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Forex Trading StrategiesNZD renews meltdown on rumors of Uridashi cancellation. Majors still handcuffed in the range.
USD/CAD beginning to commit higher. A break of 1.1750 puts the 1.2000 target on the board
MAJOR HEADLINES – PREVIOUS SESSION
• US Net Foreign Securities Purchases data at +89.1B vs. 85.0B expected
• False rumors of hawkish comments by ECB official pushed European treasuries and the Euro all over the place yesterday before treasuries finally settled lower and the Euro mixed.
• New Zealand officials talking down their currency and rumors of uridashi cancellation rocked AUD and NZD overnight.
• Fed Beige Book offers positive outlook on US economy.
Markets were mostly in tight ranges though AUD and especially NZD were weaker overnight
THEMES TO WATCH – UPCOMING SESSION
A bizarre situation unfolded in the late European session yesterday as at first the ECB's Bini Smaghi (already the source of some nasty moves in the European treasuries on an earlier occasion with some of his comments) was rumoured to have said that he favoured further rate increases in the future. Only minutes later, he denied being the source of any rumors. In any case, the action on the treasury market is heating up as treasuries sold off heavily from new highs in the US, and Europe was much lower as well - even after Bini Smaghi's denial.
The currency market kept things contained, however, and no major support or resistance areas gave way in the majors. This has been a truly remarkable market with extensive bouts of range trading (punctuated by sharp moves of one or two day's duration) since all the way back in early November. We still favor a break weaker in the USD, though we admit that the two weeks in a tight range have taken all momentum out of the market and it may be more prudent to wait for a break before reacting.
The CAD scenario seems to be unfolding as expected, with USD/CAD possibly aimed at 1.2000 on a break of the 1.1750 resistance. Don't forget the huge event risks coming up there, however, with the election on Monday and the Bank of Canada rate decision on Tuesday (25 bp hike expected)
The NZD situation is heating up again. One of the drivers that makes the currency artificially strong are issuances of bonds called uridashi that are issued in NZD and sold to Japanese investors, who enjoy reaping the fat interest rate differential between New Zealand and Japan. The ironic thing about New Zealand's interest rate policy has been this: the RBNZ continues to hike rates (now at 7.25%!) in order to choke off excess in consumption and the housing market that threaten the country's current account deficit. At the same time, the higher rates make it more and more attractive for foreigners to hold paper from New Zealand - and the uridashi are one of the biggest instruments whereby foreigners can participate in the New Zealand market. This latter phenomenon hurts New Zealand's export markets by making the kiwi artificially strong. Apparently, overnight a rumour has developed that government officials from New Zealand have convinced a Japanese issuers of uridashi to stop a $600 million issue. NZD is likely headed for a big fall on this in the coming weeks and months - as the country desperately needs a weaker currency and will likely get increasingly aggressive about getting what it wants.
Up today we have US Housing Starts and Building Permits and the US Philly Fed later.
Note: the support/resistance levels used in the matrix’s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.
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