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Wednesday, 23 Nov 2011
USD Continues to be Favored
As investors reduce their exposure to higher yielding currencies the USD has become the overwhelming favorite.
USD - US Sovereign Credit Rating Affirmed by Moody's and S&P
After the US congressional super committee failed to come to an agreement both Moody's and S&P left the US sovereign credit rating unchanged while Fitch will release its decision later in the month. Expectations are for Fitch to put the US on review for a potential downgrade. In the wake of the failure of the congressional super committee to agree to a deficit reduction plan there will be 1.2 trn combined mandatory budget cuts from the military and an expiration of tax savings and unemployment benefits.
Despite the failure of the US government to agree to any program that would put the US on a path of fiscal responsibility the USD continues to be favored. The most recent IMM data from the CFTC Commitment of Traders report shows speculators are increasing their USD positions as market sentiment deteriorates.
Today will have the release of US durable goods orders and weekly unemployment claims. Both of which are expected to show improvements which is in-line with the recent trend of improving US economic data. With the approaching Thanksgiving holiday liquidity may begin to fall during the North American trading session and increasing volatility in the FX pairs. The trend of a stronger USD may continue into the holiday weekend.
EUR - Is the FX Market Becoming Overly Bearish on the EUR?
Talks of a potential euro zone break up are doing no favors for the EUR as the EUR/USD continues to trade near the psychologically important 1.35 level. A meeting between the leaders of the euro zone's three largest economies Germany, France, and Italy will commence in Strasbourg on November 24th as the crisis deepens. The meeting of Merkel, Sarkozy, and Monti will be important as one of the weaknesses of the euro zone has been the inability of euro leaders to tackle the issues together and to bridge the differences between Germany and France. The meeting will also carry additional significance as it is prior to the euro zone finance minister meeting on November 29th. Here it will be decided whether or not to release the next tranche of aid to Greece. The EU Economic Council meeting on December 9th will also be a significant event to watch for.
While the threat of an EU nation defaulting and leaving the EMU is real given recent comments by both Merkel and Sarkozy, one has to note the increased level of bearish sentiment that is being baked into the market. After browsing through research notes from some the bulge bracket investment banks it is easy to notice the trend of recently updated bearish EUR forecasts. Given the additional bearish sentiment, should the upcoming meetings provide a potential solution with the creation of euro bonds or additional ECB involvement the EUR shorts could be squeezed.
GBP - Sterling is on the Ropes
The GBP has been pushed lower as the USD continues to strengthen. Yesterday's news that the budget deficit shrank in October helped sterling to recoup some of its gains as the data was in-line with consensus estimates. The UK budget deficit is beginning to fall following the implementation of past austerity measures. Reducing the budget deficit has become a major part of the economic plan by PM David Cameron.
Today the BoE Monetary Policy Committee (MPC) meeting minutes will be released and may push the GBP lower as the dovish MPC could signal their support for additional quantitative easing.
The major test for the GBP/USD is at the 1.5600-30 level where the October 18th low coincides with the 61% Fib retracement of the October move. Versus the EUR, sterling has been on the ropes this week with the EUR/GBP climbing as high as 0.8660 but failing to make a close October 21st low. Additional tensions in Europe could drive pair lower to test the November low of 0.8485.
Copper - Copper Prices Rise from this Week's Low
Copper prices came off of their lows as market sentiment picked up slightly. This comes after Monday's move lower to a 1-month low. The December copper contract for delivery traded as high as $3.3700 before falling back to $3.3000. Europe's largest copper producer Aurubis AG, issued a report suggesting despite the troubles in Europe surrounding the euro zone debt crisis demand for copper remains healthy.
Copper prices continue to fall given the sharp drop in market sentiment. Should the European debt crisis worsen, copper prices could retest the October 20th support at $3.050.
There is a bullish wedge pattern that has formed on the EUR/USD daily chart. The falling resistance line is off of the October high and the support line falls off the November 1st low. Resistance is found at 1.3615. A break here and the EUR/USD could test the November highs near 1.3850. Should the pair continue its trend lower the pair could encounter support at the rising trend line from the January 2010 and October 2011 lows at 1.3270. Traders may be eyeing the October low of 1.3145 followed by a deeper move to the 2011 low of 1.2875.
After breaking lower from the late October-mid November consolidation pattern the GBP/USD rose back to the previous support line at 1.5850 only to turn lower once again. This is a textbook retracement to a previously known support that has now turned into resistance. Support may be found at the October 18th low of 1.5630 followed by the October low of 1.5270. Resistance comes in at the top of the previous consolidation pattern at 1.6075.
The slow decline of the USD/JPY back to its all-time low at 79.60 continues while the charts show very little support to prevent the move. Any attempt to bid the pair higher may encounter selling pressure at the November 15th high of 77.50 followed by the long term downtrend from the June 2007 high which comes in at 79.10.
The rally from the late October low continues to gain steam as the pair approaches the October high of 0.9310. Both weekly and monthly stochastics continue to move higher. A break of 0.9310 will expose the 20-month moving average at 0.9450 followed by the February high of 0.9770. Support is off of the November 3rd low of 0.8760 which coincides with the 100-day moving average. While perhaps a bit extreme the pair may eventually target the falling trend line off of the 2003, 2008, and 2010 highs which comes in at 1.1200.
The Wild Card
After breaching below its rising trend line from the 2010 low the EUR/GBP has pulled higher only to find resistance off of the October 21st low at 0.8665. Yesterday's price action had the pair testing this resistance but the pair never succeeded to break above this level. Forex traders may note that EUR shorts may have stops placed above this price and should the euro zone debt crisis intensify the pair could quickly move lower to test the November low of 0.8485.
|22:30||AUD||AIG Manufacturing Index||46.9||-||-|
|23:30||AUD||MI Inflation Gauge||m/m||0.0%||-||-|
|01:35||JPY||Final Manufacturing PMI||52.1||52.1||-|
|08:00||EUR||Spanish Unemployment Change||-64.4K||-32.4K||-|
|08:15||EUR||Spanish Manufacturing PMI||53.8||54.2||-|
|08:45||EUR||Italian Manufacturing PMI||48.4||49.3||-|
|09:00||EUR||Final Manufacturing PMI||51.0||51.0||-|
|13:30||USD||Core PCE Price Index||m/m||0.0%||0.0%||-|
|14:45||USD||Final Manufacturing PMI||53.7||54.1||-|
|15:00||USD||ISM Manufacturing PMI||55.5||54.9||-|
|15:00||USD||ISM Manufacturing Prices||38.5||40.1||-|