Forex - Markets Pair Back Fed Rate Expectations

Forex News and Events: The recent support the USD has garnered on speculation that the Fed would begin to drain liquidity and tighten rates seems to be waning. Mounting positive economic data (Friday's NFP) and hawkish comments from ECB members (Trichet's press conference comments) fueled USD buying and a decline in demand for risky assets. However, the foundation of the trade was thin and since Tuesday has seen a complete reversion in trading patterns. The market is now pricing in a 50bp hike by Jan 2010, a shift from a hike before the end of 2009. The USD was weaker across the board in the Asian session, as risk appetite returned (regional equity indexes were broadly higher).The EurUsd traded up to 1.4130 from 1.4060, while the UsdJpy slid to 97.10 before rallying back to 97.60. Carry and EM are now trading higher with the AudJpy pushing up towards 79.30 while the UsdTry traded lower to 1.5360. Risky assets also got a boost from the news that the US Treasury has cleared 10 banks to repay TARP funds. A move that will help restore confidence in the banking sector and provide additional funds for banks still struggling to raise capital. Tonight in New Zealand, the RBNZ is expected to hold rates at 2.50%. However there is a significant number of analysts expecting a rate cut (bills market are pricing in a cut of 36bp). The rational for further easing is based on the fact that domestic economic conditions remain weak and the stronger NZD will not help NZ's fragile export driven recovery. Irrespective of the final decision outcome, the markets will also be watching for the RBNZ to talk down recent NZD strength, perhaps even building a case for intervention. The recent pull back in AUD and NZD in our view should provide traders with a good opportunity to build long positions. The stronger global growth outlook and surging commodity prices (copper hitting an 8-month high an tin and nickel were up 5.9% and 4.9%, respectively ) we expected will offset spells of risk aversion. On a side note, the market will be watching the results of $19bn 10yr auction today. Recently, demand for US sovereign debt has been strong (including indirect bids, seen as a reflection of central banks demand) but any perceived weakness will have significant repercussions across assets classes (such as pressure on US longer term yields and USD weakness). On the economic front we will see the first major release from the US in Trade Balance today.

Today's Key Issues (time in GMT): 08:30 GBP Industrial production, % m/m (y/y) Apr -0.2 (-12.5) exp,-0.6 (-12.4) prior 08:30 GBP Manufacturing output, % m/m (y/y) Apr0.0 (-12.6) exp,-0.1 (-12.9) prior 08:30 GBP Trade balance, £ bn Apr-6.4 exp, -6.6 prior 11:00 EUR ECB’s Gonzalez-Paramo speaks at Aviva event 12:30 USD Trade balance, $ bn Apr -29.0 exp, -27.6 prior 12:30 CAD Int'l merchandise trade, C$ bn Apr 0.9 exp,1.1 prior 14:00 USD FRB of Richmond President Lacker (FOMC voter) speaks on the economic outlook 16:15 USD Fed Governor Duke (FOMC voter) speaks on consumer protection 16:30 EUR ECB’s Stark speaks at a book presentation "Der Euro" 18:00 USD Budget balance, $ bn May -175.0 exp,-165.9 prior 18:00 USD Fed's beige book published 21:00 NZD RBNZ interest rate announcement, % Jun 2.50% exp, 2.50% prior 23:50 JPY real GDP, second preliminary, % q/q saar Q1 -14.9exp,-14.4 prior

The Risk Today: EurUsd as stated tuesdays floor in at 1.3807 held well as we embark on building the shoulder of the S-H-S formation we started May 21st. For the time being the upside risk is for a resistance at 1.4220. On the downside 1.3907 holds as crucial floor with tentative stops at 1.3865. GbpUsd 21 day ma support proved to be to strong for sterling bears. Trading above 1.6400 re-instates bullish trend with target of 1.6830. UsdJpy pair is now trading squarely in daily cloud covering after stalling at 98.88. The broader theme is still bullish with a daily close above 98.50 will target 99.56. Intraday support stands at 96.20/50 area. UsdChf sharp correction from 1.0997 (range lows) gives the pair a heavy tone with the focus now back on a retest of 1.0591 key support( june low).

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.4350 1.6665 100.00 1.0990 1.4265 1.6585 99.56 1.0950 1.4220 1.6500 98.86 1.0860 1.4107 1.6424 97.97 1.0736 1.3960 1.6250 96.50 1.0660 1.3907 1.6175 96.20 1.0590 1.3865 1.6075 95.50 1.0545 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot