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Forex Market Update
Published: Jul. 06 2006, 05:48 GMT
With a heavy calendar, two Central Bank decisions and rise aggressions in N. Koreaâ€™s, we see a very volatile day.
The market will be focusing on ECB's statement which should give some clarification on future hikes in 2007, but we expect ECB's Trichet to remain very hawkish sending EUR crosses higher.
MAJOR HEADLINES â€“ PREVIOUS SESSION
â€¢ US Factory Orders (May) up 0.7% vs. 0.1%.
â€¢ US ABC Consumer Confidence (Jul3) -9 vs. prior -10.
â€¢ JN Leading Economic Index (MayP) 75.0% vs. exp. 88.9%.
â€¢ JN Coincident Index 77.8% vs. 88.9%.
â€¢ N. Korea threatens to launch more missiles.
â€¢ Oil hits new highs at $75.40.
THEMES TO WATCH â€“ UPCOMING SESSION
12:30 GMT ECB Trichet, Monthly News Conference.
13:10 GMT ECB Weber speaks at Bundesbank Conference.
14:00 GMT US ISM Non-Manufacturing (Jun) 59.0 exp.
In a page right out of the international strategic handbook N. Korea said they may test more missiles after the firing of seven Taepodong 2 long range missiles. In addition four short or medium range missiles may be test in the next four to five days. South Korea called the North Korean test a ``serious provocative act,'' according to a statement from Seoul. In coordinated phones calls between the US, Japan, China and South Korea leaders agreed to work together to find a solution using diplomatic efforts including the United nation security council.
In an addition rumors are now circulating (reported on Bloomberg wire 5:38 GMT) that Taiwan will be testing missiles which have the capability to reach China in September.
Overall the Asian session was mixed with JPY +.21%, SGP +.11% and AUD and NZD each gaining +.6%, while THB -.39%, KRW -.42% and TWR -.18%. This geopolitical will add significant pressure on Asian currencies and cap most rallies unless supported by significant information such as BoJ lifting of ZIRP. We see minor selling of Asian crosses as risk aversion continues to be the overriding theme in this region.
While all is quite internally, in last four days AUD has benefited from external forces i.e. the rise in N. Korea aggression, â€˜flight to qualityâ€™ and appreciating gold prices, moving the AUDUSD +2.8% to .7470. With a thin calendar until the 10th of July and no end to regional conflict in sight we see the AUD continuing to gain strength.
Big day in the EuroZone. The market will be focused on the ECB rate decision which will set the tone for the rest of the day. While in recent comments ECB members have stressed their aggressive stance, we believe rate will stay unchanged at 2.75%. Instead the emphases will be on the August meeting which will contain at .25% and perhaps a .50% rate hike. We expect Trichet comments at 12:30 GMT to help clarify the ECBâ€™s position and provide direction for future rate decisions. The market is anticipating Trichets remarks to be very hawkish and provide strength for the EUR. In addition ECB members will be speaking all day in a coordinated voice. So whatever tone Trichet takes will be reiterated all day. Given a hawkish Tricheet we believe today will provide the trajectory for the EURUSD to move to the 130 lvls in the near term.
Yesterdayâ€™s out of the blue ADP payroll report (which is relatively new and has a mixed track record often overstating) threw the market for a loop. The report printed a seasonally adjusted 368,000 jobs were added in June. If correct this would be the largest increase since March 2000 and adds significant pressure to Fridays Nonfarm Payroll. These numbers could reflect a stronger US economy with enough strength and inflationary potential to keep the FED in a tightening cycle. Traders should pay attention to todayâ€™s Initial Claims and tomorrowâ€™s employment numbers for FED guidance.
The market is still very bearish on the GBP and will be looking for reasons to sell. We believe that todayâ€™s BoE announcement holding rates steady at 4.50% with a neutral bias will not improve the GBP position. In addition, any disappointment in Industrial Production and Manufacturing Production will have traders selling the pound. However, any change in monetary policy bias will surprise the market and send the GBP higher.
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 (1.2727 @ 05:27 GMT)
02-07-200 Weekly Update: EURUSD took out major resistance late in the week and the break of 1.2695 gives reason the believe that 1.2480 is the low for now. Daily stochastics has turned higher and we expect a test of 1.2980 in the weeks to come the long term inverse head and shoulders target. A close above would give scope for 1.3300 target the top of the bull channel from March 06.
Thursday: the break of 1.2760 yesterday send the pair lower on technical trading, but the pair remain well supported by intra-week fibo support at 1.2700 and again at 1.2655, which we look for to hold unless ECB's statement should be considered extremely dovish which we see a as highly unlikely. So buy the dips as long as the mentioned support levels remain intact for a test of new weekly highs.
06 Jul 06
British Pound/US Dollar
GBPUSD (1.8347 @ 05:28 GMT)
02-07-2006 Weekly Update: GBPUSD made a strong upside reversal last week as daily stochastic has remained in oversold territory since mid-June 06. 1.8565 is the medium term trend reversal level and would give scope for a retest of 1.9025 the highs from early May 06. 1.8130 50% retacement (from 1.7230-1.9025) remains key for the longer term bullish trend to remain intact.
Thursday: GBPUSD tested lower yesterday and remains more vulnerable to the downside then EURUSD form both a technical and fundamental standpoint, but we remain intra-day bullish as long as 1.8265-1.8315 remains intact. So buy the dips for a 1.8450 target, but look to for a stop reversal below the mentioned support to take the pair back to the recent June lows.
06 Jul 06
US Dollar/Japanese Yen
USDJPY (115.61 @ 05:28 GMT)
02-07-2006 Weekly Update: USDJPY made a sharp reversal last week as the pair was unable to close above the top of the G7 gap at 116.70. Only a close above this level would suggest further upside, but expect the long term bear trend line from 98 presently at 119.40 to cap any upside move. A close below 114.40 wave support this week would confirm a medium reversal for a for a test of the 108.75-109.20 support area from May 06. Look for intra week support at 113.35 and again at 112.82 50 % retracement (from 116.79-112.82).
Thursday: The break of 115.00 send USDJPY on another corrective rally, but we remain bearish below 115.80 a break is needed to challenge last weeks highs at 116.70. But for today we look to sell on rallies stop above 116.10 target 115.30.
06 Jul 06
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