Waiting on European Policy Makers

Posted by: Piper Joshua / On: October 18, 2011 / No Comments »

Massive uncertainty around this weekend’s summit will dominate fx price action today. We suspect further reduction of risk going into this weekend, given the chaotic and often times confusing comments, reports and politicized nature of this crisis, as it is really anyones guess on what will happen sunday night (or now potentially wednesday). Given European policy makers renewed efforts to hammer out a deal, we suspect that a solid solution will be forth coming. That said, this deal never fully addresses the structural root of the problem. Greece and other peripheral and core nations (western and eastern) needs growth to help manage deficits. And on this topic, the sell off we are witnessing in China’s stocks and commodities are worrying. Even if the USA manages to print a 3 percent Q3 growth number, 2012 will remain fragile and not strong enough to pull the rest of the western world higher. A prolonged global downturn will again put countries like Greece and Hungary in a difficult situation. Risk appetite in FX markets has managed to stabilize overnight in the face of concerning headlines from Eurozone. In a worrying move Eurozone officials have scheduled a second summit for Wednesday Oct. 26th, alongside the one planned for Sunday Oct. 23rd . The additional meeting clearly indicates the complexity involved in creating this grand plan. Yesterdays headlines were confusing, to say the least, but the primary takeaway is the European policymakers are moving towards a solution although it will take longer than the market had originally anticipated. According to a draft statement from Eurozone Finance Ministers they expect to finalize the agreement on a permanent bailout mechanism by the end of November. And for this selling of FX risk was held to a minimal. As for today, FX traders remain cautions as German policy makers continue to downplay expectations for this weekend summit. Baring any further significant developments on the European sovereign debt front, we suspect FX, will discount the economic calendar, and linger in there current tight ranges. Of all the rapid fire news flow it was the leaked Troikas report that truly captured our attention. Amidst all the electrifying images of protests in Athens, the EC, IMF and ECB commission provided its own sensational new by concluded that Greece’s debt dynamics are not sustainable. However, the Troika still recommended that the 6th tranche should be released regardless. In other news the Greek parliament passed the latest Bill on austerity measures. But there was an immediate price, as the lone dissenter from Prime Minister Papandreou’s parliamentary party was quickly dispelled. This now cuts the new social democrats parliamentary majority to just three seats. In other, news a draft paper of the EFSF bank recapitalization suggests a core focus on the financial sector revitalization. Guidelines seem to state that banks eligible for recapitalization would need to restructure, and only ailing banks that pose systemic risk would received assistance.

09:00 EUR German IFO Business Climate Prior 107.5 Exp 107.3
09:00 EUR German IFO Current Assessment Prior 117.9 Exp 117.5
09:00 EUR German IFO Business Expectations Prior 98 Exp 98
09:30 GBP PSNBX Prior 15.9 Exp 14.1
09:30 GBP PSNB Prior 13.2 Exp 10.9
09:30 GBP PSNCR Prior 11.8 Exp 22.0
10:00 EUR Government debt % of GDP Prior 80 Exp 85
11:30 EUR Portugal’s Costa Speakin
13:45 EUR ECB Board member Praet Speaking
16:00 EUR Nowotny
18:00 USD Kocherlakota

The Risk Today: EurUsd So now we wait on European policy makers. Trading remains dominate by random headlines making thing very difficult. After a week days of choppy, whipsaw action the pair is head towards the lower edge of its consolidation pattern. Initial resistance stands at 1.3878 (short term bearish trend), 1.3914/37 (15th Sept & 17th Oct high), then not much till 1.4278 (6th Sept reaction high). Key support is located at 1.3673/83 (13th & Intraday Oct low), 1.3653 (18th Oct Low), 1.3566 (11th Oct low), 1.3525 (7th Oct high) then 1.3346 (10th Oct low).

GbpUsd Cables momentum stalled ahead of resistance at 1.5869 (15th Sept high), now heading towards the upper edge of this week’s trading band. We remain constructive on the pair. Last week’s break of key resistance at 1.5716 (29th Sept high) should opened the way towards 1.5907 (12th Sept high), 1.5928 (5day MA), then 1.6000 (psychological resistance). Initial support is located at 1.5668 (10th Oct high), 1.5632 (18th Oct low), 1.5333 (23rd Sept low), then 1.5297 (7th Sept 10 low) and after that, lots of space.

UsdJpy USDJPY continues to bore us to sleep moving just 30 pips in Asia. Rallies continue to lack follow through. Even the spike in US yield dif has not given the pair much of a boost as historical correlation remains low. Given our positive view on safe-haven trades (and lack of freedom from CHF) we continue to expect to eventually revert and trade comfortably in its 76.12 to 77.49 range. Support will come into play at 76.60 (17th & 18th Oct low), 76.12 (21st Sept low), then 75.95 (all time low). On the topside initial resistance is located at 79.95 (daily cloud base), 77.49 (range ceiling), then 77.86 (9th Sept high).

UsdChf Decent CHF buying as speculation of a EURCHF repeg comes undone sends the pair lower in sharp moves. Support stands at 0.8850 (intraday low) then 0.8647 (15th Sept low). On the topside 0.9086 (30th Sept high), 0.9147 (4th Oct low) then 0.9316 (6th Oct high) should provide temporary resistance

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