Fundys – The initial reaction amongst investors and officials post the G20 has been positive with the improved sentiment reflected in the push back into the higher yielding currencies and concurrent rally in global equity and oil prices. A number of EU and ECB officials have been on the wires following Thursday’s surprise decision by the ECB to only cut rates by 25bps. Almunia and Juncker, offered some downbeat and gloomy outlooks for the global economy while ECB Trichet, Wellink and Nowotny all left the door open for additional rate cuts. The New Zealand Dollar was by far the standout currency overnight with the single currency rallying over 1.0% against the buck. Usd/Jpy price action was also exciting with the major finally breaking above key psychological barriers at 100.00. Some bids in the pair have been attributed to the latest news of a North Korea test missile launch and potential threat to neighboring Japan. The second best performer on the day against the greenback has been Sterling, with the currency outperforming on the back of better than expected services PMI data which easily offset any disappointment from the mildly weaker Halifax house prices. In Switzerland, the release of much softer CPI data reinforced the SNB’s deflationary fears and was seen weighing on the Swissy, while slightly firmer than expected services PMI in the Eurozone hardly factored into price action. US equity futures are moderately higher while commodities are flat. All eyes now turn to today’s key event risk in the form of US Non-farm payrolls (-660k expected) due at 12:30GMT followed by ISM non-manufacturing (42.0 expected) at 14:00GMT. On the official circuit, Fed Kohn is slated to speak on the economic crisis at 15:00GMT, while Bernanke will talk at the Fed Credit Markets Conference in Charlotte at 16:00GMT.
Techs - EUR/USD stalled yesterday by the 61.8% fib retracement off of the 1.3740-1.3115 move, with the market now finding a hard time extending gains in the former support now turned resistance zone of the 1.3400’s. We expect trade to remain choppy, but ultimately favor a resumption of setbacks back towards 1.3115 over the coming days. Above 1.3500 however would concern and open the door for a push back to 1.3740. USD/JPY had finally managed to clear key psychological barriers at 100.00 today to 100.20 ahead of the latest minor setbacks. While we see the risks from here for additional upside towards the 104.00 area, and gains today are seen limited to the 101.00 area. The Yen crosses are all showing overbought which could also weigh on the major. Key level to watch over the coming session come in by 100.20 and 99.00. GBP/USD has finally closed a good ways above the 100-Day SMA to put the focus back on next key resistance by 1.4990 (9Feb high). However, inability to establish any momentum above 1.4800 could open a resumption of the broader setbacks with a break back below 1.4650 to potentially accelerate declines and suggest short-term topping. USD/CHF continues to be well supported in the 1.1300’s which offers itself as formidable former resistance now turned support and the risks from here are for a push back into the 1.1500 and eventual break above the recent trend highs at 1.1550. Only back below 1.1165 ultimately negates bullish outlook. Key levels to watch over the coming session come in by 1.1400 and 1.1300.
Flows – Hedge funds and local corporates have been bidding Kiwi. UK clearer demand in Cable; Asian central bank offers.
Trade of the Day – Nzd/Cad: The cross rate has been rallying sharply since early March, from the 0.6400 area to just shy of 0.7300 thus far ahead of the latest minor setbacks. Daily studies are now severely overextended and call for a much needed and healthy corrective pullback. The overall trend still remains grossly bearish, and following today’s sharp push higher to the 78.6% fib retrace off of the 0.7580-0.6150 move (Oct08-Feb09), we have decided to initiate a sell recommendation with limited upside seen ahead. All relevant SMAs have been well exceeded and we will look for a minimum pullback to retest the 10-Day SMA at 0.7080, which has been supporting the entire push higher. Next key short-term support comes in at 0.7145 with a break below to accelerate declines. Strategy: SELL @0.7280 FOR AN OPEN OBJECTIVE, STOP @07420. Stops to be trailed to cost (break-even) on a break back below 0.7200. Recommendation to be removed if not triggered Friday.
Fundamental Catalyst – On Wednesday RBNZ Governor Bollard said that the rise in long-term rates was unwarranted and that he expected interest rates to remain at low levels for an extended period of time. This was followed by Thursday’s FinMin English remarks, with the NZ official saying that the rise in Kiwi was unexpected. While official speak quite often does little to move markets, and particularly in New Zealand, we feel these comments should not be taken lightly and could start to weigh on the higher yielding antipodean. The NZD has also been a clear beneficiary of the improved market sentiment and increased risk appetite over the past several days, with the currency showing significant relative strength on this theme rather than on any underlying fundamental strength within the local economy. As such, we view the currency as well overvalued at current levels against its commodity cousin and see the risk from here for a material corrective pullback, with any sign of elevated risk aversion or profit taking in global equities to exacerbate the NZD outlook. In Canada, while BoC Carney did give a downbeat assessment on the economy yesterday, there was some silver lining with the central banker stating that Canadians could “also expect that once the global recovery begins, the Canadian economy will recover faster than many other industrialized economies." This bodes well for Canada and should start to be reflected in the cross rate over the coming days. Finally, with today’s event risk in the form of US NFPs, we like the idea of eliminating USD exposure on our trade.
Written by Joel Kruger, Technical Currency Analyst for DailyFX.com
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