By GCI Forex Research
Fundamental Outlook at 1400 GMT (EDT + 0400)
USD
The dollar weakened gradually during a quiet Asian session as investors looked ahead to today’s industrial production data out of the US. EURUSD traded 1.2804-1.2865 and USDJPY 85.12-85.44. Risk-seeking remained muted after US equities closed flat and Treasurys were bid, with lower yields across the curve. Disappointing Empire Manufacturing data and a surprise drop in the NAHB Housing Market Index did not help the dollar, though the Fed’s Senior Loan Officer Opinion Survey showed broad easing in lending standards. The survey noted that the easing in standards is still concentrated at large banks but there was improvement among smaller banks as well, which is important because small banks more often serve small businesses, where the credit crunch has been the worst.
Treasury TIC data showed foreign selling of US corporate debt and equities in June while Treasurys remained in demand. But Chinese holdings of Treasurys slid again in June, according to TIC data. That said, there has been decent US data as of late and industrial production and housing starts are up next. We could see some headline risk from the Treasury’s Housing Finance Conference, scheduled to begin at 1300 GMT, but chances of any follow-through could be limited right now given upcoming mid-term elections and with Congress out of session. Property market as well as industrial production data is due for publication today in the US. On the whole we are slightly more optimistic than consensus but it is questionable whether that will be sufficient to end the debate about a possible double dip. There is some indication that the sideways move in EUR-USD between 1.27 and 1.30 will continue today. The technical levels to look out for are 1.2730 at the lower end and 1.30 at the top end.
EUR
Peripheral sovereign spreads continued to widen ahead of Ireland’s EUR1.5bn auction of 2014 and 2020 bonds. That said, 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. The latest ECB reports showed EUR10 mn in bond purchases in the last week despite speculation that the ECB had been buying a decent amount of Irish debt. The data includes purchases up to Tuesday of last week, for settlement on Aug 13, so investors will keep an eye on next week’s release to see if there was indeed any truth to the matter.
Eurozone CPI was slightly better than expected at -0.3% m/m, and 1.7% y/y. Core CPI came in at 1.0% y/y. The Eurozone and German ZEW surveys will be closely monitored for signs of softening as the recent Q2 GDP data likely marks the cyclical peak.
GBP
July CPI 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.
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 contractionary and disinflationary consequences of fiscal consolidation. Nevertheless there could be further gains versus the euro, as any escalation in Eurozone debt issues would lead to safe-haven Gilt inflows.
JPY
At USD-JPY prices around 85, possible interventions on the part of the Ministry of Finance and the central bank remain the main issue for the FX markets. Last week comments by Japanese officials explaining the effects of a strong yen on the Japanese economy had increased. According to the English language newspaper Nikkei there will be a meeting between Prime Minister Naoto Kan and BoJ governor Masaaki Shirakawa next week. Obviously the meeting will be about the yen. It seems to make little sense though that the Prime Minister and the governor of the central bank take one week to arrange a meeting. So this news item could be part of the increasing verbal interventions on the part of the government. Should verbal interventions not suffice to take the appreciation pressure of the yen we expect Tokyo to take action effectively. While yesterday’s GDP data suggested that foreign trade remained resilient there was not much good news from the inflation side of things. A further appreciation of the yen would aggravate this situation due to falling import prices. Due to the threat of interventions downward potential in USD-JPY therefore seems limited. Against this background we would advise against possible shorts.
TECHNICAL OUTLOOK
EURUSD BEARISH Momentum is negative; next support below 1.2604 lies at 1.2152 ahead of 1.1877 key low. Initial resistance at 1.2933 ahead of 1.3334
USDJPY BEARISH Next big support below 84.73 lies at 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 BEARISH Stalled above 1.0332; break of the level would open 1.0131 ahead of 0.9918 key support. Near-term resistance is defined at 1.0534 ahead of 1.0676
AUDUSD BEARISH Break of 0.8860 would expose next support lying at 0.8781 ahead of 0.8634. Near-term resistance comes in at 0.9035 ahead of 0.9389
USDCAD BULLISH While support at 1.0108 holds, expect the gains to target 1.0587 with scope for 1.0853 next.
EURCHF BEARISH Clearance of 1.3342 has opened up the way for another run towards 1.3074. Near-term resistance at 1.3451 ahead of 1.3665
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 Focus is on 107.32; move below the level would open 104.72. 111.57 defines the near-term resistance
Forex Daily Market Commentary provided by GCI Financial Ltd.
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