Quick FX update

Will be back in Michigan tomorrow and will resume regular posting & updates starting then.

Cable at 68% fibo retracement of selloff from Aug 09 highs. 1.60 could act as a pivot to reverse from. If 1.60 is taken out, cable targets 1.64, but if it reverses course like I expect then watch 1.58 level– if it’s taken out, watch out below.

EURUSD still targeting 200d around 1.35. As contributor Qasim Khan has been stating, EURUSD is trading off of USD/EUR Libor spread, as Eonia ticks up toward ECB rate at 100bps since the LTRO matured. This is effectively a rate hike in the backdrop of credit availability for Euro banks from the market on the heels of the stress tests and recent decoupling theme based on deteriorating US economic conditions and upside surprises in Eurozone IP & PMI. This suggests the recent uptick in Euribors is largely irrelevant to the euro situation, as Euribor is more about credit than liquidity. The bullishness of Eonia ticking up could reverse fast if it catalyzes further Eurozone economic weakness, however, and if recoupling seems to be manifesting itself in future economic data, then USD Libor should start rallying again and the USD/EUR Libor spread would tighten. This would be devastating to the EURUSD, and we expect this to begin occurring soon. Again, we target 1.35/200d for EURUSD in the nearterm, but expect it to pretty much plunge from there. Parity is the long-term target for now. EURGBP long could work as a theme based on room to run for EURUSD and potential GBPUSD topping pivots. Euro/CEE crosses might be trying to find some footing. EURPLN has important support at 3.97 that it’s holding. If it can hold, then watch 4.02 as a level to get long at on breakout. Still bearish chart however, and definitely needs to show some constructive movement before a rally can be seriously considered. EURHUF been very volatile as late but watch for a possible reclaim of 2010 highs if eurozone situation deteriorates further.

AUDUSD in a wedge and losing momentum as it approaches 9200-9400 resistance zone. Fundamentals are bearish for this one, and technicals are aligning as well. Watch 9070, if it cannot hold then it may have a lot of downside risk. SSEC at an important S/R level at 2700 (summer 09 highs, fall 09 lows, summer 10 highs), as well as 50% retracement from April highs. If Shanghai can’t breakout through this level, watch out below for AUDUSD. 2700 breakout, which would be very constructive for SSEC as well as AUD crosses, would target 2750 and then 2870. Important pivot point right here for Chinese & Aussie markets.

AUD looking bearish vs EUR & GBP. EURAUD in a variety of consolidating patterns on different timeframes and seems to be trading off equity/risk vol. Breakout could send it to 200d around 1.50 and further to important S/R around 1.55. Same story with GBPAUD, targeting 1.81-1.83 on breakout.

Similar situation for CAD vs EUR & GBP. Impressive day for EURCAD on Friday and a breakout through 1.37 targets 200d around 1.41 and possibly S/R & fibo level at 1.45. GBPCAD (my biggest long) held 200d and resumed breakout on Fri– targeting trendline resistance and S/R level around 1.72.

USDJPY still trading off 10yr UST/JPY yield spread. Fed MBS proceeds reinvestment into Tsys could be announced by FOMC tmw. 10yr being bid up in anticipation and will likely continue rally if announcement is made. It would be the first step toward continued “extraordinary policy,” as it would prevent MBS prepayment optionality from shrinking Fed balance sheet and possibly set up for additional asset purchases. 2s10s are flattening, but 10s30s are at all-time wides and still bull steepening. Bearish for USDJPY and breakdown through 85 could send it plunging. BoJ intervention at or below USDJPY 85 is a possibility.

Yen crosses looking bearish, particularly in commodity space. CADJPY selling off at 55d and approaching support at 81.50. If this level breaks, low- to mid-70s appears to be in the cards. Lower highs are intact for CADJPY since April. AUDJPY is consolidating between 77.50 & 79.50 and in a larger consolidation pattern between 73.00 & 79.50. If rising trendline from early July can’t hold in AUDJPY, then 77.50 could be at risk of being taken out, which implies a selloff back to 73.00. Below that it’s toast. If AUDJPY can rally, 200d is the first target around 81.00 (also June CNY float highs). How AUDJPY acts around these important pivots in the nearterm will determine its overall trend in larger timeframes. Equity trades off the AUDJPY so watch these levels– they could determine a lot of movement in risk space. EURJPY pulling back from 115 resistance and is rangebound between 112.50 & 115. No clear trend here, but with EURUSD left with little room to run and USDJPY looking bearish on both spot chart as well as yields, EURJPY could be headed for a selloff back to July lows and below. GBPJPY acting more constructive but trendline resistance is converging near an important S/R level at 138-139. If GBPJPY cannot push through this level, it may be ready to selloff back to recent lows.

USDX approaching 61.8% fibo level and huge S/R level at 79.785. With GBPUSD having little upside room to run, AUDUSD forming a bearish wedge, and EURUSD about 250 pips from what should/could be a huge reversal point, USD might find some footing in the nearterm and start rallying again. Fed tomorrow is key and reaction to potential MBS reinvestment into Tsys could go either way, though I see it priced in and without outright QE announced (highly unlikely), USD could rally on the news. Breakdown through 79.785 invalidates the thesis and could send USD seriously plunging however. I’m inclined to bullish USD in the nearterm and will position myself as reaction to FOMC sets in and as majors begin potential reversals. Only cross USD remains bearish against is JPY. A breakout through 200d in USDX would be confirmation to get long USD. Range between 200d & 79.785 should end soon and should determine future action in a lot of markets.

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