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Friday June 23, 2006 - 09:20:37 GMT
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Forex Market Update

Published: Jun. 23 2006, 05:37 GMT

USD Strengthens on Risk Selection in EM pairs & Speculation FED will go to 6%.

What might prove to just be a statistical aberration or just speculators trading on rumors had the greenback gaining strength in yesterdays trading and firming up in early Asian.

MAJOR HEADLINES – PREVIOUS SESSION
• Continued tension in North Korea.
• Confederation of British Industry Survey - highest output reading since January.
• Bank of England voting member David Walton 43 died suddenly on Tuesday
• US Initial Jobless Claims (Jun) 308k vs. exp 306K - Increase of 11, 000 MoM shows continued economic pressure.
• US Continuing Claims (Jun) 2439k vs. exp. 2415K.
• US Leading Indicators (May) 0.6% vs. exp. Exp. -0.5% (prior -0.1%) – signs of a slowing economy.
• Fed Reserve Bank President Jack Guynn announced his retirement on Oct.1 2006, leaving an opening in the FOMC.
• NZ GDP (1Q) QoQ 0.7 vs exp 0.7% (prior -0.1%) – shows slight expansion.

THEMES TO WATCH – UPCOMING SESSION
• 8:00 GMT NO Unemployment Rate (Apr) AKU exp 3.9%.
• 12:00 GMT GE Streak of German CPI Brandenburg, Saxony, North Rhine-West.
• 12:30 Durable Goods Orders (May) exp. 0.4%.
• 12:30 Durables Ex Transportation (May exp. 0.6%.
• 13:45 EC ECB’s Weber speaks a ZEW.
In a day which lacked any real additional information for the markets to absorb, the USD rallied on increasing risk selection and interest rate differentials. Speculators moved out of risky EM currencies with structural imbalances such as HUF, TRY and ZAR and into the relative safety of the USD. The GBP was the biggest G7 losers against the USD dropping over one figure when BoE hawk Walton passed away, thus leaving GBP bulls with no tightening advocates.

Asian Markets are calm after yesterday’s choppy activity.

NZD
In recent session the NZD has seen little relief with GDP (QoQ) increasing to .07% from -.1%. Mounting structural concerns and growing risk aversion have traders selling NZD. Yesterdays record Current Account Deficit (YoY) of $14.5b which represents a whopping 9.3% of GDP, 3rd in line of OEDC, dropped the USDNZD a figure lower. Pressure continued to grow as S&P commented that the deficit posed a significant risk to the Kiwis sovereign credit rating. The sum of all the days bad news was the NZD plunged to a 10-week low (April 10th) of .6074. The deadly combination of bad data and market sentiment will continue to weaken the NZD. We see no relief unless commodities rally.
USD

The USD continues to benefit from interest rate speculation, lack of new information, global risk selection. On the back of major investment houses revised FED forecasts from 5.25% or 5.50% up to 6% had the market buying USD. The concept of a 6% FED and therefore lower interest rate differentials triggered major selling in EM pairs as traders no longer valued the higher risk. We see the USD holding this relative position in the market until we get some clarity from the FOMC next week.

JPY
Outside of the pressure caused by Korea, yesterday’s session began to discount the verbal activity out of Japan by selling JPY to monthly highs against the majors. When the results of a “scheduled” lunch between the BoJ and Government lacked any substance trader unwound USDJPY shorts. Market sentiment might be turning away being effected by Japanese policy rhetoric to looking for some real substance. We see the market close to fully pricing in all the ZIRP noise.

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.


Euro/US Dollar
EURUSD (1.2571 @ 05:37 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.

Friday: EURUSD saw strength yesterday and with only durable goods out of the US we expect the pair to be level driven through most of today's trading session. We still favor the dips with a stop just below 1.2530 for a test of 1.2650 short term. for the downside to look to a stop reversal below 1.2530 giving scope for a possible test of 1.2400 50% retracement support.
Resist.
1.2858
1.2730
1.2653
1.2571
1.2526
1.2475
1.2347
Support

Quoted:
23 Jun 06
05:37 GMT


British Pound/US Dollar
GBPUSD (1.8292 @ 05:37 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.

Friday: GBPUSD this big looser in the European session, breaking 1.8340 38 % retracement (from 1.7123-1.9023), but the pair remained bid above 1.8250 with short term downside target being 1.8130. For the upside look for the pair trade up for a test of 1.8360 resistance.

Resist.
1.8748
1.8542
1.8410
1.8292
1.8204
1.8131
1.7925
Support

Quoted:
23 Jun 06
05:37 GMT


US Dollar/Japanese Yen
USDJPY (116.01 @ 05:37 GMT)
Weekly Update 18-06-2006: USDJPY’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.

Friday: USDJPY trading higher yesterday on growing concerns of the North Korean missile situation and the rate differential that is consuming the market right now. Expect the pair to be in a 115.40-116.50 range today and we look to ply the neutral side playing the range.

Resist.
118.93
117.31
116.71
116.01
115.09
114.07
112.45
Support

Quoted:
23 Jun 06
05:37 GMT

Risk warning
Saxo Bank A/S shall not be responsible for any loss arising from any investment based on any recommendation, forecast or other information herein contained. The contents of this publication should not be construed as an express or implied promise, guarantee or implication by Saxo Bank that clients will profit from the strategies herein or that losses in connection therewith can or will be limited. Trades in accordance with the recommendations in an analysis, especially leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits, in particular if the conditions mentioned in the analysis do not occur as anticipated.

Please read our full Analysis Disclosure & Disclaimer at www.saxobank.com/analysis/disclaimer.

Saxo Bank
Saxo Bank

 

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