Forex - Stress Test Starts a Temporary Move to Risky Assets

Forex News and Events: Just as the stress test advocates were getting ready to declare Friday’s results a success due to a selloff in USD and rally in equity markets, we then ran right into a summer whipsaw. The broad majority of G10 currencies sharply reversed their brief trends with today’s European open. Yesterday’s wave of risky asset investing lacked any solid drivers, so the momentum was bound to falter. Commodities continue to trade well (the exception being Gold) as Crude Oil continues to test the top part of its ranged resistance at 79.50. Commodity currencies should continue to be supported and could even receive a decent push in the near-term. AUDUSD traded about its 200 day moving average for the first time since May, while EURUSD traded about 1.3000. However given the frivolous nature of the current low-liquidity trading environment, we suspect the tide will change again. The markets did view the stress tests as a minor positive, as slightly increased transparency is always good, sovereign bond spreads only tightened slightly. The tests failed to truly address the concerns of the market, especially because some EU banks refused to disclose their sovereign debt holdings. Due to several German banks refusing disclosure, German yields were pushed higher. On a side note, Basel III announced yesterday that the members had come to a historic agreement to tighten capital requirements and start worldwide liquidity & leverage rules. Most likely, they’ll reduce some of their proposals while postponing others. FX markets should settle into a period of consolidation this week as a lack of economic data will hinder any large decision making processes.

Today's Key Issues (time in GMT): 07:30 SEK PPI (Jun); exp: 0.2% MoM, 0.5% YoY, prev: 0.0%, -0.5% 08:00 EUR M3 (Jun); exp: -0.1% YoY, prev: -0.2% 14:00 USD Consumer confidence (Jul); exp: 51.0, prev: 52.9 14:00 USD Richmond Fed (Jul); exp: 12, prev: 23

The Risk Today: EurUsd The symmetrical triangle pattern we highlighted in yesterday’s report now appears to have become activated by the break above 1.2950, so we have gone long and now set our sights on a target above at 1.3290. The market is being somewhat choppy and directionless this morning, so should we pare back some gains and get a re-test of the 1.2950 break-out area we feel it would be a great opportunity to add to longs (or for those who missed the initial break-out to jump onboard). Next resistance is expected to exert its effect at 1.3028 (20 Jul high) and 1.3093 (10 May high) with weak resistance also anticipated at 1.3213 and 1.3254 (14 and 13 May highs respectively). With the 1-month uptrend very much still in play we expect buyers to step in ahead of trendline support at 1.2965 with more technical levels seen at 1.2793 (Friday’s low), 1.2733 (21 Jul low), 1.2683 (14 Jul low) and 1.2522 (13 Jul low). GbpUsd GBPUSD’s revival has continued in the past 24 hours, with the 15 Jul high of 1.5473 becoming the latest technical landmark to be conquered by the bulls as the pair has marched on to the heady heights of 1.5530 not seen since February. For now, the quick peek above 1.5525 (15 Apr high) has only been brief, and indeed the pair has tumbled rather ungracefully back down to 1.5470 levels this morning. But we feel that the UK GDP figures last Friday were a game changer, and from here we would relish any dips towards the lower edge of the current uptrend channel (now seen at 1.5315) to get long. The 1.5350 pivot does come in just ahead of the trendline today so we set a limit order around 1.5360 with a stop through 1.5300 (the back side of last week’s downtrend). For now we feel the cluttered net of technical resistance above will cap this leg of the rally between 1.5525-75; this zone contains not only the 15 April high as previously discussed, but also the 200-day moving average at 1.5554 and 23 Feb high 1.5575. Should we be wrong and the pair instead capitulate through uptrend support, next levels eyed below are at 1.5125 (last Wednesday’s low), followed by 1.5080. Nearest support is back down around 1.5350 pivot level, with the lower edge of the 6-week uptrend now coming in below at 1.5280. Should the trend break lower once more then first stop on the downside will be 1.5125 (last Wednesday’s low), followed by 1.5080. UsdJpy Although USDJPY and JPY-crosses have been broadly supported since the release of the bank stress tests and the much better than expected US housing data yesterday, we remain locked in the same range between 86.25 –87.75. Our bias is certainly for USDJPY to go higher in the medium term so focus on the price action approaching the range ceiling at 87.75, and for now there is still a possibility that a break above there could signal a double bottom pattern on the hourly chart. Should this be the case, we would be looking at a target above at 88.85. Before that destination, sellers are expected to step in around 88.00 (former pivot), 89.15 (12 Jul high) and 89.50 (28-29 Jun high). Obviously, until the break-out higher materializes we should still respect the range-trading environment that prevails, where 82.80 currently provides an intra range support and the range floor around 86.25 still looks robust having caught two previous sell-offs on 16 & 22 Jul. UsdChf The bias on USDCHF in the short-term is bullish, but barely! The potential bullish flag pattern we noted on the hourly chart yesterday did not even activate (due to the failure to break above 1.0560) and now the slump back towards 1.0460 seems to have written off the possibility of this pattern being valid later on. Support should be readily forthcoming around 1.0450, with added buying interest below at 1.0425 (where the back side of the former downtrend now comes in). For now, 1.0565 is growing into a major ceiling of resistance limiting the upside, but should we manage to break above there, next levels expected at the 14 Jul highs 1.0618 and the 200-day moving average at 1.0641.

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.3213 1.5575 89.50 1.0641 1.3093 1.5554 88.00 1.0620 1.3028 1.5525 87.75 1.0565 1.3005 1.5465 87.39 1.0559 1.2793 1.5350 86.25 1.0365 1.2730 1.5280 85.30 1.0315 1.2680 1.5125 84.80 1.0230 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot