Forex - Speculation of an Evolving Bailout Plan

Forex News and Events: Markets seem to be in a state of paralysis, unable to find a clear direction this Monday morning. The EURUSD was contained in a tight 100 pip range, while the USDJPY languished right below the Ichimoku daily could cover. Starting this week, the early part of March is filled with events which have the ability to truly shift market direction. This week is packed with macro G10 economic data (including the critical US NFP on Friday), central bank meetings, and speakers galore. Over the weekend, there were a slew of articles from the FT, WSJ and NYT suggesting that Germany was moving closer to solid plans for a Greek bailout. The NYT’s reported that the German and French Governments might offer guarantees on newly minted debt to encourage investors to purchase the debt. The WSJ suggested that the German and French government might use state owned entities to buy Greek paper as a way of circumventing EU regulations. These articles where clearly risk and EUR positive but we would be cautious driving into a long risk position just yet. As we have witnessed in the past month, the sovereign credit trade is very fickle and highly reactive to political rhetoric and market interpretation. Ahead of the March 16th date, when the EU and IMF are expected to review Greeks fiscal strategy, we expect the market views to shift many times (and doubt an announcement of a pre-mature "bailout package"). Greek Economy Minister Katseli stated that EU inspectors, which went to Greece last week, said that unless supplementary austerity measures are introduced the goal of cutting the fiscal deficit by 4% of GDP this year would be unachievable. Despite the bailout speculation and solidarity quotes, there seems to be a growing fissure between the EU and Greek proposed austerity measures. Luxembourg PM Juncker highlighted this fact when he said that Greece must take further measures to decrease its fiscal deficit, saying that "taxpayers in Germany, Belgium or Luxembourg aren't prepared to correct Greek fiscal policy mistakes”. Right now, we would be content playing the ranges, rather than expecting a clear directional breakout. In Australia, a wealth of strong economic data has pushed up expectations of a 25bp hike to 4.00% by the RBA this week. There is still considerable uncertainty due to external factors such as Greece and China, which soft PMI figures today and renewed concerns over tightening, added to the uncertainly. However, even should the RBA hike rates and retail sales point to a continued recovery, we expect that any language hinting to a pause will hurt the AUD in the short term. In China, February NBS PMI came in significantly weaker than expected, down to 52 vs. 55.2. exp, the lowest print in a year, compared with January’s 55.8. And on a final note anticipating the storm that will eventual hit the US, S&P's Managing Director of Sovereign Ratings Chambers said that the US’ AAA sovereign rating is "still hanging in there". Words which don’t sound very encouraging to us.

Today's Key Issues (time in GMT): 07:30 SEK Feb mfg PMI; last 61.7. 08:30 CHF Feb mfg PMI, 56.0 exp; last 56.0. 08:30 SEK Q4 GDP, last +0.2% q/q, -5.0% y/y. . 08:53 EUR GER Feb mfg PMI, 57.1 exp; last 53.7. 08:58 EUR Feb mfg PMI, 54.1 exp; last 52.4. 09:00 EUR ITA Jan unemployment; last 8.5%. 09:28 GBP Feb mfg PMI, 56.1 exp; last 56.7. 09:30 GBP Jan consumer credit, -GBP100 mln eyed; last +GBP52 mln. 09:30 GBP Jan mortgage applications, 50k exp; last 59.02k. 09:30 GBP Jan mortgage lending, GBP800 mln exp; last GBP1.165 bln. 10:00 EUR Jan unemployment, 10.1% exp; last 10.0%. 13:30 CAD Industrial Production Price 0.5 exp, -0.1% prior 13:30 USD Personal income, % m/m (y/y) 13:30 USD PCE price index, % m/m (y/y) 15:00 USD Feb ISM index, 54.0 exp; last 58.4. 14:45 USD Richmond Fed President Lacker (FOMC non-voter) speaks 15:00 USD Construction spending, % m/m (y/y)

The Risk Today: EurUsd As we suspected in Friday’s report, EURUSD has reverted to range-trading for the time being, with 1.3444 marking the floor of the nascent range and 1.3695 providing a ceiling of decent supply. At the time of writing the pair is smack in the middle of that band which doesn’t make for an appealing opportunity for new trade entry, but until we see a breakout either side there is a good 200 pips or so to harvest if we manage to get back in nearer to edges. It is worth noting that the 14-day RSI continues to creep higher, and the CFTC Commitment of Traders report highlighted that net speculative short positions reached an all time high of 78,246 contracts last week; so our gut instinct is that the breakout will eventually come to the topside –makes sense considering the fundamental backdrop of a German-backed bail-out of Greece starting to take shape. Depending on when that break higher may come, we may potentially confirm the double bottom pattern highlighted on Friday (on a break above the range highs), a pattern that would look to target 1.3950. GbpUsd The GBPUSD rout has continued from last week, as fresh selling interest on the post-GDP rally pushed the pair to new lows of 1.5097. We noted on Friday morning that up until that point, new lows in spot had not been accompanied by new lows in the 14 day RSI (albeit by a slim margin), but notably the price action at the start of this week has now convincingly printed new lows of 25 in the 14-day RSI, quashing any suggestion of RSI divergence. Like EURUSD, the CFTC report also shows that net short speculative positions in GBPUSD futures set a new record high of 80,968 contracts; exceeding the previous high of 76,698 net short contracts seen on Oct 16, 2009. In addition, the target of the bearish flag we highlighted on 19 Feb comes just below at 1.5080, so we feel there is decent reason to suggest some short covering from here and a pause in the sell-off. Even so, while we decline the opportunity to add to shorts, the break below the 7 month downtrend channel suggests a deeply bearish trend still reigns supreme, and we anticipate a strong ceiling of offers poised around there should we re-test the back side (now at 1.5325). UsdJpy USDJPY has been confined to a tight range between 88.75 and 89.50 for the past few sessions, with Eurozone anxiety weighing on the pair with every fresh wobble in Greek bond markets, and bargain hunters still keen to try and pick the bottom in this one. Either side of the range we can see plenty technical levels likely to keep price action constrained; on the topside the 100 day moving average comes in at 90.22, backed up by 90.35 (38.2% fib retracement), 90.55 pivot level and the 50 day moving average now coming in at 90.83. On the downside, the 4 Feb lows at 88.55 represent the first area of buying interest, then 88.25 (61.8% fib retracement) and 87.55 prior lows not seen since December. UsdChf USDCHF continues to trade in a choppy fashion, with a slight upward bias to the price action. It was encouraging to see the lower bound of the 3 week uptrend channel remained intact on Friday, and although the rebound has only gone as far as 1.0773, the pair is still hovering above the 1.0717 fibonacci level (23.6% retracement of 1.0131-1.0898). The lower bound of the 3 week uptrend now comes in below around 1.0690, so expect bids to come in around there, however a breach through that support would open up a move back down to 1.0600.

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.3850 1.5690 90.83 1.0900 1.3800 1.5425 90.22 1.0830 1.3695 1.5350 89.50 1.0800 1.3614 1.5032 89.33 1.0749 1.3444 1.5000 88.55 1.0690 1.3425 1.4980 88.25 1.0650 1.3300 1.4940 87.55 1.0600 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot