1. Review.
I said: ”Post the QE3 announcement the dollar is looking extremely oversold, so a pullback in risky assets in the coming days would not be unusual. However, we believe that the sell-off, especially in EURUSD could be fairly shallow due to the ECB action to reduce credit risk in the currency bloc (see more below). We believe this pair could trade in a 1.28- 1.35 range until the end of the year”. There was a pullback for risky assets.
EURUSD sitting at 1.297
“USDJPY: It is natural for USDJPY to react to a move in Treasury yields, also as market and sovereign risk levels have dropped then the yen tends to get sold off. Thus, the move higher in USDJPY is perfectly normal at this stage.” T notes dropped and pair is at the same level.
It seems like the fundamental winds are at the back of the euro which should support the euro on dips as there is still an overhang of euro shorts.
Trades
None
2. Analysis.
"Fundamental analysis"
Tuesday: EUR German ZEW Economic Sentiment -18.2 -19.4 -25.5
Wednesday: USD Building Permits 0.8M 0.79M 0.81M, CNY HSBC Flash Manufacturing PMI 47.8 47.6
Thursday: EUR German Flash Manufacturing PMI 47.3 45.4 44.7, USD Philly Fed Manufacturing Index -1.9 -4.1 -7.1
Friday:
Saturday:
Sunday:
Both ECB and FED have pledged “unlimited” support to sort out their respective problems and for the first time since the financial crisis broke out in 2008 the Fed and the ECB have said they won’t stop until the problems are solved. This is aggressive action from the world’s most important central banks and the markets like it. If the Fed is going to keep its foot down on the accelerator until the economy recovers then QE could be with us for the long-term, which may keep dollar strength capped and the Aussie, Kiwi and Real fairly strong.
Fed: its QE3 programme will last until the unemployment rate drops to a level acceptable to the Fed (probably be somewhere south of 7%) or inflation rises above 3%. Lockhart indicated that the “immediate outlook for jobs” is the focus of the Fed and said that the potential risks associated with QE3 are “manageable”. Dallas Fed President Fisher who said that he sees a sharp rise in inflation expectations and long-term inflationary fears.
EUR: OMT is not yet triggered. There is hope that Spain will apply for a bailout after reports on Friday that Spanish officials were in negotiations with the EU. A sovereign bailout for Spain also has significance for the wider market as it would trigger the ECB’s OMT programme. Once this happens the ECB becomes a lender of last resort for the currency bloc
GBP:
JPY The BOJ surprised some by adding to their QE programme. With Qe3 in play, the JPY is emerging as a more attractive haven. Recent economic data that showed continued contraction in Europe and in China’s manufacturing sector spurred risk aversion which saw the JPY outperform the US
CNY:
| Id | Driver | Comments | Immanency |
| 1 | On-going global recovery | Germany slow down. EZ growth low. US growth may be picking up | Yes |
| 2 | FED and BCE | FED will be on hold for until 2015; | No |
| 3 | EZ break up | EU dynamic is a longer term dynamic of "putting the structures in place”; Greece exit | No |
| 4 | PIIGS | Greece government and Spain banks in focus | Yes |
| 5 | QE3 | Until unemployment < 7% or inflation > 3% | No |
| 6 | Commodity rise | Falling prices are confirming slowdown | No |
"Technical analysis"
EURUSD: 1.30, at top of the grid. Need a grid adjustment. Golden cross of the 200 sma
GBPUSD: testing the extreme of the trading range 1.54-1.60, at 1.62
USDJPY: broken the top of a recent range and broke above the 79.00 figure.
Median grid
EURUSD GRID 1.2400-1.3000, north bias
USDJPY GRID 76.00-80.00, neutral bias
| Currency | Short term view(technical) | Long term view (fundamentals) |
| USD | Short | Short |
| JPY | Short | Short |
| AUD | Long | Long |
| EUR | Long | Long |
"Market dynamics”
EURUSD: we believe this pair could trade in a 1.28- 1.35 range until the end of the year. We expect to trade in a 1.2830 (200-day sma) – 1.3100 range in the coming days.
Practicalities will cause euro dips but they will be short and shallow. Spain is the biggest concern for euro markets at the moment. If it applies for a bailout in the next couple of weeks we could see the single currency and euro-based assets start to rise, if we don’t then they could just as easily sell off sharply.
Buy the dips if they are there. You can also sell the tops, but be aware that the train is going UP.
I think there is still a lot negativity in the Euro that needs to be priced out. We are not returning soon to mid-low 1.20s, maybe mid-high 1.20s but more likely we settle above 1.30.
GBPUSD:
USDJPY: we believe we are seeing bottoming behavior in USDJPY and it won't go lower. The USDJPY will move on what happens in the US and not in the Yen side of the equation. ,The JPY will remain sensitive to broader risk sentiment as well as US Treasury yields.
Bottom line - QE3 or not it won't change the current positive EUR situation materially.
Key events:
Monday: EUR German Ifo Business Climate 102.7 102.3
Tuesday: USD CB Consumer Confidence 62.9 60.6
Wednesday: USD New Home Sales 381K 372K
Thursday: USD Unemployment Claims 378K 382K
Friday:
Saturday:
Sunday:
Prices and Risk on/off view
RORO (30): +0.39 (1.21)
3. Plan
Play JPY short trades and EURUSD long on pullbacks
