Risk Rally Pushing Through Technical Levels - Looking for reversals
02/08/10 23:39
It is a one way street against the USD. Other than
CAD and JPY, the USD has lost about 10% against the
majors. What is driving this? It is a combination of
a series of weak U.S. Economic data which has pushed
the U.S. treasury yields lower against Bunds, Gilts,
JGB's and other equivalents, as well as softening
concerns about Eurozone risk (which still exists, by
the way). The trends are simply driven broad based
USD weakness and lower yields.
The majors are approaching key technical levels, as discussed in Pro Traders Club, and we could see a slowing of these trends following this weeks barrage of important data. We are looking for technical patterns to give us indication to sell into the current rally and are easing off our longs into the major resistance faced by EURUSD, GBPUSD, AUDUSD and support for USD Index. Watch bond prices closely as the market seeks yield outside of USD's. As bond prices fall, the USD will likely stage a rally.
We are likely to see continued USD weakness into Friday's NFP as risk rallies in a scene of good or bad data. When data is good, risk rallies with equities. When data is bad, risk rallies on yield support favoring high yielding currencies.
The majors are approaching key technical levels, as discussed in Pro Traders Club, and we could see a slowing of these trends following this weeks barrage of important data. We are looking for technical patterns to give us indication to sell into the current rally and are easing off our longs into the major resistance faced by EURUSD, GBPUSD, AUDUSD and support for USD Index. Watch bond prices closely as the market seeks yield outside of USD's. As bond prices fall, the USD will likely stage a rally.
We are likely to see continued USD weakness into Friday's NFP as risk rallies in a scene of good or bad data. When data is good, risk rallies with equities. When data is bad, risk rallies on yield support favoring high yielding currencies.
The first major US data release of the week supported investor risk-seeking as equities closed 2% higher. The dollar lost ground against some of the higher beta currencies as EURUSD broke above 1.31 but held in relatively well against the safe haven yen and Swiss franc. ISM Manufacturing did not dip as much as expected (55.5 versus consensus 54.2) and the index continues to indicate solid growth in the manufacturing sector. But with solid European PMI manufacturing figures, investors will await further US data to see if data asymmetry between the US and Europe continues. The risk that the Fed resumes quantitative easing is clearly weighing on the dollar, which is likely to keep the greenback undermined over the summer. As a result, the dollar can weaken further, near term. Fed Chairman Bernanke said the US still has a "considerable way to go" for a full recovery, but said the Fed is maintaining strong monetary policy support for the recovery, without giving more details. He also said rising consumer demand should help the recovery.
I believe EUR is becoming overbought and overpriced, but FX markets often overshoot/overreact.I maintain a view that the euro will weaken as quite a bit of good cyclical news is now priced in. The boost that Eurozone exporters have received from the earlier euro depreciation should wane as the exchange rate stabilizes. But for now, data continues to positively surprise as PMI figures were broadly robust across the Eurozone. All national PMIs showed further expansion in the manufacturing sector, with France and Germany particularly strong. The overall Eurozone figure was also above-consensus at 56.7.
The recent spate of surprisingly firm data, together with further spread tightening in the sovereign bond space, could give ECB President Trichet grounds for some cautious optimism this week, though fiscal consolidation remains an obstacle to growth.
UK PMI surprised to the upside at 57.3 (cons. 57.0), while the June figure was also revised higher. These results may alleviate growth concerns in the near term, but with housing activity showing a slowdown is in the works amid weak credit growth, we expect policymakers to remain on a dovish note. Banking sector earnings will be released throughout the week and strong results may encourage further asset reallocation flows in light of disappointing stress-test results in the Eurozone..
What to do:
We are reducing our longs and waiting for technical signs of reversal of major pairs to be covered in Pro Traders Club
Source: UBS, Bloomberg, Chris Lori