| Daily Forex Fundamentals | Written by Saxo Bank | Jul 25 08 06:24 GMT | | |
| EURUSD mulls what it ought to do at 55-day moving average support after more ugly German survey data MAJOR HEADLINES - PREVIOUS SESSION
THEMES TO WATCH - UPCOMING SESSIONKey event risks today (all times GMT):
Market Comments The German IFO survey for July surprised to the downside again yesterday as the mood at German businesses continues to sour, especially in terms of forward expectations. While the Current Assessment component of the survey has edged steadily lower since the beginning of 2007, the Expectations component has plummeted in recent months and is now close to levels not seen in over 5-years. The preliminary German releases for the July Services and Manufacturing PMIs also show the manufacturing sector edging close to contraction, while the broader EuroZone surveys were both below expectations and well below 50. This data continues to underline the rapidly decelerating EuroZone economy and will likely serve as a drag on the EUR for here on out. The peak in the broader EUR index may be behind us. The question is: have we also seen the top for EURUSD? We mentioned yesterday that our conviction was that the equity rally was unlikely to last and that we would also like to see the USD able to maintain strength even as equities sell off. Yesterday provided the first real test for this idea as equities saw their worst day of the month. The USD survived reasonably well, but needs to push through the next layers of resistance for conviction. Let's see how we close the week, but the USD recovery story is showing signs of promise. Here's how one version of a continuing USD recovery could play out: the worst of inflation is finally behind us as oil continues another 10% lower and begins to simply trade back and forth in a range. Inflation numbers finally begin to tick down on the commodities correction and slackening demand and other data point to increasingly weaker economies around the world, building up the negative momentum already developing. A drastic downward reduction in forward rate expectations causes the higher yielders to continue to loser their shine and the ECB is forced to beat a hasty retreat, cutting rates to 3.00% by the summer of 2009. The US economy worsens less than its global counterparts and the Fed is able to maintain rates at 2.00% while the housing market shows signs of less precipitous deceleration (the very generous housing bill just passed should definitely begin to slow the pace of the US housing decline in the months ahead - this is a massive boon to homeowners and home buyers, the long-term fiscal effects aside). All of this is just a scenario, of course, but the gist of this scenario is necessary for a continued USD recovery. A couple of significant wild cards out there in the coming months are the US presidential election and the geopolitical risks stemming from Iran's nuclear ambitions. We suspected (as did market expectations) that the May UK Retail Sales data was an aberration and that the June numbers would do much to reverse the impression of any strength building in UK private consumption. But the market was not prepared for the truly awful data point (a -3.9% drop MoM - by far the worst in over 20 years) that immediately knocked GBP for sharp losses. The weak shorts who had been squeezed out of short GBP positions just the previous day apparently all dove back in and GBP lost ground sharply almost across the board. GBPUSD is looking soft again as long as it remains below the 1.9900 resistance (former support). Watch out for the GDP release today. The JPY is finally showing some backbone as it should in this environment, and we wonder if this could be the start of something big for the currency. The strength in JPY and CHF could accelerate if the trifecta of lower commodities, yields and equity prices continues. GBPJPY saw a spectacular reversal yesterday after breaking the neckline of a massive upside down head and shoulders formation and the 200-day moving average. USDJPY is also barely back below its 200-day moving average as of this writing after breaking this obviously key technical level for weeks. We have a look at AUDJPY below. Charts: EURUSD and AUDJPY EURUSD: EURUSD has found support close to the 55-day moving average (the red line), which is also the middle of the seemingly eternal range we've been embedded in since March. This level looks like the next important test for the pair if we are to see the USD stronger still. The key resistance zone is now in the 1.5750 (0.382 Fibo of move down from recent 1.5950 peak) and 1.5770 area (10-day EMA that seemed to be serving as support recently).
AUDJPY: A short AUDJPY trade is one of our favorite trades if the global growth/inflation slowdown story begins to spread. AUD rate expectations have corrected sharply lower relative to US and Japanese rates, and yet the market has hardly begun to price in this development. The pair could fall sharply if the trend lines give way and equities and yields continue to correct lower.
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Friday, July 25, 2008
USD Rally Faces Key Test As Equity Markets Renew Sell-off
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