GBP Underperforms

Overall, currencies remain well bid against the USD, with the Euro once again looking to extend gains to fresh yearly highs beyond 1.3700 on Tuesday. A combination of hawkish comments from ECB President Trichet and improved sentiment towards the Eurozone, in light of what appears to be a comprehensive support package, have contributed to the relative strength. Technically, while we continue to look for opportunities to buy USD’s over the medium-term, there is certainly room for additional Euro gains from here, and we eye a potential move just shy of 1.4000 before the market once again looks to roll over in favor of broader USD gains.

Relative Performance Versus USD Tuesday (As of 10:00GMT)

1. SWISSIE+0.24%
2. YEN +0.23%
3. KIWI+0.10%
4. EURO-0.11%
5. CAD-0.22%
6. AUSSIE-0.31%
7. STERLING-1.26%

The big story on the day has come out of the UK, with the Pound showing weakness all day and then accelerating to the downside following a much weaker than expected growth reading. This opened a drop of well over 200 points in Cable on the day and put pressure on the UK against the other major currencies as well. Of course, attempts were made to mitigate the results, with Chancellor Osborne downplaying the results of the weather impacted data. The Bank of England is in a tough position where they need to balance between the threat of rising inflation (which is very real) and a shaky economic recovery. The Sterling market had been well bid in recent days on stable economic results and higher inflation readings, but has since come back under pressure following the latest GDP result.

Elsewhere, the Australian Dollar has also been loser on the day. Although the single currency is only marginally lower on the day against the buck at this point, we continue to see relative weakness ahead, with a combination of softer economic data and narrowing yield differentials in favor of other major currencies driving the relative weakness. The latest inflation data certainly does not help the antipodean’s cause, with a much softer CPI print earlier today, providing added support for the idea that the RBA will continue to remain on hold going forward. The Australian central bank has been in a period of transition, with the RBA moving away from a hawkish monetary policy to a more balanced policy. Meanwhile, other major central banks look to be on the verge of shifting away (if they have not done so already) from super accommodative policies.

Moving on, as was widely expected, the Bank of Japan came out and left rates unchanged with the overnight call rate holding at 0-1.10%. Meanwhile, the BOJ maintained its economic assessment with economic growth in 2011, 20112 and 2013 seen growing at 3.3%, 1.6% and 2.0% respectively. Also in Japan, MOF Noda said that the 2011 budget needed to be passed by the end of March to rid deflationary concerns, but there has been some resistance within the government and the passage of the budget may prove to be a difficult task with some speculating that PM Kan will have to make some serious personnel changes in order to achieve government goals re the budget.

On the strategy side, we have been looking for opportunities to buy USD/CAD on dips in recent days, and USD/CHF is now back on our radar, with a move towards the 0.9400 figure viewed as a potential counter-trend long opportunity. We will let you know as things progress throughout the day, but right now, it looks as though our next recommendation will be in one of these two currencies.

Looking ahead, all eyes turn to Canada, where inflation data (CPI- 0.2% expected) is set for release at 12:00GMT. US Case Shiller (-0.9% expected) is then out at 14:00GMT, with consumer confidence (54.3 expected), the house price index (0.0% expected) and Richmond Fed manufacturing (23 expected) capping things off at 15:00GMT. US equity futures are marginally lower while commodities are being hit harder with oil down some 1.50% and gold off by 0.50%.

TECHNICAL OUTLOOK

EUR/USD:The recent break back above 1.3500 has signaled a shift in the short-term structure and now potentially opens the door for additional upside over the coming days back towards the 1.4000 area. Next key topside resistance comes in by 1.3745 (61.8% of Nov-Dec move, while above exposes the 78.6% fib retrace off of the same move at 1.3985. Overall however, our core bias remains net USD bullish and as such, rallies to 1.3985 this week will be aggressively sold. In the interim, a break and close back below 1.3540 will be required to relieve topside pressures.

USD/JPY: The market appears to be locked in some consolidation with clear directional bias not easily determined. The latest rally has stalled out by the Ichimoku cloud top to suggest that the pressure still remains on the downside for now. Back below 82.00 should accelerate declines and expose the multi-year lows from 2010 just ahead of 80.00, while back above 83.70 will relieve downside pressures and shift structure back to the topside. In the interim, we remain sidelined and await a clearer signal.

GBP/USD: A major bearish reversal day in the works and could now confirm a fresh lower top in place by 1.6060 ahead of the next major downside extension. Tuesday’s break back below 1.5840 helps to strengthen bearish bias, while a daily close below this level will further reaffirm. From here, look for any intraday rallies to be well capped ahead of 1.5900 in favor of a drop towards next support by 1.5665 further down. Only back above 1.6060 negates.

USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. Look for the current setbacks to be well supported on a close basis above 0.9400, with a fresh higher low sought out ahead of the next major upside extension beyond 0.9785.

TRADE OF THE DAY

GBP/CHF:While we acknowledge that on the fundamental front today’s data was certainly not pretty, we also can not ignore intraday technicals which are showing severely oversold. The daily ATR has already been well exceeded and hourly studies are violently stretched. On the daily chart we see evidence of longer-term basing, and as such we like the idea of buying into this latest dip below critical psychological barriers by 1.5000 in anticipation of a fresh higher low above the record lows set in late 2010. A key 50% fib retrace off of the latest Dec-Jan low high move and some solid previous resistance now turned support come in by the 1.4900 figure, and we will use this figure as our ideal entry for today’s trade. STRATEGY: BUY @1.4900 FOR AN OPEN OBJECTIVE; STOP 1.4730. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON TUESDAY.

Are Spanish Auction Results Keeping Euro Propped Up?

Although the Euro has managed to mount an impressive recovery, with the market trading well off of the multi-week lows set on Monday by 1.2875, we continue to classify the move as corrective, and fully expect to see a bearish resumption over the coming days. For now, the market has been propped by a potential EU aid package for Portugal, and solid bond auction results out of both Portugal and Spain. Also seen helping to keep the Euro somewhat bid have been comments from Germany’s Merkel who has pledged to protect the Euro with “whatever needed.” However, it is quite evident that despite efforts to intervene on behalf of the ailing Eurozone economy, there is a long road ahead which is likely to produce some unpredictable and unwelcome results. As such, we see any additional gains being well capped below the 1.3300 figure on a close basis, and would recommend considering to build into short positions on a rally towards 1.3300 (no specific trade recommendation here at the moment).

Relative Performance Versus USD Thursday (As of 11:05GMT)

1. KIWI+0.42%
2. EURO -0.01%
3. AUSSIE-0.02%
4. YEN-0.07%
5. STERLING-0.10%
6. CAD-0.22%
7. SWISSIE-0.69%

There is some event risk worth mention today, although we do not expect any surprises. Both the ECB and BOE are scheduled for rate decisions, and as is usually the case, the risk from the BOE comes from any changes to the QE program, while risks to the ECB decision will originate from the post decision Trichet press conference. At the end of the day, we do not expect to see any surprises from either central bank, but will be watching closely should anything materialize. While the beleaguered Eurozone peripherals are obviously problematic for the health of the Eurozone economy, we expect Trichet to downplay any such threats and maintain a less pessimistic outlook. Meanwhile, UK inflation data has been concerning of late and definitely makes it harder to justify the ultra accommodative monetary policy, but here too we do not expect any changes with the central bank still needing to focus on the current economic recovery. Data released in Europe overnight has failed to materially influence price action with German wholesale sales improving from the previous month, while UK data was mixed with industrial production slightly weaker and manufacturing production a little stronger.

Moving on, although price action in the Australian Dollar is rather subdued on Thursday thus far, we would be on the lookout for a pickup in volatility over the coming hours. While the currency still remains well bid on dips for now, the much weaker than expected employment data only helps to reaffirm our downgraded outlook for the local economy. Economic data results over the past few months are not as promising as they once were, and we continue to see risks to the downside in the Australian Dollar despite the attractive yield differentials. December jobs data showed a net gain of only 2.3k after the market had been looking for an increase of 25k. Additionally, while the unemployment rate showed a drop to 5.0% ,which was on the surface better than expected, the decline was more likely due to a lower participation rate due to a softer overall employment sector.

In terms of where the value lies at the moment and over the coming sessions, we continue to look to the Canadian Dollar as a currency that is on the verge of a sizeable depreciation. This currency has held up so well over the past few sessions, and USD/CAD trades by multi-month lows into the 0.9800’s thus far. Cyclically, the market looks to be quite stretched, and our technical studies suggest that a major trend shift is on the horizon. At this point the fundamental catalyst has yet to present itself, but we will be paying close attention. Our strategy will be to continue to look for opportunities to buy USD/CAD on overdone intraday dips in anticipation of said correction. On Wednesday we had issued a buy recommendation that never materialized, and we will once again look to be buyers at lower levels in Thursday trade if given the chance. Also on the strategy front, we have finally exited our entire EUR/CHF long position from 1.2550 at 1.2825 on Thursday for a nice profit.

Looking ahead, the BOE (unchanged 0.50% and 200B) and ECB (unchanged 1.00% expected) rate decisions filter over into the North American open at 12:00GMT and 12:45GMT respectively. The attention then shifts to North American economic data at 13:30GMT with the release of US producer prices (0.2% expected), the trade balance (-$41B expected), initial jobless claims (402k expected), continuing claims (4100k expected), and Canada international merchandise trade (-C2.0B expected). US equity futures and commodity prices are tracking lower, led by moderate declines in gold prices.

TECHNICAL OUTLOOK

EUR/USD:Although the market has rallied quite impressively out from the recent multi-week lows set by 1.2875 earlier this week, we continue to classify the bounce as corrective, with any additional rallies expected to be well capped by the 1.3300 area ahead of some fresh weakness. As such, the preferred strategy is to stand aside for now and look to sell a little higher up. Ultimately, only a close back above 1.3300 would give reason for concern and delay outlook.

USD/JPY: The market appears to be locked in some consolidation with clear directional boas not easily determined. The latest rally has stalled out by the Ichimoku cloud top to suggest that the pressure still remains on the downside for now. Back below 82.00 should accelerate declines and expose the multi-year lows from 2010 just ahead of 80.00, while back above 83.70 will relieve downside pressures and shift structure back to the topside.

GBP/USD: As we had written in our commentary from previous daily analysis, the current bounce was not to be unexpected despite our bearish outlook, with the market in the process of carving out a fresh lower top below 1.5900 ahead of the next downside extension. At this point, we do not see gains extending much further and would recommend looking to consider selling rallies towards 1.5850 on Thursday.

USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. The latest bounce back above 0.9600 is certainly encouraging and the rally has also triggered the break of the previous weekly high to set up a bullish reversal week. Look for continued acceleration of gains back above parity over the coming sessions, with any setbacks expected to be well supported above 0.9500 on a close basis.

FLOWS

An ACB has been selling around the day’s highs in Eur/Usd along with Middle East and Eastern European sellers. Export sales reported in Usd/Jpy with a real money account on the bid. A corporate account has been a dip buyer in Nzd/Usd.