Sunday, November 27, 2011

Risk Correlated Assets Could Find

Although the fundamental outlook hasn’t changed and remains risk negative, there are risks for a bit of a relief rally on Monday following some intense safe-haven bids last week… 



  • Markets return to fuller trade following US holiday
  • Talk of IMF loan to Italy making rounds
  • Moody’s releases concerning Eurozone comments
  • ICAP preparing for Greece exit and return to Drachma
  • Risks for short-term correction in risk correlated assets
  • US equity futures and commodities well bid
The markets will get back to fuller trade on Monday, with the US returning from the Thanksgiving holiday and set to digest this latest round of price action which has seen accelerated risk liquidation. While we continue to project broad based US Dollar strength, we would also not rule out the possibility for some healthy corrective selling in the buck in the early week. The key level to watch is the 1.3145 October low in EUR/USD, with a break of the level to officially negate the USD bearish price action seen in the month of October, and potentially open the next major downside extension into the 1.2000’s.
Headlines over the weekend have not been Euro and currency supportive, and while there was some relief buying seen on rumors of an IMF Eur600B loan to Italy, these rumors were later denied. An article in a German publication said that the EFSF would not be able to leverage up to EUR1T, while market participants also remained focused on the ever widening Italian and peripheral Eurozone bond spreads. Moody’s then came out and said that the rising severity of the Eurozone crisis threatened all EU sovereign debt ratings and that the probability for multiple defaults by Euro area countries was no longer negligible. Finally, news that ICAP was preparing its electronic trading systems for a potential exit by Greece from the Eurozone and a return to the Drachma, did not help the Euro’s cause.
Looking ahead, the economic calendar for Monday is rather light, with only some secondary data due out in the European session. Things hardly pick up into North America, with the only key release coming in the form of US new home sales. Still, there are broader forces at play and we suspect that the larger global macro themes and developments will ultimately be what drive price action for the remainder of the day. US equity futures and commodities prices are tracking suspiciously higher in our opinion, with these markets all very well bid.
TECHNICAL OUTLOOK
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EUR/USD: The market remains under some intense pressure and is now fixated on a retest of the key October lows at 1.3145. Look for any rallies to be well capped below 1.3500 on a daily close basis, while ultimately, only back above 1.3870 would negate outlook. Once 1.3145 is taken out, it will negate the corrective October price action and should result in a more aggressive bout of selling into the 1.2000’s. We continue to project weakness over the coming weeks into the lower 1.2000’s as per the monthly chart.
Risk_Correlated_Assets_Could_Find_Temporary_Corrective_Relief_body_jpy2.png, Risk Correlated Assets Could Find Temporary Corrective Relief
USD/JPY:The market has managed to successfully hold above the bottom of the daily Ichimoku cloud to further strengthen our constructive outlook and we look for the formation of a inter-day higher low by 76.50 ahead of the next major upside extension back towards and eventually through the recent multi-day highs by 79.55. Ultimately, only a close back below the bottom of the Ichimoku cloud would negate outlook and give reason for pause.
Risk_Correlated_Assets_Could_Find_Temporary_Corrective_Relief_body_gbp2.png, Risk Correlated Assets Could Find Temporary Corrective Relief
GBP/USD: The latest daily close below 1.5625 further confirms our bearish outlook and should now open the door for a bearish resumption back towards the key October lows at 1.5270 over the coming days. Next key support comes in at 1.5400, while any intraday rallies are expected to be very well capped below 1.5800 on a daily close basis.
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USD/CHF: The previous weekly break above the critical October highs at 0.9315 is significant and now opens the door for the next major upside extension over the coming weeks back towards parity. Daily studies are looking slightly stretched at current levels, so we would not rule out the potential for some corrective selling, but ultimately, look for any setbacks to be well supported in the 0.9000 area, where a fresh higher low is sought out.
--- Written by Joel Kruger, Technical Currency Strategist

Talk of stability pact, IMF loan, elite bond issuance, shakes the Euro

There have been two clear stories making the headlines early in the Asian trade, proving to have enough substance to sparkle a relief rally in the Euro, which triggered stops above 1.3280 and 1.3325 as market gains confidence the debt crisis may ease on a potential “Stability Pact” being discussed by Germany and France; hopes for a EUR 600 bln bailout for Italy added to the temporal optimism, which was later denied by another report carried by Dow Jones.

The risk on mode follows meetings over the weekend between German Chancellor Angela Merkel and French President Sarkozy, both rumored to be nearing a “stability pact” and more involvement from the ECB in shoring up the spreading of the European debt crisis.

Deeper fiscal integration may see its implementation feasible by early 2012, discarding any change on existing EU treaties as it would take too long. According to the Welt am Sontag newspaper, among the measures of the new Stability Pact, there would be a treaty stricter deficit rules and control rights for national budgets.

German Finance Minister Wolfgang Schaeuble said on Sunday they could secure these changes rather quick. "One can do that quickly," he told ARD television on a quote from Reuters, referring to changes to the Lisbon Treaty that Germany has been seeking to allow much tighter budget controls. "The goal is for the member states of the common currency to create their own Stability Union and to concentrate on that," Schaeuble said.

As reported by Marc Chandler, Global Head of Currency Strategy at BBH: "Many critics have argued that such a course will require tedious, laborious and protracted negotiations among seventeen countries and the investors were becoming increasingly impatient. However, the German-French initiative that is expected now to be formally put forward at the December 9 EU Summit, will advocate a different but not unprecedented approach."

The ECB should also increase its role on containing the Euro crisis by more bond buying. Expectations on the ECB acting more aggressively are key to see a more sustainable Euro rally. Welt am Sonntag wrote: "Based upon these measures, there should be a majority within the ECB for a stronger intervention in capital markets," Welt am Sonntag said. It quotes a central banker as saying: "If the politicians can agree to a comprehensive step, the ECB will jump in and help.”


Rumour and counter rumour on large Italy/IMF deal 

Meanwhile, an article in La Stampa managed to animate even further the sense of risk appetite, after IMF officials were cited as proposing an EUR600bln bailout. “The money would give Italy’s Prime Minister Mario Monti 12 to 18 months to implement his reforms without having to refinance the country’s existing debt” reports Bloomberg.

However, the Euro slipped back below 1.3300 after Dow Jones reported that officials indicated that there have been no discussions within G7 of the reported large IMF package for Italy first cited by "La Stampa" newspaper.

Italian 10 year yields continue to trade at incredibly high levels above 7%, with a 10-year bond auction scheduled tomorrow, when it plans to offer up to EUR8bln. It will be interesting to see how the IMF is going to raise €600bn given that Lagarde only recently said they only have €285bn in emergency funds.


'Elite' bonds issuance an alternative to Euro bonds


In another rumour that popped up through mid Asian session, European newspaper Die Welt cited unnamed highly placed EU officials saying "the German government and five other Eurozone member states with a triple A credit rating are considering issuing bonds together."

"The paper said that the money raised by the bonds would finance the debts not only of the six AAA-rated countries — Germany, France, Finland, the Netherlands, Luxembourg and Austria — but also help provide financial assistance, under strict conditions, for Italy and Spain" the article added.


Political breakthrough in Belgium

There was an important political breakthrough in Belgium over the weekend too that should not be under estimaed. After an impasse that has laste more than one year and a half, a new government will be allowed to be formed in the next fews days, agreement predicated on a budget breakthrough. The increasing pressure on Belgium 10-y bond yields and its recent downgrade has undoubtely help to speed up the political stalemate.

"Belgium's 2012 budget will boost planned savings by 11.3 bln euros. It projects next year's budget deficit will be just below 3% (2.8%) and will deliver a balanced budget in 2015. The risks to the euro zone growth in general appear on the downside and this in turn risks deficit projections. In any event, the take away here is that end of Belgium's political paralysis comes in the nick of time for it to demonstrate its resolve to stay within the core, despite its high debt/GDP levels" Marc Chandler said.

Australian And New Zealand Dollars Rise On Eurozone Bailout Hopes

The Australian and New Zealand dollars strengthened against their major counterparts in Asian trading on Monday amid hopes of a likely solution to the European debt crisis.
The Australian dollar that closed last week's trading at 0.9700 against the US dollar rose to a 6-day high of 0.9871 in today's Asian deals. The next upside target level for the aussie-greenback pair is seen at 0.990.
Against the euro, the Australian dollar climbed to a 10-day high of 1.3503, compared to Friday's close of 1.3653. On the upside, 1.345 is seen as the next target level for the Australian currency.
The Australian dollar strengthened to a 1-week high of 76.65 against the yen and a 6-day high of 1.0270 against the Canadian dollar. If the aussie advances further, it may likely target 77.5 against the yen and 1.030 against the loonie. The aussie-yen and the aussie-loonie pairs were worth 75.40 and 1.0176, respectively at Friday's close.
The New Zealand dollar jumped to a 1-week high of 0.7547 against the US dollar. The next upside target level for the kiwi-greenback pair is seen at 0.765. At Friday's close, the pair was quoted at 0.7393.
The kiwi rose after NZ Prime Minister John Key was re-elected with his party's biggest mandate in 60 years, strengthening his ability to balance the budget.
John Key's National Party won 48 percent of the vote on Nov. 26, up from 45 percent three years ago, allowing him to form the next government with support from political allies in parliament. His administration will focus on advancing the sale of state assets and returning the budget to surplus by 2014-15 or earlier, Key said in Auckland after the election.
Against the yen, the New Zealand dollar edged up to a 10-day high of 58.59, compared to Friday's closing value of 57.47. On the upside, 60.0 is seen as the next target level for the kiwi.
New Zealand's business confidence improved in November, halting the slide seen in the past three months, survey results from National Bank of New Zealand showed today.
The confidence index rose to 18.3 in November from 13.2 in October. Firms' own activity expectations followed the movement in general business sentiment, lifting a tad, the survey report said.
The New Zealand dollar rose to an 11-day high of 1.7658 against the euro. If the kiwi gains further, it may target the 1.760 level. The euro-kiwi pair ended last week's trading at 1.7900.
Looking ahead, Japan's small business confidence index for November is due at 12 am ET.
The Eurozone M3 money supply for October and the U.K. CBI reported sales for November are expected in the European session.
The U.S. new home sales for October is slated for release at 10 am ET.
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EURUSD: Stay Short on Approach

StrategyShort at 1.3526, Targeting 1.3144
Floating Profit / Loss: +209 pips
We sold EURUSD at 1.3526. The pair is now approaching our first target at 1.3144, with a daily close below this level serving as the trigger to move our stop-loss to break-even and look for deeper through 1.2836. In the meantime, our risk cutoff continues to require a daily close above 1.3882. Near-term resistance lines up at 1.3450.
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