FX Daily Planet: London Open

FX Daily Planet: London Open

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View for the day
Risk markets started the week on a firm note, following a rebound in the US stocks last Friday; Asian equities broadly rallied with a 3.3% gain in the Shanghai index standing out. Other major Asian stock indices posted gains of around 1.2-1.5%. Meanwhile, FX market experienced choppy moves; although JPY sharply declined against the majors in the early morning session, it quickly reversed its initial losses. On net, GBP outperformed the most, rising 0.1% against USD, which was the 2nd strongest currency. Meanwhile, NOK and NZD underperformed the most within the G-10 currencies.

As today’s event calendar is very thin with US existing home sales being the only major release, the relevant headlines on fiscal problem in European peripherals and financial regulatory issues will remain the main market driver. Notably, financial regulatory issues could take the center stage in coming weeks in the run-up to the June 25-27 G-20 summit instead of fiscal issue in European peripherals. One evidence suggesting that the fiscal problem in European peripherals has become less significant for the market, at least compared to a few weeks ago, is the fact that EUR became the 2nd strongest G-10 currency last week following JPY. Meanwhile, economic releases will continue to take a back seat; although there will be tons of economic releases in coming weeks, its market impact should be limited.

Commodity currencies look close to fair value levels after the past week's deleveraging and as we do not see a meaningful recovery prior to G-20, we have pulled down our end June forecasts for AUD, CAD and NZD to current spot levels. Uncertainty about the policy direction in Europe should recede over the summer and the BoC still likely to hike faster than expected, we forecast USD/CAD at 0.95 by year-end while setting end-2010 targets for AUD/USD and NZD/USD at 0.92 and 0.75 respectively (see FX Outlook: As undershoots go, this is no Lehman in FXMW, May 21 2010).

The recent currency performance mirrors positions and it’s the inverse of fundamentals; given that, we recommend avoid the temptation to chase or fade the position squeeze. As such, we recommend taking losses on short EUR/USD while keeping low residual risk (long CHF vs EUR in options and vs GBP in cash and options; stay short GBP/USD vs USD/CHF vol) (see Trade Recommendations in FXMW, May 21 2010)

Overnight news

JPY: March all industry activity index -0.8%m/m vs -0.7% consensus.

CNY: Vice Premier Wang Qishan said that talks in Beijing between the U.S. and China will cover issues including reform of the international financial architecture, trade and investment, financial market stability and macroeconomic policy.

USD: Treasury Secretary Geithner said that economic growth in the U.S. and China is broader and stronger than many people had anticipated “even a few months ago” and the world economy is “now coming out of crisis”; He also said that China’s leaders have recognized that reform of the nation’s exchange rate is “an important part of their broader reform agenda” and the U.S. welcomed China’s stance.

IMM: Aggregate IMM longs in USD increased slightly by $1.8bn to $20.5bn as of May 18th; EUR shorts decreased albeit only slightly by $0.8bn to $16.8bn and JPY shorts remained little changed at $4.8bn; notably, AUD longs shrank by $1.2bn to $3.2bn.

Today’s watchlist (all times BST; +9hrs for Sydney, +8hrs for Tokyo, -5hrs for New York)

USD: Apr Chicago Fed nat. activity index (index) @13:30 (Prev: -0.07); Apr existing home sales (mn, saar) @15:00 (JPM: 5.65, Cons: 5.65)

Israel: BoI rate announcement @15:30 (JPM: 1.75, Cons: 1.50)

GBP: BoE’s Posen speaks @18:30

NZD: RBNZ releases 2yr inflation expectation @04:00

Overnight price action

FX: GBP outperforming the most, rising 0.1% against the second strongest USD, while NOK and NZD slid 0.6%-0.7% against USD.

FX vol: 1-month vols in USD/JPY fell 0.2-0.3 vols to 16.25% whilst 1-month vols in NZD/JPY and AUD/JPY rose 0.2-0.3vols to 30.75% and 32.25% respectively.

Commodities: gold up 0.9% to $1187.3/oz; oil up 0.9% to $70.7/barrel.

Bonds: JGB yields a tad higher in mid to long term sectors; JGB 10-yr yield 1bp higher

Equities: Asian equities made marginal to sharp gains led by the Shanghai which rose over 3% in contrast to the Nikkei which is 0.3% down as of writing.

Technical View for the day

The massive risk unwinding process across asset classes basically went on throughout last week and brought world stock markets and in particular the leading S&P500 to the brink of much broader sell-off. Only the failure to trigger any follow-up after the penetration of neckline support at 1062 saved the market from a stronger sell-off which might however only be delayed for a while. The strong consolidation of commodity currencies also seems to have reached a first exhaustion point after EUR/NOK hit key-resistance at 8.2393 which is a 7 % rise in 3 days and as such almost not sustainable. The picture in EUR/CAD, EUR/AUD and in EUR/NZD looks pretty much the same which means we could now get to see a setback lower before the 3rd corrective leg up would focus on the overall consolidation targets like 1.3935/68 in EUR/CAD or 1.6396/1.6638 in EUR/AUD. As for EUR/USD the bigger picture remains negative as long as key-resistance at 1.2691/1.2735 has not been taken out. Below the bear-cycle from 1.5145 seems to be missing one leg down towards 1.1640 to be complete. The picture in Cable is similar as it requires a break above key-resistance at 1.4714/83 to potentially escape another selling round towards the 09 low at 13504. CE3 currencies are also due for a temporary recovery but are not expected to resume their bull-trends straight away.
Research from the region you may have missed
FX Markets Weekly: as undershoots go, this is no Lehman
https://mm.jpmorgan.com/stp/t/c.do?i=E34C1-666&u=a_p*d_418121.pdf*h_-183u8i5

Global Data Watch: the bounce meets malaise
https://mm.jpmorgan.com/stp/t/c.do?i=E360B-405&u=a_p*d_418351.pdf*h_-6qdmed8

The J.P.Morgan View: Q&A on market sell off
https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS-418166-0

ENDS

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