EUR/USD needs to hold above 1.2440 to encourage the bullish view. Very little data this week.

Mixed bag of US data caused wild day on Friday - but the USD bears have won the first round.

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October 18, 2004

Highlighted Economic Data This Week:

• Tuesday: Bank of Canada Rate Decision, US CPI, US Housing Starts, US Building Permits
• Wednesday: UK BOE Minutes, US Weekly Crude Oil Supplies
• Thursday: UK Retail Sales, Canada Retail Sales, US Leading Indicators, US Philly Fed
• Friday: UK GDP

Market Commentary

Well, we finally broke out of the range on Friday in EUR/USD and USD/CHF, but it's still not necessarily free sailing from here for USD bears. The market has become so conditioned to a range-trading market that many have placed huge bets on that range holding. And while the strict technical range was clearly taken out on Friday as EUR/USD squirted higher to 1.2500 and above briefly,  many of those bets - in the form of exotic options barriers - are still in the running because they were placed higher still - all the way to 1.2600. An example of an exotic option is a October 31 1.2550 "no-touch" in EUR/USD, a bet by some market player that EUR/USD will not trade above that price before expiration. If EUR/USD never trades above that price, the trader receives a large pay-out, while if it goes above that level, the trader loses a more modest option premium that was invested in the strategy. (Exotic options are most commonly traded by those looking to risk small amounts for an outsized gain). In practical terms, what this means if there are lots of "short gamma" options barriers above the market is that the market may have a hard time making progress higher, but once it does make it through those barriers, it can actually accelerate even more as traders are forced to buy back the EUR/USD they were shorting to protect the barriers. This is a difficult phenomenon to quantify, but it may help explain why the market has stayed as range bound as it has. The flipside of this is that when the range really breaks, it could do so with surprising violence. In other words, the jury is still out on this breakout. 

Last Friday's data was a mixed bag, with the surprisingly strong US Retail Sales number countered by a very bad Michigan Confidence number and disappointing Empire Manufacturing, Industrial Production and Capacity Utilization numbers. All in all, the data snapshot doesn't provide much fuel for the strong US economy argument. This week has little to offer the market in terms of data, with only tomorrow's CPI and Thursday's Philly Fed of any interest. The CPI number should be closely watched, as a continued rally in fixed income aids the cause of the USD bears.

Technical Comments:

EUR/USD:  Broke higher and now first support comes in at 1.2440. It's almost always a sign of weakness if first support can't hold after a breakout, so its best for the bullish view if this level of support holds. Still, 1.2350 also provides some support. Looking higher, 1.2600 looks to be the next stop if we have indeed initiated a new bull market to 1.2900 and beyond. 

GBP/USD: is still capped by GBP's weakness against EUR and CHF. Still, GBP/USD looks ready to break through 1.8050 resistance to the upside if 1.8000 support can hold. Next target is the 1.8150 resistance to the upside.

USD/CHF: was heavily sold off on Friday and easily sliced through 1.2450 support. That level now becomes resistance and USD/CHF may after some consolidation continue lower to the 1.2205 area low in the coming days.

USD/JPY: Made a stab at 108.80 support, which survived on the first try. Resistance comes in at 109.80. JPY outlook is a bit uncertain as US data and stock markets are not looking terribly insipiring (usually JPY bearish). Still, USD/JPY may eventually work its way lower towards 107.00 if 108.80 fails.

EUR/JPY: broke through 136.00, which now becomes support. EUR/JPY may makes its way back to 137.50 and beyond, especially if oil prices continue their march higher and the market begins to fret about the prospects for global growth.

AUD/USD: Looks resilient, but is still mired well below key resistance at 0.7385. A break of that resistance could lead to 0.7500 or slightly higher in the days and weeks ahead if 0.7220 area support holds. In an environment of concern about a global recession (not yet the market concern, but definitely a concern of this strategist), AUD may underperform against EUR and CHF

USD/CAD: gave traders whiplash on Friday as the break of 1.2600 resistance didn't hold for more than about 15 minutes before USD/CAD turned tail and nearly fell to the psychologically key 1.2500 level once again. One more test lower may lie in wait for this currency pair below 1.2500 before tomorrow's Bank of Canada meeting, in which the Bank is expected to raise interest rates 0.25% to 2.50%

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EUR/USD:  Broke higher and now first support comes in at 1.2440. It's almost always a sign of weakness if first support can't hold after a breakout, so its best for the bullish view if this level of support holds. Still, 1.2350 also provides some support. Looking higher, 1.2600 looks to be the next stop if we have indeed initiated a new bull market to 1.2900 and beyond.  

One data point the market may be anticipating in the more immediate future is the first Q3 GDP report from the US. I have a hard time believing that the consensus projections of a 4.1% annualized growth rate will be met. Perhaps the market is having a hard time believing this too. Today's Philadelphia Fed survey is the only data point of note - let's see if it disappoints as did the Empire Manufacturing number for earlier this month. 

Comments out this morning from French Finance Minister Nicolas Sarkozy that a strong Euro is good for Europe because it helps insulate against higher oil prices sparked the current sharp rally. The market has come unraveled even faster than I expected - and we may be seing a challenge of the 1.2900 level in Euro in a matter of just a few weeks.

Technical Comments

EUR/USD - Blasted higher to 1.2625 before recoiling and heading higher again this morning to around 1.2650. May be getting a bit ahead of itself in the very short term, but support may come in around 1.2550 with ultimate support at 1.2450. Looking higher, the EUR/USD's next target may be the 1.2740 area before later setting its sites on the 1.2900 top.

GBP/USD - GBP/USD shot up like a rocket today on positive UK retail sales and stop-running. Support now comes in at 1.8180 and resistance at 1.8450. Eventually, GBP/USD may look to challenge the 1.9100 top.

USD/CHF - Is flirting with eight-year lows around 1.2135. 1.2230 is resistance and USD/CHF may make it's way to 1.15 eventually. 

USD/JPY - came unraveled overnight. The strength in JPY underlines the central bank reserves theme as JPY strengthened despite the presence of numerous, normally JPY-bearish factors, including strong oil prices, weak stock markets, and weak US data. The 107 is within sight and may be hit soon. Some kind of consolidation may follow that nonetheless may stay below 108.80 resistance, but eventually USD/JPY may zero in on the 105.00 level. At times, the going may get choppy on any Bank of Japan intervention rumors.

EUR/JPY - can't convincingly decide which way to go as it didn't follow through on the break of 136.00 support and remains in a no-man's land technically. A return through 136.50 would perhaps bring on a test of the 137.50 high, while a fall through 135.50 could bring on a test of the 134.60 low.

AUD/USD - Blasted just beyond the 0.7385 recent high in sympathy with EUR/USD before reversing sharply. Looks this may have been a premature breakout. If that is indeed the case, AUD/USD may consolidate back to the 0.7300/20 area before gathering strength for another try and a spill-over to the 0.7500 level.

USD/CAD - Has made an impressive move lower to 1.2420, but may consolidate back toward 1.2500/20 before making another try at lower levels - perhaps 1.2320 the next time around. Eventually, USD/CAD may head to 1.2000.

EUR/USD poised just off all time highs as US payrolls data looms. EUR/USD may rise 1.3050 next week if US data bad.

The event risk of Nonfarm Payrolls today makes the immediate technical situation uncertain.

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November 5, 2004

Economic Data Today (all times GMT):

• 09:00 - Norway Industrial Production (Sep)
• 09:30 - UK Industrial/Manufacturing Production (Sep)
• 10:00 - EuroZone Retail Trade (Sep)
• 11:00 - Germany Industrial Production (Sep)
• 12:00 - Canada Unemployment Rate/Change in Employment - expected at 7.1% / +29.0K
• 13:30 - US Unemployment Rate (Oct) - expected at 5.4%
• 13:30 - US Change in Nonfarm Payrolls (Oct) - expected at +175K
• 13:30 - US Average Weekly Hours, Average Hourly Earnings (Oct)
• 13:30 - UK NIESR GDP estimate (Oct)

Market Commentary

Today's payrolls data are the obvious event risk of the moment. One of the leading indicators we use to make a guess (never better than a guess!) at how the payrolls data will turn out is the monthly Monster Employment Index the - which showed no change from the previous month. If this number has any correlation with the payrolls data (and we feel it often does), then we would seem to have high odds of a worse number than the 175K expected. The 4-week moving average for the weekly initial jobless claims has ticked down since the hurricane induced problems in September, but is still higher than it was for much of the summer.

The payrolls data will certainly be the day's main focus - here are a few ways this may play out...

• Negative data (< +150K). On negative data, one would expected EUR/USD to immediately rush higher to new levels - even if the market gets choppy on profit-taking before the weekend.
• As expected data (between 150k and 190K) - EUR/USD might sell off initially, but then could regain its feet and close essentially unchanged
• Better than expected (over +190K) - EUR/USD drops to 1.2750 immediately and drops a bit further next week, but gains support above 1.2600

Technical Comments

EUR/USD - made new highs yesterday on rumors of Arafats demise and an essentially bullish ECB press conference (in which Trichet only expressed concerns about "excess volatility" rather than the actual level of the Euro). The event risk today determines whether EUR/USD is beaten back to support around 1.2800 or slightly lower, or whether it zooms immediately to 1.3050 by early next week before a larger correction sets in.

GBP/USD - the break above 1.8450 resistance was apparently premature as GBP was beaten back against the USD and especially the EUR and CHF on signs that housing prices are beginning to come off more rapidly in the UK. Nonetheless, GBP/USD may have found support just above 1.8400 and could rally again back through the 1.8500 top on its way to 1.8600. On positive payrolls data from the US, on the other, GBP/USD may risk a further selloff towards 1.8300 support.

USD/CHF - CHF is very strong, perhaps partially due to the fear of Arafat's eminent death. History shows that this kind of fear is unwarranted, but the technical situation gives us no reason to sell CHF just yet. Against the USD, USD/CHF may fall further to 1.1700 by early next week if the US payroll data doesn't contain any upside surprises. 1.1910 is resistance, and USD/CHF could risk a correction back to 1.2000 on positive US data.

USD/JPY - USD/JPY made a brief attempt at new lows yesterday, but the lows couldn't hold and USD/JPY edged back higher. On negative US data, USD/JPY may be somewhat rangebound, but could fall further to 105.20, while positive surprises could see USD/JPY back towards the 107.00 resistance.

EUR/JPY - while still within its medium term range, the sharp EUR/JPY rally looks to stay intact and possibly rally to new highs beyond 137.00 as long as the 136.00 level stays intact. Positive US data surprises could quickly derail this scenario, however.

AUD/USD - AUD/USD is the most "elegant and organized" technically of the USD pairs charts - a highly unusual circumstance as AUD/USD tends to be rather volatile. Positive US data could put the AUD/USD at risk of falling through 0.7500 support, while negative data could see AUD/USD snapping cleanly higher to 0.7700 by early next week.

USD/CAD - the rapid fall in oil prices is not tarnishing the still-shining CAD, which continues on its ramapage against the USD. Today is especially risky, however, with Canada employment numbers up 90 minutes before their US counterparts. USD/CAD is clearly on a downtrend, but the right combination of data could see it pushed as high as 1.2160 (or even 1.2300 if US data extraordinarily good and Canada data extraordinarily bad) or pushed lower towards 1.1900. If traders are short, they might consider taking profits on any further downward spikes if they occur before the US data is released. In general, favor one more push lower just beyond 1.2000 before a new corrective sequence starts.