FX Weekly Brief - 19 Aug 2011 (Sell, Sell, Sell)

Market ended in another ugly week after the respite from the preceding week's turmoil. Risk sell-off resumed by mid week as global economic data continued to paint a gloomy outlook. According to Morgan Stanley, US and Europe are coming very close to a recession. Citigroup and JP Morgan also downgraded their forecasts on US growth outlook. Sentiments were boosted briefly immediately after Franco-German meeting as the leaders proposed a series of tax reforms aimed at achieving closer economic integration in the region. However, this was very short-lived as markets soon reversed course and resumed its downward trajectory when investors find that the summit lacked substance to soothe their fears about Europe debt problems. To add to all these, ECB said that it has extended a 7-Day lending facility of U$500m to a bank, and this was the first time since February that this facility was used. Concerns that there could be other banks awaiting ECB's help ignited worries about interbank liquidity.
Dow closed the week at 10,817.65 (-4%); S&P at 1,123.53 (down 4.7%) and Nasdaq was 7.15% lower at 2,341.84. In forex market, flows were seen moving back to safe havens swiss franc and the yen though gains were capped as investors held back due to concerns of official intervention. Gold managed to attach itself to the increase in risk aversion and continued to trend higher, topping 1,878, with no indication of a reversal in focus at present.

Coming next week, market will be watching Jackson Hole symposium closely on clues from Bernanke pointing to possibility of QE3. This will determine the fate of the US dollar. If QE3 materialises, and BoJ and SNB threaten further intervention, market will have to decide which will be the next best safe haven currency.

EUR/USD: Pulled back from intraday week high of 1.45162 at mid-week to close at 1.43928 for the week as investors digested softer than expected GDP data on eurozone which was compounded by disappointing outcome from Franco-German summit. Market seemed quite reluctant to buy anything above 1.44513 level whereas sub 1.426 was drawing strong buying interest as week closed.

Technicals: Supportive tone above 1.4176 but bias still tilted to the downside, particularly if it can't get above 1.44508 barrier. Below 1.4176 will see bears targeting 1.4102. Lift above 1.44508 will see bulls testing the next resistance at 1.45146.

Strategy: Jackson hole aside, next week calendar promised some events to change the short-term bearish EUR status quo, most notably German ZEW on Tuesday. Positive data or a better offered USD could see USD/EUR breaking the malaise at 1.44508 to test resistance 1.45146. However, any bullishness in this pair is likely to be capped given the fragile sentiment surrounding EUR debt problems and weakness in global economy. 1.46 is seen as too rich for this pair and likely to induce intraday profit taking to keep resistance in check.

EUR/USD daily (2-wk)

USD/CHF: After reaching a record low of 0.70658 on 8-Aug, activity for this pair was consolidated for the week as market traded cautiously, wary of SNB intervention. Even though a EUR/CHF peg scare has been put off temporarily, SNB promised further expansion of liquidity measures to stem the franc's advance.  Despite the risk selloff last week, market appeared unwilling to test anything below 0.78. Likewise, psychological barrier 0.8 was rarely broken, and if so, would be quick to attract subtantial selling interest to push price back to 0.785-0.795 range. There's an early sign that this pair is losing its safe haven appeal.

Technicals: Immediate support at 0.78, with key support at 0.73318 if risk aversion blows. Next to test would be the historic low of 0.70658. Strong resistance formed at 0.8, and if it breaks, 0.82 would be eyed, and could stage a start of USD/CHF rally.

Strategy: Given the fragile sentiment, USD/CHF is likely to trade heavy and 0.8 resistance probably would remain intact. A broad based USD selloff if QE3 were to come could see a convincing break below 0.78 to test the key support zone 0.73316, provided EUR rallies too. EUR/CHF should be the gauge for SNB intervention with 1.1 deemed as a dangerous zone.

USD/CHF daily (2-wk)

USD/JPY: With continuing diversification away from USD and CHF, JPY is being favoured as the popular choice for safe haven flows. Threats of intervention by BoJ managed to keep this pair more subdued. However, market was eager to test the limit and USD/JPY reached a historical low of 75.931 on 19-Aug. BoJ has said that it will discuss further measures to stem yen gains.

Technicals: Weekly USD/JPY chart pointed to bearishness in USD/JPY. 1^st resistance seen at 76.6, with 77 as the next key level. A failure to hit the first resistance will signal a downside momentum with 76.2 targeted as immediate support. If a convincing break below this is made, it will not be too adventurous to believe that the low of 75.931 would soon be broken.

Strategy: Much awaits what BoJ is likely to come up next. If it is slow to respond or can only to resort to old measures to prevent yen gains, bears would be happy to come back in stronger control to send prices dipping. Global uncertainty has a tendency to support flows to yen and if  Jackson-hole summit disappoints and selloff in USD ensues, BoJ may see its old attempt to curb its currency going into a black hole again. 75 is the psychological level to look out.

USD/JPY daily (2-wk)

NZD/USD: It swung with risk sentiment. It tested a high of 0.84241 briefly in mid-week but bulls were not able to hold onto sharp gains as bears quickly came in to send price falling to a week low of  0.81701 as equities futures pointed to the red.

Technicals: 1^st resistance formed at 0.84 as the pairing faces some strong selling interest above this point. Lift above this will inspire an upmove to 0.85.  Below the immediate support at 0.81077 will see bears targeting psychological level 0.8 with some consolidation expected and dip buyers come in before meeting 0.7963 (Aug 9 low).

Strategy: RBNZ will meet in coming week on inflation outlook. A hawkish tone is going to re-ignite interest in the kiwi to test the key resistance of 0.85 and possibly 0.88 level again if flows move out of USD on QE3 to the higher yielding currency. However, given the weakness in global economy, it’s quite unlikely that RBNZ will raise interest rate anytime soon. At present, given the poor market sentiment, risk-reward points to a potentially asymmetric reaction where NZD/USD is likely to be more sensitive on the downside than upside if we were to see another bout of negative economic news. This means NZD gains to be capped while facing potentially greater selloff in the downside.

NZD/USD daily (2-wk):

USD/SGD: The volatility in this pair is significantly lower than the rest as USD/SGD remained in a managed float regime. It started the week at 1.20489, briefly tested 1.2 as sentiment improved , before the equities-selloff sparked risk aversion to send it stalling just below 1.22 highs.

Technicals: Key resistance at 1.22 which sees substantial selling interest beyond this point.  A convincing break above this would see 1.225 targeted. If first resistance fails, a downward trajectory towards 1.2 will hold temporarily before a new low 1.19 forms.

Strategy. Downside bias of USD/SGD due to slight appreciation stance of MAS before the next policy meeting in October.  Broad based weakness of USD and the continuing erosion of its safe haven appeal if QE3 materialises, coupled with inflation concerns in the asian economics will reinforce the appreciation bias of SGD.  1.17 targeted with 1.2 barrier.  

USD/SGD daily (2-wk)