.  It seems most of the MPC members are no longer favoring rate increases.  Further, unemployment continues to rise, and there is speculation that the BOE will announce some sort of QE2 in the near future.  An initial reaction to QE2 could provide a rally in the sterling, but that may be short-lived versus a safe haven currency, such as USD or JPY.  Any substantial rallies may be opportunities to get short.

Trade Setups:

• We never saw much of a bounce materialize over last week, and have been afraid of a risk-rally this week, but so far, risk continues to sell off.  We still like being short EUR/USD and AUD/USD overall, but are having difficulty finding a place to enter with so much event risk and volatility out there right now.
• Looking to short EUR/USD on a bounce.  I’ll repeat what I said last week, as a reminder to watch these levels more closely during the week.  “A channel bottom starting back on May 23 and tested on July 12th, has been broken.  Support could turn to resistance, as the channel is now just shy of 1.3650, and the next fib higher is 1.3660.  The 50% fib from the Jan 10, 2011 low to the May 4, 2011 high, is just above 1.3900, which was the top before this latest move lower.  Above that we get the 200 day SMA, which is at 1.4044.  Support should be found at the 76.4% fib of 1.3360, and below that we show potential support at 1.3225, strong support at 1.3100, and potentially the psychological level of 1.3000.  The low on Jan 10 was 1.2872.  We may look to sell between the 1.3660 and 1.3900 fib levels, with a stop somewhere above 1.3900 (maybe 1.3970), targeting 1.3400 as a soft target, but down to maybe 1.3100.”   However, we have yet to see a bounce anywhere close to 1.3660, and are currently at 1.3200. 
• Looking to sell into any AUD/USD rallies.  A longer term support line was broken this week (drawn from 12/1/2010 low as well as the 3/17/2011 low and extended from there).  Currently the line is roughly at parity.  If Friday’s low stays in place, then I have drawn new fib lines from the 9/1/11 high and Friday’s low.  23.6% retracement is at 0.9943, 38.2% is at 1.0100, and 50% is at 1.0226.  I have drawn a very short-term channel around the most recent move down, the top of which is around 1.0100 currently.  I think we will look to sell into rallies between 0.9943 and 1.0100.  Parity can often act as support/resistance, but during this last move, it didn’t give the market pause. 
• With the British economic problems, and potential for more stimulus, which if enacted should weaken the currency, it seems shorting GBP on rallies could prove profitable.  We haven’t traded this pair much recently, except for scalping opportunities, but with the volatility the GBP/USD yields, there could be opportunity in the next week or two.  
• The S&P continued its sell off on Monday, closing just below 1,100.  While psychologically, it seems rather important, I think a move below 1,075ish before we really see the bears push the index much lower.  With earnings season upon us, we are fearful of some surprisingly low numbers, and a big move lower into the end of the year is a real possibility (down to 1,000 and below).