Forex - RBA Hike Fails to Lift AUD & Waiting for the BoC

Forex News and Events: Markets were quiet until Europe woke up, where we saw a steady unwind of risk. The EURUSD traded down to 1.3490 from 1.3560, while the GBPUSD fell to 1.4860 from 1.4960. While in the mid-term we are short risk right now these pairs are well oversold and we would expect a near term term risk rally. There was really no single catalyst for the move, rather a continuation of yesterday’s selling. The highlight of the Asian session was the RBA rate announcement, where the board opted to raise rate 25bp to 4.00%. The accompanying statement was basically unchanged, hinting to further tightening. However, they seem to be slightly less concerned with external risk such as Greece and China. With roughly 4.70% worth of hikes already priced in for 2010 (consensus 5.00%) the interest rate differential advantage enjoyed by the AUD should erode quickly, as the Fed and PBoC take less accommodative stances. Given our base scenario for global central banks tightening cycle and the situation in Greece deteriorating further (pulling FX risk correlated trades down), we are now looking for opportunities to short the AUD. The big story continues to be the Sterling, which took a thumping yesterday despite strong manufacturing PMI data. Markets are still debating the actual cause, which varies from political uncertainties, the Prudential & AIG deal, British names and models selling aggressively, renewed emphasis on fiscal imbalances and potential additional QE. As stated above, given our base scenario we would expect further deprecation in the GBP especially in light of the probable of revival of asset purchases. Today’s weaker than expected Construction PMI, which printed at 48.5 vs. 48.9 exp, is further evidence that the rate of recovery is slower than the MPC official forecast and the BoE might be compelled to act (although not necessarily on Thursday). For today, the key event will be the BoC rate decision. We are in line with consensus in expecting the BoC will hold rates steady at 0.25%. Despite the strong economic data, including yesterdays Q4 GDP, which printed at 5.00%, the central bank is in no rush to unwind its accommodative position. That said, markets have been too complacent in believing the central bank's commitment to low rates means tightening is a long way off. We believe that the BoC will use the accompanying statement as an opportunity to re-align market's expectations, potentially even moving forward the date of the first hike. As the market recognizes the BoC will not sit on 0.25% forever, the pricing in of tightening should give the CAD a significant kick.

Today's Key Issues (time in GMT): 09:00 PLN GDP, % y/y 3 exp, 1.7 prior 09:30 GBP PMI construction, index 48.8 exp, 48.6 prior 10:00 EUR "Flash" HICP, % y7y 1.0 exp 10:00 EUR PPI, % m/m (y/y) 0.6 (-1.1) exp, 0.1 (-2.9) prior 14:00 CAD Bank of Canada rate announcement, % 0.25 hold 00:00 USD Vehicle Sales 10.97 exp, 10.80 prior 18:00 USD Minneapolis Fed President Kocherlakota (FOMC non-voter) speaks

The Risk Today: EurUsd The round trip in EURUSD over the past 24 hours has confirmed our assertion of range-bound trading between 1.3444 and 1.3695; however there is also an indication that a few more participants are catching on to this theme, with the buying interest towards the lower end of the channel on the last oscillation coming in a little early at 1.3461 yesterday afternoon. It looks like an interesting scenario is lining up ahead, with a major downtrend line already starting to encroach on our current range around 1.3680. This trendline represents the upper bound of the channel that has guided price action all the way down from 1.5140 and defined the entire sell-off since the break of the 12 month uptrend back in early December. As such, expect a big reaction to a break above this, potentially confirming a triple bottom pattern in the process and likely headed straight to 1.3950 as a first target. Obviously, we won’t be betting against such a major downtrend line until a clear break above takes place, but considering the 14-day RSI has been gradually edging higher and net short positioning in EURUSD futures is at record levels as noted yesterday, this is building up to be a very tasty trade indeed. GbpUsd GBPUSD has taken another thumping since the start of the week with the glut of negative UK media coverage and M&A activity helping push the pair to lows of 1.4783. Despite a snap back in spot from the dead ball lows to current 1.4930 levels, the pair is still down over 6.5% in just the past month, and support levels on the downside are few and far between. Yesterday’s lows look to coincide with the lower bound of a 6 week downtrend channel (1.4755 at the time) which today comes in around 1.4715. Below there we cannot see a horizontal support until 1.4515, and then 1.4375 levels which makes for a dizzying prospect should we breach 1.4715 support. UsdJpy Despite the fireworks in Europe, USDJPY has been a pretty low-thrill pair to trade this week, with the rollercoaster of EURJPY price action almost entirely led by EURUSD moves rather than USDJPY. Since last Thursday we have been confined to a tight range between 88.75 and 89.50, and really there is very little to add on this until we see a breakout from one side or the other. One thing that’s for sure is that former trendline support/resistance is playing very little part in influencing price action, with the back side of the former downtrend channel being churned up with ease, and the 89.30 fibonacci level (50.0% retracement of 84.83 to 93.77) also providing very little useful information. Reiterating yesterday’s thoughts; 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 90.21, backed up by 90.35 (38.2% fib retracement), 90.55 pivot level and the 50 day moving average now coming in at 90.78. 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 Much like EURUSD, USDCHF has been range-bound since the middle of last week, but today has looked to threaten the upper bound of 1.0900 (1.0888 the high so far). This ceiling of selling interest has held since the 19 Feb and if we break above there we will be in territory not seen since July last year. Until then however, the range remains intact and with first support coming in at 1.0717 (23.6% retracement of 1.0131-1.0898), and the floor of the range around 1.0695.

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.3850 1.5615 90.83 1.1100 1.3800 1.5580 90.22 1.0980 1.3695 1.5325 89.50 1.0900 1.3491 1.4948 89.01 1.0848 1.3444 1.4783 88.55 1.0717 1.3425 1.4715 88.25 1.0695 1.3300 1.4515 87.55 1.0600 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot