By GCI Forex Research
Fundamental Outlook at 1400 GMT (EDT + 0400)
USD
The positioning data produced by the CFTC for the FX Futures market of the Chicago Mercantile Exchange has been displaying a strong swing from USD longs to USD shorts over the past months. So it is hardly surprising that the greenback came under pressure allowing EUR-USD to appreciate to levels above 1.33. The current notable USD short positioning lets a continuation of the recent correction in EUR-USD (i.e. the dollar uptrend) seem likely. The fact that Friday‘s latest data (referring to last Tuesday) illustrates a further rise in USD shorts does not question the reliability of the positioning indicator (as this should have pointed towards a rise in EUR-USD). After all EUR-USD was still trading above 1.31 on Tuesday and it cannot be ex-cluded that the USD shorts were already falling even though the weekly data suggested some-thing else. We would initially expect a further fall in EUR-USD. First of all this means that the support area around 1.2730 would have to be breached.
EUR
The euro came under some selling pressure on Friday as concern over sovereign credit risk intensified. What began as a gradual widening of Ireland’s yields last week amid concerns about the domestic banking system, has now affected other sovereigns on the Eurozone periphery. Media sources continued to speculate that the ECB had been forced to buy sovereign bonds last week in an effort to limit spread widening. Further details are expected today when the ECB is due to announce the value of purchases settled last week. A significant increase beyond the EUR8 mn in purchases settled the week before could weigh further on the euro. Although sovereign supply is light this week, given the recent jitters, attention will focus on Ireland’s attempt to issue up to EUR1.5 bn in notes on Tuesday. The auction could mark a significant test for the euro after poor T-bill auctions last week. Nevertheless our fixed income strategists expect to see solid domestic demand given the small volume on offer, and the fact that an estimated 81% of Ireland’s 2010 issuance program is already complete.
Today, Eurozone CPI is due and the market expects to see a rise to +1.7% y/y (prev. 1.4%). The figure of course conceals a tremendous dispersion of readings across the individual member states. Greece’s EU harmonised CPI for July came in at +5.5% y/y, while Ireland reported a -1.2% y/y decline. The spread of CPI readings underlines the difficulties the ECB will face when choosing the right moment to eventually tighten monetary policy. On Tuesday the August ZEW survey of investor sentiment is scheduled for release. After plunging in June, and falling again in July, a further decline to 9.3 (prev. 10.7) is expected.
We remain bearish on the euro. Q2 GDP data last Friday likely marks the cyclical peak, and future growth and economic data disappointments together with concern over sovereign credit risk, are likely to contribute to euro weakness into year-end
GBP
This is a heavy week for UK data. July CPI, due on Tuesday, is expected to moderate again to +3.1% y/y (prev. +3.2%). Although the reading remains well above the BoE’s 2% medium-term target, Governor King has made it clear that near-term CPI strength would be looked through, and the recent inflation report confirms that inflation is expected to return to target in 2012. On Wednesday, the minutes from the August 5 MPC meeting are due, with weekend press speculation suggesting the possibility of a three-way-split in how the votes were cast. We expect MPC Member Sentance to remain a lone voice in calling for a rate hike. After the recent weakness in house price and consumer confidence, retail sales due on Thursday will be a useful barometer of whether consumer spending has been affected by headlines warning of imminent and severe fiscal consolidation.
We maintain our negative outlook on cable as the BoE will likely be forced to keep policy loose until well into next year, to offset the contractionary and disinflationary consequences of fiscal consolidation. Nevertheless we acknowledge the risk of some further gains against the euro, given that an escalation of the Eurozone sovereign debt crisis would likely lead to Gilt inflows on safe-haven demand.
JPY
Q2 GDP came in far weaker than expected, rising only +0.1% q/q (cons. +0.6%, prev. 1.1%), prompting a temporary surge in global risk aversion that slowly eased as the Asia session wore on. Commenting afterwards, Economic Minister Arai said that he is watching out for the risk that Japan’s economy might hit a soft patch but that he would await the revised Q2 data, due in September, before deciding if additional stimulus is needed. Exchange rate rhetoric continues to flow out of Japan. On Saturday, Prime Minister Kan said that he would “carefully monitor” the yen, and would “communicate” with BoJ Governor Shirakawa “in a way that’s necessary”. The Nikkei reported that efforts to arrange a meeting between Kan and Shirakawa are ongoing but that a date has not yet been set.
USDJPY continues to be driven largely by front-end US yields and will likely remain sensitive to US data surprises. Despite the solid CPI print in the US, the US Treasury yield curve continues to flatten, and US 10y yields fell another -5.2bp on Friday. Front-end yields were relatively unmoved however, providing some relief for USDJPY.
TECHNICAL OUTLOOK
EURUSD BEARISH Decline through 1.2737 has exposed 1.2606 with scope for 1.2152 next. Initial resistance at 1.2933 ahead of 1.3334
USDJPY BEARISH The pair found support at 84.73, a break here would leave little support till 79.95. Near-term resistance at 87.15 ahead of 88.12
GBPUSD NEUTRAL Model is neutral; 1.5999 and 1.5324 mark key near-term directional triggers
USDCHF NEUTRAL Remains heavy below 1.0676 which keeps our focus on the downside. Support holds at 1.0332 ahead of 1.0131
AUDUSD BEARISH Violation of 0.8896 has exposed further weakness towards 0.8781 ahead of 0.8634. Near-term resistance comes in at 0.9035 ahead of 0.9389
USDCAD BULLISH Upside potential is initially capped at 1.0587 ahead of 1.0853. Near-term support comes in at 1.0303 ahead of 1.0108
EURCHF BEARISH Eyes 1.3342 break of which would open up the way for another run towards 1.3074. Near-term resistance at 1.3665 ahead of 1.3924
EURGBP BEARISH Outlook is bearish; violation of 0.8068 would expose 0.7694 next. Short-term resistance is defined at 0.8266 ahead of 0.8363
EURJPY BEARISH Momentum is negative; break of 107.32 would open 104.72. 111.57 defines the near-term resistance.
Forex Daily Market Commentary provided by GCI Financial Ltd.
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