FX Markets Welcome 2012

Forex News and Events:

A subdued start to 2012. FX markets were relatively well behaved on the first trading day of the new year. With many Asian regional indices closed, price action and news flows were limited. The ultra thin flow did wreak havoc on JPY with pre holiday liquidations pushing USDJPY below 77.00 and this in turn sending EURJPY under 100. Gold was able to consolidate around the $1560 level but the precious metal clearly feels heavy and is expected to press lower. There were two headlines that grabbed our attention. First was the report that Greek Central Bank Governor Provopoulos cautioned against reverting back to the drachma, stating "Living standards would plunge. The new currency would be significantly devalued, possibly by up to 60-70 percent". It isn't that we really disagree with the comment, but we are just surprised by the open and honest conversation around leaving the Euro and returning to the drachma. While in Spain, the new Spanish government surprised participants by revealing that Spanish 2011 deficit would likely be closer to 8% than the previously expected 6%. In order to stop a negative reaction in the market (although no one was really around), Spanish officials announced additional tax hikes and austerity worth around €8.9bn to close the newly reported gap. For 2012, we are mostly focused on growth levels in the Eurozone. We suspect that a deadly combination of crisis inspired sagging consumer confidence and deep austerity cuts coupled with the historical structural problems, which make many nations in the Eurozone uncompetitive, will become a drag on growth. Given the recent comments by Italian PM Mario Monti outlining the strategy appropriately named ‘Grow Italy', European policy makers fully appreciate the vital necessity of driving growth. Without satisfactory growth levels the enthusiasm for healthy countries such as Germany to bailout failing nations will be exhausted quickly. We remain bearish in the EUR and given the recent IMF quarterly survey on the composite of central bank FX reserves, portfolio managers are also become less enthusiastic about holding the EUR. The USD shares rose to 61.7% from Q3, up from 60.3% previously. While valuations have a majority to do with the shift, there was a portion whihc could be attributed to new accumulation. In addition managers did nothing to sterilize the appreciation as reserves outside the G5 also fell.

 

Today's Key Issues (time in GMT):

• 07:30 SEK Swedbank PMI Survey (Dec) index
• 08:55 EUR GE PMI Manufacturing (Dec F) index
• 09:00 EUR Eurozone PMI Manufacturing (Dec F) index

The Risk Today:

EurUsd Overarching bearish Eurozone sentiment and sustained price action below 1.3000 gives the pair a bearish tone. Initial demand is located at 1.2858/65 (29th Dec low & 1st Jan low 11) then 1.2600 (76.4% Fibo retracement). On the topside minor resistance is located at 1.2965 (intraday high), 1.3078 (30th Dec high), 1.3237 (13th Dec high), 1.3456 (8th Dec high), 1.3553 (9th Nov high), then 1.3852 (61.8% Fibo retracement).

GbpUsd Thin markets sent the cable to 1.5545 (intraday high) in an overreaction to todays surprise European PMI read. However, indicators remain bearish and but the pair continues to trade heavily. Next level of demand will come into play at 1.5361 (29th Dec low), 1.5333 (23rd Sept low), then 1.5272 (6th Oct low). Resistance should kick-in at 1.5545 (intraday high), 1.5692 (28th Dec high), 1.5780 (30th Nov high), 1.5805 (21st Nov high), then 1.5880 (61.8% Fibo retracement).

UsdJpy Friday saw year-end flows flooding into JPY with the USDJPY falling below 77.00. With the pair trading safely below daily cloud cover, indicators remain bearish. Initial critical support will come into play at 76.30 (intraday low), 76.11 (22nd Sept high), then 75.35 (31st Oct low). Resistance can be seen at 78.04 (28th Dec high), 78.29 (30th Nov high), 79.53 (31st Oct intervention high), 80.24 (prior intervention high) then 81.48 (8th July high).

UsdChf The pair started the New Year with a sharp low liquidity inspired fall to 0.9348 but has since regained lost ground. Last week the USDCHF was able to break-out of its 0.9300 to 0.9400 range resuming its bullish trend seen since Oct 27th. But since then momentum has stalled. Next resistance is located at 0.9453 (30th Dec high) then 0.9603 (17th Feb high). Next support region is located 0.9398 (29th Dec low), 0.9321 (28th Dec low), 0.9244 (21st Dec low) then 0.9133(65d MA).