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Forex Market Update
Published: Jun. 22 2006, 06:05 GMT
USD firmer in Asia, but remains weak with EURUSD looking for the upside once again!
Central Bank action clearly the market focus. EUR and JPY gain strength on central bank comments. GBP weakens on BoEâ€™s lack of action.
MAJOR HEADLINES â€“ PREVIOUS SESSION
â€˘ ECB's Trichet Speaks to EU Parliament Panel - Trichet notes â€śMonetary policy still accommodative" and â€śprices risks need careful monitored".
â€˘ UK BoE Minutes â€“ 7-1 vote with little prominence on tightening diminishes prospects of a rate hike in the near future.
â€˘ US MBA Mortgage Applications (Jun) -0.8% prior 7.0% - slight sell off on fears of continued of USD weakness.
â€˘ Canadaâ€™s Retail Sales (Apr) MoM 1.7% vs. exp. 0.4% CA Retail Sales Less Autos (Apr) MoM 1.9 vs. 0.7% exp. â€“ excellent numbers signals continued economic acceleration and CAD strength.
â€˘ US DOE / API Crude Inventories (Jun) 1385K/-3693K oil rallies.
â€˘ BoJ Governor Toshihiki Fukui comments that a ZIRP policy may cause â€śTroubleâ€ť suggesting shift as early as next month.
â€˘ Japans Merchandize Trade Balance Total (May) widened to ÂĄ384.88B (exp. ÂĄ438.4B prior ÂĄ646.2B). Second biggest increase in two years. A positive sign for economy and upcoming Tanken survey.
â€˘ New Zealandâ€™s Current Account Balance (1Q) -$2.688b from -$3.857B (exp. -2.233B) Deficit widens to 9.3% of GDP.
THEMES TO WATCH â€“ UPCOMING SESSION
Today we see a very light calendar. Traders should be watching for central bank signals and clues from economic indicators on inflation and accelerated growth.
Since Mondayâ€™s geopolitical interference that temporarily distracted the FX markets, we have seen a healthy return to monetary policy and â€śinterest rate differentialsâ€ť as the guiding factor for a currencies direction. Remarks from Fukui and Trichet moved their respective currencies higher, while the BoE minutes which showed a lack of support for hike had traders selling the USD. Riksbanks .25% hike and continued bias towards additional increases rewarded the SEK. The CAD reaped the greatest reward of a steady hand from the BoC as an accelerating economy will lead to imminent tightening. On the other hand the USD has already benefited from expected tightening in June and August and will see very little support for FOMC comments. In fact most remarks will have a negative effect as it illustrates the slowing US economy and the chance that the FED might over hike.
The greenback is basically out of bullets. With two rates hike already factored in the USD the usual support from a higher interest rate differential gone. However recent economic indicators such as Building Permits show continued decline in the outlook of the US economy and we expect a break of 1.2695 to accelerate dollar weakness across the board. The USD will continue to see some support from risk aversion and asset flows but with decreasing effectiveness to prop the USD. Thursdays FOMC meeting and subsequent rate hike will only deflate to USD. We see broad based weaknessâ€¦â€¦..
On yesterdays strong retail sales we continue to see CAD as the darling of the FX markets. Events continue to build the case for a stronger CAD and a break of 1.1000 would likely lead to a break of the 25 year lows at 1.0950. All indicators such as employment and retail sales figures point to a strong economy, foreign investment reaching new highs, robust oil prices and a steady and transparent BoC poised to tighten should push the CAD higher.
The level of rhetoric coming from the BoJ regarding the its ZIRP has reach new highs with this morning Fukui comments. In addition, Japans trade balance showed a strong increase in exports which boost manufacturers confidence and will filter into the Tanken survey which will only fuel to the market expectations. The general consensus is that a strong Tanken survey will lead to a July rate hike and therefore continues to push the JPY higher. While we believe that ending Japans long standing zero interest rate policy in July will be premature, we do see the Yen continue to strengthen.
Note: the support/resistance levels used in the matrixâ€™s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.
EURUSD (1.2663 @ 06:02 GMT)
Weekly update 18-06-2006: EURUSD continues to find renewed upside after the corrective recovery from a test of 1.2537 38% retracement from (1.1823-1.2979) from the February bull wave. We favor the upside with short term bullish confirmation if the pair is able to break 1.2692 resistance which would give scope for a retest of the inverse head and shoulder target at 1.2980 where a close above would suggest longer term upside acceleration for a 1.3200+ target. For the downside key support is now at 1.2537 and again at 1.2400 50% retracement support.
Thursday: We saw the EURUSD going higher on a light data day, with the disappointing US Housing Permits still being traded in the market. We continue to focus on the 1.2530 short term double bottom to be the low from now and we are looking for 1.2695 key resistance to be taken out which would open up to challenge 1.2980 short term. Look for support above 1.2600 in today's session.
22 Jun 06
British Pound/US Dollar
GBPUSD (1.8447 @ 06:02 GMT)
Weekly update 18-06-2006: GBPUSD has made swift recovery after the downside correction from 1.9023 highs from May 2006 was rejected at 1.8338 38% retracement (from 1.7123-1.9023). Daily stochastics are turning higher and we look for a close above 1.8530 this week which would give scope for a test of 1.8900 in weeks to come. Key support for the upcoming week is now at 1.8340 and again at 1.8130.
Thursday: BOE disappointed Cable bulls yesterday, with the market not getting the hawkish rhetoric it was looking for. But we expect the USD bearish bias to overshadow this fact and the pair for a test of 1.8530 with the pair being once again well bid below 1.8400.
22 Jun 06
US Dollar/Japanese Yen
USDJPY (114.95 @ 06:01 GMT)
Weekly Update 18-06-2006: USDJPYâ€™s upside corrective rally fell short of breaking 115.50 wave resistance and we remain with a slight bearish view as long as 115.50 remains intact. A close above would suggest a test of 116.00. But our preferred scenario is the downside and we look for a break of 114.50 to accelerate the downside for a short term target of 113.00.
Thursday: USDJPY remains heavy and we continue to look for a further sell-off in today's session. Only a break of 115.30 would challenge the recent highs. Look to sell rallies with stop above 115.70 for a test of 113.50-60 support area.
22 Jun 06
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