Market Unconvinced of a December Tapering Start
Posted by Peter Rosenstreich at 10/12/2013
Forex News and Events:
FX markets continued to buy risk seeming unconcerned over the prospect of Fed tapering. USDJPY firmed around the 103.20 and 103.40 levels. AUDUSD collapsed to 0.9075 at the start of the session as thin liquidity conditions looked to have been the culprit (selling in AUDNZD). US 10 yr treasury yields eased to 2.83% which supported further buying in US equities. However, Asia’s regional indices could not hold on to the goodwill. Most of Asia is in the red as the Nikkei, Hang Seng, Kospi and Shanghai composite are down between -0.05 and -0.20%.In a scheduled speech yesterday, Federal Reserve Bank of St. Louis President James Bullard stated that the improving economic data, specifically that of the labor markets, has increased the likelihood that the Fed would begin decelerating its asset purchase program in December 17-18th policy meeting. Yet Bullard reduced the statement's impact by say that any cut should be modest due to the low inflation environment. Bullard stated, “A small taper might recognize labor-market improvement while still providing the committee the opportunity to carefully monitor inflation during the first half of 2014.” Then added, "should inflation not return toward target, the committee could pause tapering at subsequent meetings.” Despite NFP increasing by over 200k and GDP growth reaching 3.8% there is still a strong feeling on the street that tapering will be delayed until March 2014. Given the pullback in US 10-yr treasuries and rally in EURUSD, clearly markets are in a position for a continuation of asset purchasing into the new year. We suspect that the market is on the wrong footing on this one and is significantly too pessimistic on the USD. As Fed’s Lacker stated just after Bullards comments, the additional monetary stimulus is unlikely to have a significant impact and there are still growing risks. In our view the economy is strong enough to easy off the asset purchasing, instead of relying on more “traditional” policy measures. For us we are starting to see USD as oversold and building mid-term position would make sense.
Today's Key Issues (time in GMT):
2013-12-10T09:00:00 NOK Nov CPI; prior +0.1% m/m, +2.4% y/y.
2013-12-10T09:00:00 NOK Nov PPI; prior +2.3% y/y.
2013-12-10T09:30:00 GBP Oct ind production, +0.3% m/m, +3.2% y/y exp; prior +0.9%, +2.2%.
2013-12-10T09:30:00 GBP Oct mfg production, +0.4% m/m, +2.9% y/y exp; prior +1.2%, +0.8%.
2013-12-10T09:30:00 GBP Oct trade balance, GBP9.35 bln def exp; prior GBP9.82 bln def.
2013-12-10T09:30:00 GBP Oct – non-EU bal, GBP3.6 bln def exp; prior GBP3.85 bln def.
2013-12-10T10:00:00 EUR ITA Q3 GDP – final, -0.1% q/q, -1.9% y/y exp; prelim -0.1%, -1.9%.
2013-12-10T12:30:00 USD Nov NFIB small business index, 93.0 exp; prior 91.6.
2013-12-10T15:00:00 USD Oct wholesale inventories, +0.3% m/m exp, prior +0.4%.
2013-12-10T15:00:00 USD Oct wholesale sales, +0.4% m/m exp; prior +0.6%.
The Risk Today:
EURUSD Despite Bullards warning of a Dec tapering start EURUSD continues to find buyers. EURUSD rallied to 1.3768 taking out resistance (and our target) at 1.3740. With MACD having crossed over the zeroline we suspect any pullback should be transitory (1.3553 65-DMA should support downside move) and technicals are pointing to a test of 1.3830 year high.
The first region of resistance is located at 1.3830/35 then a distant 1.4248 (Oct’ 11 high).
The next support can be found at 1.3620 (28th Nov top), 1.3546 (65 dma), 1.3421 (Fibo 61.8% on Jul-Oct rally), 1.3365 (100 dma), 1.3295 / 99 (7th Nov low), 1.3106 (6th Sept low), 1.2995 (10th July reaction high), 1.2963 (11th July low), 1.2877 (Fibonacci 50% retracement on Jul 12’ – Feb 13’ rally), then 1.2820 (20th May low).
GBPUSD Other than a bit of choppy trading Not much doing in in GBPUSD. GBOUSD has started the week on a bullish footing climbing to 1.6391. Trend and momentum indicators are all bullish suggesting a challenge to 1.6488. In broader terms the decisive bullish break of key resistance 1.6388 indicates an extension of strength to 1.6746 should be anticipated. Yet failed to make new highs suggest a short term pullback.
Watch for next resistance to come into play at 1.6440 (2nd Dec high), 1.6488 (8th Aug high), 1.6625 (18th Aug ‘11 high), then 1.6746 (2011 high).
The support levels from here are 1.6265 (old range top), 1.6093 (21- DMA), 1.6045 (downtrend top), 1.5884 (13th Sep high), 1.5759 (17th June high), 1.5708 (fibo 61.8% on Jul-Oct rally), 1.5600 (resistance turned support) then 1.5429 (28th Aug low).
USDJPY USDJPY has rallied to 103.38 where bullish momentum has temporally dried up. Any bearishness that had crept into USDJPY has been erased and we are just a stones throw from our 103.65 target. However, failure to break above current supply region will clearly give the bears confidence for staging a attempt at a reversal.
The first resistance region is located at 103.65 (16th Sep 08 & 30th Sep 08 low), then 105.00 (psychological resistance).
On the downside, supports are located at 101.61/70 (Fibo Aug-Dec retracement), 99.10 (13th Nov low), 98.59 (Ichimoku cloud top), 97.50 (triangle support), 96.56 (8th Oct pivot low), 95.83 (6th June low), 93.57 (Fibonacci 61.8% on Sept 12’ – May 13’ rally), 92.56 (2th Mar low & Fibo 38.2% retracement), 90.93 (25th Feb low).
USDCHF USDCHF sell-off continues fall to 0.8886 support and hitting our bearish target. With momentum indicator MACD threatening to crossing below the zeroline and USDCHF within clear downtrend, we should see an extension of weakness to 0.8763.
The first levels of support remains at 0.8860 (Fibo 38% Aug 2011 to July 2012 retracement level) then 0.8763 (2nd Nov 11’ low)
The next levels of resistance are located at 0.9123 (21 & 65- DMA) 0.9179 ( 100-DMA), 0.9280 (17th Sept pivot), 0.9320 (200-DMA), 0.9450 (target), 0.9481 (range top), 0.9568 (fibo 61.8% on May-June drop), ), 0.9598 (11th July high), 0.9626 (31st May low & 3rd June low) then 0.9672 (fibo76.4% level on May – June drop).
Resistance and Support: