Good morning,
It seems that relative value is not only appropriate but also timely given the developments we’ve seen overnight in markets.
Where to begin?
Ok let’s start with the fact that risk aversion is now the new black with all major indices, led by Asia, sold down on average 3% lower overnight, thanks in large part to more talk of China going down the tightening path (albeit indirectly) using the old chestnut of increasing capital reserve requirements for a number of its largest domestic banks. The usual suspects were moved as a result including a fresh bid tone in the JPY predominantly through the crosses with the AUDJPY and EURJPY giving up most ground while USDJPY understandably was essentially sidelined caught between the normal rush to buy the greenback (despite Obama) as well as the JPY. Nonetheless the USDJPY is looking more precariously at the bottom end of recent ranges and in all likelihood will be testing overnight lows once more at 89.55.
Giving the JPY some more impetus was of course last night’s BOJ decision which left rates unchanged and not much said about further QE. So from this we take that QE remains unchanged for the time being but the jawboning is set to continue with fresh talk hitting the wires from the press conference held this morning, truthfully sending nothing but mixed messages (what else is new from Japan?), I still remain JPY bullish in the near term given recent developments and would feel far more comfortable expressing this view in the respective crosses rather than direct through USDJPY. Adding a little more confusion to the overall picture is the fact that Japan received another downgrade overnight to a negative outlook from S&P…. Interesting but in times of risk aversion one thing has been proven JPY remains bid.
In the Cable we’re looking for the GDP number due this morning and the market as a whole is looking for confirmation that the recession did in fact end in Q4 of last year. Anything resembling a print on expectations will see the Cable retain its very bid tone and as you can imagine anything better than 0.4 will see this thing fly higher with small stops above 1.6280 and 1.6320 being the first targets to get taken out. Given how the market has positioned itself over the last 24hrs though a print of anything even slightly worse will see this cross hit and hit hard with 1.6080 being the next intuitive target on the downside. I don’t think the recession is over and I remain bearish the cross, but today of all days’ play it cautiously and perhaps add to my GBPCHF short again should come into that sell zone once more.
On the EURUSD, this thing is being hit like everything else on the back of risk aversion and the downside continues to look vulnerable. Plenty of stops line up below 1.4050 and today could be the day we see the 1.3900 handle printed at some point. I remain a seller of rallies into 1.4150/1.4230 but suggest keeping an eye on the US data in Consumer Confidence, Case-Shiller and the Richmond Fed numbers to get a better guide as to where we’re likely to go on the day.
USDCAD remains well bid and is now still looking higher towards the 1.0650/1.0720 mark, if you’re not long already buying dips is recommended but the risk reward scenario at present levels isn’t the most rewarding so be careful. Likewise the AUDUSD continues to go lower and now looks for the important breakout level of 0.8930. Don’t expect too much more upside ahead of next week’s RBA meeting.
Good luck out there today and to all those that care (other Australians like me) happy Australia day!
Best regards,
Ken Veksler.
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