09 února 2009

9/2 Saxo Bank Forex Update

EURUSD breaches 1.3000 again on improved risk appetite - can it maintain these levels?

Squeeze on risk averse positions continues after a steep, if brief bout of consolidation in the Asian session

Friday saw risk-takers thumbing their noses at the torrent of terrible data out of North America, as the US and especially Canadian job reports failed to obstruct the recent swing into risk-taking mode across markets.

Yields on the long end of government treasuries have been creeping higher of late even as central banks around the world have been cutting rates. Current yield levels will offer an interesting psychological test, as we stand precisely at 3.00% on the US 10-year benchmark as we start the week and close to 3.75% on the 30-year. That 3.00% level on the 10-year was the previous cycle low back in the post internet-bubble blowup when Greenspan was lowering rates to the then-unbelievable 1.00%, so it is a structural resistance level that tests the resolve of the latest round of seemingly improved sentiment. (Our niggling devil's advocate asks us, by the way, whether this really is about improved sentiment, or if it is about some of the more aggressive pessimists simply unwinding some of their positions as the momentum has come out of the market of late...).

In any case, the reactions in currency land to the seeming rays of sunshine have been as one would expect, with a tremendous squeeze on JPY crosses, a squeeze on CHF and USD longs and especially on GBP shorts. EURGBP again tested that key support are down under 0.8700 (the old high and last week's low of close to 0.8665 is the critical area) before rallying sharply, suggesting that GBP may not have the penetrative forced necessary to break through stronger right away here - though if it does, the implications could takes us much lower toward 0.8250. In the major EUR crosses, 120.00 in EURJPY is still intact, though the psychological pivot in EURUSD at 1.3000 has just been breached here ahead of the North American session.

The market's reaction to the Canadian jobs data on Friday was an amazing act of defiance, as the loonie fought back to a solid gain on the day despite a surprise level of several standard deviations from the norm. Still, USDCAD is perched near the middle of this months old, churning range and today's follow up moves show us that the action there (spike low and then strong rally) has more likely been driven by frustrated CAD shorts unwinding their positions due to USD strength elsewhere rather than an incipient sign of a more sustainable move to CAD strength.

The focus in the news remains on the announcement of Obama's stimulus package this week and especially Geithner's plans for the banks, as there is still considerable uncertainty surrounding the nature of the eventual "solution" to their constantly eroding balance sheets. Soros has advocated a "side pocket" solution, where banks can park their bad assets until a better day rather than the much discussed "bad bank solution that would have the US government possibly overvaluing bad assets by creating a market for them and bidding on them. Obama has been unpleasantly surprised at the resistance offered up by the Republican opposition, after all of his attempts at creating a bipartisan esprit de corps in the legislature. Negotiations and planning must be furious, as Geithner was forced to delay a press conference announcing plans for banks originally scheduled for today until tomorrow at 1600 GMT. Bernanke will also be testifying tomorrow in front of a panel of the House of Representatives.

The data emerging from Japan in Monday's Asian shows how the contraction in global demand is most brutal on the producers of production equipment, as Japan's January Machine Tools orders showed an astounding drop of -84.4% year-on-year. Still, this data point was somewhat confused by the earlier release of Dec. Machine Order data, which showed a much smaller decline than expected.

As we head into the US session, it appears that the wind is still at the back of the recent moves in USD and JPY weakness, with 120.00 in EURJPY and 1.5000 in GBPUSD possible key tests of resistance for those moves. Also keep one eye on treasuries as a barometer for whether this move has legs here in the short term or whether it will be turned back. The 55-day moving average in EURUSD in the 1.3300 area is the next major resistance if last week's high at 1.3070 gives way. We suspect that this move higher in risk appetite will run into resistance sometime this week.

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