Forex - Risk Aversion Prompts Gold, USD and Treasury Buying

Forex News and Events: Risk aversion surged back in yesterday’s trading, prompting significant selling in equity markets, while traders found comfort in Gold, Usd and treasuries. The core driver of this capital flight was the Moody’s warning that they were going to review the rating for European banks. The review was prompted by the rapid deterioration in Eastern Europe. While this event was focused on the corporate side of credit, it once again highlights the weakness in Eurozone Sovereign ratings. In the past few weeks we have seen a CDS spreads balloon led by concerns regarding Ireland . US markets received little support on the economic data front. The US NAHB housing index rose from a record low of 8 to 9 in February, which suggests low mortgage rates are becoming tempting to buyers. However, at such a low lever an uptick would hard to get excited about. The bigger new and more of a market mover was NY Fed Empire manufacturing index for February, that dropped to a record low of -34.65, below expectations of -24.0 and down from -22.2 in January. This reading hints to more deterioration, rather than stabilization as other releases have indicated. Wall Street had a horrid day, with the S&P closing down -4.56%, which has now pilled over in into today’s Asian and European sessions. Despite the slightly encouraging earning releases from a few European banks, which beat analysis estimates, European indexes couldn’t exploit the positive momentum. In the FX markets, we are seeing choppy trading without real direction. However, with risk aversion still well elevated we would expect this environment to benefit the Usd and and, to a lesser extent, the Jpy. The EurUsd is expected to make a slight correction to the 1.2707 resistance before retesting December 2008 1.2550 and October 2008 1.2331 support. In Australia, retail sales rose 0.8% q/q vs. 1.0% exp. Declines were across industries but sectors with a reliance on discretionary spending performed weakly. The decent rise in sales seems solidly the result of the government’s first $8.4bn stimulus package. Given the relatively subdued shift from stimulus to sales suggests the consumer decided to save over spent. Looking forward we would expect that next round of stimulus spending (11bn) to have a greater impact. In the US session, markets will be watching Industrial production data, where surrounding evidence is suggesting that another sharp drop is in the making. The closure of many auto plants should have a significant influence on this critical reading. In addition drops in overall industrial indexes suggested dark readings ahead.

Today's Key Issues (time in GMT): 10:30 GBP BoE Minutes (5th Feb) (Cut 50bps–Cut 100bps) 9-1 11:00 GBP CBI Monthly Industrial Trends Survey (Feb) -45 exp, -43 prior 13:30 USD Housing Starts (Jan) 530k exp , 550k prior 13:30 USD Import Price Index (Jan) -1.0%(-11.2%y/y) exp, -4.2%(-9.3%) prior 19:00 USD Minutes of Fed Meeting (27th-28th Jan.)

The Risk Today: EurUsd After yesterday breakout move not much movement today. We see strong momentum towards 1.2553 (Dec 4th low) with an eye on 1.2651 and 1.2707 as retracement levels (23.60% and 50.00% on Fibonacci retracement). GbpUsd Corrective move back to 1.4300 fell slightly short and Usd rally pushed the sterling down. Pentrating 1.4142 support to the 1.4100 handle. Short term support stand at 1.4053 with 1.3506 as a mid-term target. On the upside 1.4311 (38.20% on Fibonacci retracement) then 1.4499. UsdJpy Not much actively from the JPY but dailies have picked up a bullish trend. 92.75 stands as initial resistance, however we see 94.65 a crowded resistance – a break at this level would pave the way for a renewed upward bias towards 97.44. Intraday support stands at 92.09 – long-term support remains at 87.12. UsdChf Stuck in a 1.1652 - 1.1762 range. Swissy’s moves have been more subdued than other majors, strong resistance at 1.1784 (Jan 10th high) – a break of this level allows us to aim for 1.2308 in the long-run. Intraday support stands at 1.1652 with mid-term support at 1.1508.

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.2947 K 1.4606 S 97.44 M 1.2250 S 1.2826 S 1.4485 S 94.65 T 1.1815 T 1.2727 M 1.4320 M 92.75 M 1.1783 M 1.2673 1.4143 92.57 1.1748 1.2550 M 1.4123 M 92.09 M 1.1652 S 1.2388 S 1.4085 M 91.63 M 1.1560 M 1.2331 P 1.4000 S 91.30 M 1.1508 S S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot