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Forex - China Lending Supports Risk Corrolated Trades
Forex News and Events:
Risk appetite remains firm, as Chinese data suggests that the real economy has good momentum. In particular, lending, the area of some concerns, was much better than the market expected printing at cny300bn. This reading clearly is a sign that the Chinese government is still encouraging credit growth and committed to loose monetarily policy. However, it’s important to note that trade figures were very weak at -23.4% y/y, casting a shadow on the health of external demand.
Overall, with China continuing to move in the right direction, risk favorable trend should continue. Asian equities were higher on the figures (Shanghai up 2.21%) and the positive momentum has carried over into the European session. We are currently seeing a slight pullback in the EURUSD from the 1.4628 highs, but expect this just a short term correction. Yesterday, the BoE held rates steady and left the amount of asset purchases unchanged. They also decided not to lower interest rates on bank reserves to encourage lending as markets had speculated.
The Sterling gained on the news, with GBPUSD penetrating the psychological 1.6700 level. Also helping risk correlated trades was US Treasury Secretary Geithner testimony before the Congressional Oversight Panel on TARP: "As we enter this new phase, we must begin winding down some of the extraordinary support we put in place for the financial system. We are now in a position to evolve our strategy as we move from crisis response to recovery, from rescuing the economy to repairing and rebuilding the foundation for future growth." He also noted that recovery might take more time to develop than originally anticipated.
The data from the US supported the theory that recovery was slowly entrenching itself, as the initial claims came in better than expected at 550k and continuing claims fell to 6088k. In Canada, the BoC held its policy rate steady and restated its commitment to hold the current policy rate until the end of Q2 2010. However, the central bank is clearly concerned over the recent appreciation of the CAD, stating that "persistent strength in the Canadian dollar remains a risk to growth and to the return of inflation to target. In its conduct of monetary policy at low interest rates, the Bank retains considerable flexibility…”. Today, markets will we watching some 2nd tier data form the US in Import Price Index, University of Michigan Confidence , wholesale inventories and the monthly budget statement.
Today's Key Issues (time in GMT):
07:30 SEK Final GDP, % q/q Q2 0.0 (-6.2) exp, 0.0 (-6.2) P
08:30 GBP Producer input prices, % m/m (y/y) Aug 0.6 (-8.7) exp, -1.4 (-12.2) prior
08:30 GBP Producer core output prices, % m/m (y/y) Aug 0.2 (0.7) exp, 0.5 (0.2) prior
08:30 GBP Producer output prices, % m/m (y/y) Aug 0.3 (-0.5) exp, 0.3 (-1.3) prior
12:00 GDP, % y/y Q2 -1.0 exp
12:30 USD Import prices, % m/m (y/y) Aug 1.0 (-16.0) exp, -07 ( -19.3) prior
12:30 USD Nonpetroleum import prices, % m/m (y/y) Aug) 0.0 (-6.9) exp
13:55 USD Michigan consumer sentiment, index Sep P 67.0 exp, 65.7 prior
14:00 USD Wholesale inventories, % m/m (y/y) Jul -1.0 (-11.6) exp
18:00 USD Budget balance, $ bn Aug -174.0 exp
19:30 MXN Industrial production, % y/y Jul -10.6 prior
The Risk Today:
EurUsd Looking at the 4 hour chart we can see that the pair is getting rather extended and we have still not seen a retest of the 1.4445 breakout level. The pair is currently congested around one of the medium term uptrend channels at 1.4600, just above the support at 1.4570, but the RSI has been moving sideways throughout this entire move suggesting that a pullback is long overdue. Expect 1.4445 and 1.4381 to attract a fair amount of short covering and fresh buying from the USD bears.
GbpUsd We have discussed a head and shoulders pattern a lot recently and today we have a key level of 1.6750 to stay below in order to maintain the formation. An almost perfect entry level today for those playing the head and shoulders with a potentially huge reward : risk ratio for the medium term. Those playing it safe will likely wait for the ten day uptrend to break at 1.6546.
UsdJpy Continued weakness in the pair has taken it to an extremely important support level at 90.86. The medium term uptrend channels are now completely wiped out so this support level will be the only thing for the long players to cling onto. A break here targets 88.60 which also coincides with one of the 2 year downtrend channels. Expect intraday short interest at 91.80 and 92.47
UsdChf The support at 1.0340 /70 is keeping the pair afloat this morning but the pair is on a one way train for now. Expect some intraday short covering around these levels but renewed short interest at 1.0452 and 1.0550. A break of this support targets 1.0264
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