Forex - Risk Appetite Fragile Ahead of Tomorrows ECB Meeting & Stress Test Results

Forex News and Events: After a slight drop in risk appetite due to newswire reports suggesting that BofA will need an additional $34bn of capital, risk taking seems to be creeping back into the markets (Citigroup's shortfall is reported to be "more limited"). Yesterday's Wall Street session closed lower, with the S&P down -0.37%, but Asian regional indexes were able to rally back this morning. Initially, the USD and JPY gained on the negative bank news with the EURUSD trading down to 1.3247 and YEN crosses were also marked lower, with the EURJPY spiking briefly below 130. However, in early European trading, risk appetite has found its sea-legs and is now seeing USD and JPY selling and EM and commodity currencies finding buyers. In Australia, in seasonally adjusted terms, retail sales surged 2.2% higher in March. This was well ahead of market expectations (+0.5%), which suggests that the government’s second emergency stimulus package has gained traction in the retail sector. Other government data on Wednesday showed the country's trade surplus increased 43% in March, again well above expectations, as exports remained remarkably tough while imports fell again. The ‘green shoots’ phenomenon has spread to the highest levels with both Chairman Bernanke and Feds Yellen projecting a cheerful tone. Fed's Bernanke testified to the Joint Economic Committee and provided an optimistic outlook, saying "We continue to expect economic activity to bottom out, then to turn up later this year". However, he added "An important caveat is that our forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall." We hope his forecast for growth is better than his past forecasts in the housing market. Cynicism aside, US economic data has been broadly supportive (non-manufacturing ISM beat consensus by a full point to 43.7) of a year end recovery. Today's release of ADP employment for April will provide guidance for the critical NFP release on Friday. And on a side note, Norges Bank will meet today and we expect the benchmark deposit rate to be cut by 50bp to 1.5%. We expect FX markets to be range bound in front of Thursdays event packed day. In our mind, Thursday's highlight should be the ECB press conference. It is widely expected that the members will vote for a 25bp cut to 1.00%. What is lacking consensus is the ECB direction on unconventional easing. Rumor and public comments have pointed to divergence views within the historically tight knit ECB. The ECB’s Wellink’s believes the economic crisis is far from over, while Nowotny sees clear signals that the danger has been controlled. The middle view is that the ECB will lay out the framework for easing but provide no timeframe or firm commitment (a tactic used recently by the BoC).

Today's Key Issues (time in GMT): 00:00 JPY Japan Public Holiday 08:28 GBP Services PMI, index Apr 46.0 exp, 45.5 prior 09:00 EUR Retail sales, % m/m (y/y) Mar 0.1 (-2.6) exp, -0.6 (-4.0) prior 12:00 Norges bank interest rate announcement, % May 1.50% exp, 2.00% prior 12:15 USD ADP payrolls (chg, k) Apr -645 exp, -742 prior 13:30 USD FRB of Minneapolis President Stern (FOMC non-voter) speaks 14:00 SEK Riksbank Governor Ingves speaks on "The current economic situation" 14:00 CAD Ivey PMI Apr 40.5 exp, 43.2 prior 16:15 CHF SNB Chairman Roth speaks 21:30 USD FRB of San Francisco President Yellen (FOMC voter) speaks 22:45 NZD Unemployment rate % Q1 5.3 exp, 4.6 prior

The Risk Today: EurUsd The pair failed to reach 1.3479 (200d ma) as a pullback in risk damped USD bearishness. Failure to sustain move above 1.3412 neutralizes bullish theme & puts the focus on 1.3190 intra day support. We expect rangebound trading ahead of tomorrow ECB meeting. GbpUsd Sustained trading above 1.4920 implies that cable can push higher towards 1.5373 jan 8th high. However, choppy trading, momuntum & wave pattern suggests a pullback to 1.4820/30. UsdJpy Failure to test 100 psychological resistance will now focus on 97.75 intra day support. We remain constructive above 95.63 (april 28th low) and expect consolidation above 98.00 lvl near term. UsdChf After frequent spikes below 1.1300 the pair in now firmly trading under 1.1387 (200d ma). This bearish signal should lead to a test of 1.1271/41 support range ahead of 1.1160 horizontal support. Intra day drift should be capped by 1.1383 resistance before the pair resumes its bearish spiral.

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.3585 1.5280 100.43 1.1545 1.3540 1.5190 100.00 1.1480 1.3455 1.5110 99.70 1.1387 1.3385 1.5084 98.38 1.1306 1.3255 1.4950 97.75 1.1270 1.3190 1.4885 97.11 1.1212 1.3120 1.4830 96.40 1.1160 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot