Weekly Briefing 121203

1.  Review.

I said: “EURUSD: If the S&P/ Case Shiller prices do increase in September it would be the eighth consecutive month of house price growth in the US. This may boost expectations for a deeper recovery in 2013, and we could see stocks and other risky assets start to price in a recovery in this important sector of the US economy. If fiscal negotiations continue to make progress and house prices are positive then we may see the SPX 500 drift higher next week.

The break above 1.2805 – the 200-day sma – keeps us constructive on the outlook for EURUSD in the medium-term. We think that a break above 1.30 could be on the cards, but we would expect the 1.3175 level – the high from September – to be a major stumbling bloc.” EURUSD closed the weekly London session above 1.30 on Friday for the first time since mid-October. This is a very bullish development for this cross.

“GBPUSD:

USDJPY: Given the possibility of more easing, and the shear aggressiveness of current easing, further JPY weakness may be on the horizon, at least until the election on December 16. A buy on dips” The dip was small, 81.8 and the pair is chasing the 82.7 high again.
Trades
None

2.  Analysis.

"Fundamental analysis"
Sunday:
Monday:
Tuesday: USD Core Durable Goods Orders m/m 1.5% -0.6% 2.0%
Wednesday: USD New Home Sales 368K 387K 389K
Thursday: USD Unemployment Claims 393K 404K 410K, USD Pending Home Sales m/m 5.2% 0.9% 0.3%
Friday: EUR EUR German Retail Sales m/m -2.8% -0.3% 0.5%
Saturday: CNY Manufacturing PMI 50.6 50.8 50.2
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.
USD: Of the major economies to release manufacturing PMI’s next week, only China and the US are expected to show above 50 prints which signal expansion. Regional Fed surveys of manufacturing activity for the month of November have been soft and suggest that the pace of expansion has slowed.
AUD: Inflation has picked up but risks falling again as the exchange rate remains highs and the industrial sector declines. Furthermore, inflation remains at the very bottom end of the RBA’s target range after increasing by more than expected.
EUR: the fundamental picture is still dismal. On Friday unemployment data for the currency bloc was released that reached another record high of 11.7%. Next week sees the release of final November PMI surveys, which are expected to remain mired deep in recessionary territory. Sovereign concerns may also flare up again. Spain may be fully funded for 2012, but it has a record amount of debt to issue for 2013, thus we could be close to a bottom in Spanish bond yields.
GBP: Expectations are rising that the Chancellor will be forced to extend the target for reaching a cyclical budget surplus and a decline in the UK’s debt-to-GDP ratio by a year to 2016/17 from 2015/16 after some dismal fiscal data in recent months. The UK has retained its triple A credit rating and the rating agencies have said this is down to the UK’s fiscal consolidation plan. However, if the Chancellor sticks to his fiscal targets religiously and the economy is plunged into another recession then we may lose our top rating anyway.
JPY: At its latest meeting the BoJ’s board unanimously voted to leave policy unchanged, which included keeping interest rates on hold and not increasing the size of its asset purchase program (APP) or credit loan facility.
CNY: PMI above 50, more than expected.Tthe Chinese economy (the second largest in the world after the US) has begun to show signs that the economic slowdown may be nearing a bottom. Improvement in Chinese manufacturing is likely to be supportive of the overall risk environment and specifically the AUD if demand for Australia’s natural resources picks up
Gold: With both the Fed and Bank of Japan engaging in balance sheet expansion, gold has also regained its safe haven appeal and has performed strongly this week

Id	Driver	Comments	Immanency
1	On-going global recovery	EZ growth low but recovering. 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% (maybe 2 years)	No
6	Commodity rise	Falling prices are confirming slowdown	No
7	US	Fiscal cliff and risk off	Yes

"Technical analysis"
EURUSD: . From a technical perspective the bulls are still in control. The number of short contracts has been cut dramatically since June 2012. Momentum indicators don’t suggest that the euro is currently overbought in the short term. However, there is a major resistance level coming up at 1.3175
GBPUSD: flat after breaking through the key 1.5970 resistance zone. Any slackening of the fiscal targets may see a knee jerk reaction lower in GBPUSD, but we expect 1.5950 to attract buyers as long as the external risk environment remains stable. The long –term trend is still higher after GBPUSD broke above the top of the weekly cloud at 1.5925, which is the start of a long-term technical uptrend in this cross
USDJPY: broke the critical resistance of 82
AUDUSD: . We agree with the market consensus that the Bank will deliver a 25bps reduction in the policy rate to 3.00%. A move by the RBA to lower interest rates may increase pressure on the currency. Rising trendline support which dates back to the June lows is currently coming in below the 1.04 figure. This is also where the 100-day simple moving average (SMA) resides and is likely to be a key pivot. A break of the 1.0360 level is likely to see the 200-day SMA around 1.0300 next and below that may see the downside accelerate. To the upside, the 1.05 figure is a significant resistance level and a break above here would negate our bearish bias

Median grid
EURUSD GRID 1.2400-1.3000, neutral bias
USDJPY GRID 76.00-80.00, long bias

Currency	Short term view(technical)	Long term view (fundamentals)
USD	Short	Short
JPY	Short	Short
AUD	Long	Long
EUR	Long	Neutral

"Market dynamics”
EURUSD: If the ECB does not enact anything new at this meeting, the last of 2012, then we may see sentiment towards the euro start to sell off at the tail end of next week. 1.2950 then 1.2830-80 – a cluster of daily smas – should act as good support in the short term. A positive surprise in PMI figures could see the EUR/USD break the top of the cloud, however we would wait for a convincing break above the 1.30 level to signal a possible move back towards recent highs ahead of the 1.32 figure
GBPUSD:
USDJPY: Given the possibility of more easing, and the shear aggressiveness of current easing, further JPY weakness may be on the horizon, at least until the election on December 16. A buy on dips
Key events:
Sunday:
Monday: USD ISM Manufacturing PMI 51.5 51.7
Tuesday: AUD Cash Rate 3.00% 3.25%
Wednesday: AUD GDP q/q 0.6% 0.6%, USD ADP Non-Farm Employment Change 127K 158K
Thursday: EUR ECB Press Conference , USD Unemployment Claims 381K 393K
Friday: USD Non-Farm Employment Change 91K 171K
Saturday:

Prices and Risk on/off view

RORO (30): -0.20 (-0.30)

3.  Plan
Still buy EURUSD and USDJPY on dips.