03 February 2012 at 10:32 GMT
Several of the major USD pairs are at pivotal levels ahead of the US employment report and ISM non-manufacturing survey. The outcome of these key reports could be decisive as major USD pairs are at interesting pivot levels.
As we head into today’s two important US reports, we’ve had an interesting mix of data recently out of the US, including a weak December retail sales report and a very weak January Conference Board Consumer Confidence number (This was not confirmed by the University of Michigan survey, which advanced fairly strongly in January, and the weekly . ), while US manufacturing activities have been very robust, particularly given the possibility that the expiration of certain tax incentives risked triggering at least a dip in the beginning of this year. This leaves the market still expecting positive data, but with perhaps lingering doubts now that we’ve seen a few cracks in what formerly appeared as a solid wall of positive date. The ISM non-manufacturing survey , while not recognized as such, is the more important measure of the health of the US economy. It has been meandering along at right around 53 for the last four months in a row – positive, but not overwhelmingly so.
Surprise side, please?
Having seen such a torrid run higher in risk assets, I suspect the surprise side is toward negative data, meaning that for the shortest term at least, the market may need data heavily slanted toward the positive to maintain the current trends (USD weaker, risk assets continuing to rally). The question is whether mediocre to bad data is sufficiently disappointing to trigger more than a short term consolidation.
Scenarios
Bad data
If both the employment report and ISM non-manufacturing report (the latter extremely important as it is forward looking and represents the bulk of the US economy) are unambiguously bad, we should look for at least a consolidation in the USD weakness as important support levels we identify below survive. Quite bad data may be needed to serve as a trend changer here back to USD strength. (Counterargument to that: the market is so hung up on the QE3 idea that we only see a rather brief consolidation, after which the market immediately moves back into bidding up risk assets and selling the USD on expectations of the next round of Bernanke bucks. This logic is tempered by the idea that other countries have far more easing to do relative to the US if the global growth outlook is souring.)
Good data
Good data would likely encourage further USD weakening, even from current very weak levels as it would encourage the global liquidity trade using the USD and JPY as funding currencies. (Low odds counterargument: is that this market is so hung up on the idea that this trade is about QE and QE only, in which case, a sufficiently negative reaction in bond markets could temper USD weakness and instead see rather more JPY weakness, as the JPY is the most sensitive to interest rates)
Glass half full/half empty data
The most likely scenario is perhaps slightly mixed data, with something for both the optimists and pessimists. In that case, we have to default to the surprise side analysis and look for a short term consolidation and then shift the focus to the next round of event risks.
JPY intervention – the wild card?
Many of the earnings reports coming out of Japan have been horrible, with practically all of the old guard electronics giants in Japan reporting miserable results. The latest is today’s Panasonic warning of a $10 billion annual loss. Meanwhile, the rhetoric from the Ministry of Finance has been cranking up, with the very dramatic statements yesterday from Finance Minister Azumi, who pointed the finger at the Fed’s recent statement for at least some of the reason behind the JPY’s current strength (that’s fairly dramatic and suggests that Japan is rapidly tiring of the current situation and is understandably upset with the hypocritical US stance of lambasting Japan for intervening while ignoring its own central bank’s obvious devaluation efforts). The MoF is clearly at DefCon 1, and if it doesn’t move here, could move within the next figure or so (75.00 is a natural line in the sand, though 76.0 may be close enough) and a few tens of billions of USDJPY buying could throw the entire market into short term disarray. Intervention would seem more likely in proportion to how negative the US data proves, as the market moves forward its anticipation of a QE3 announcement.
Regardless of the scenario, be very careful out there!
Charts
EURUSD
The EURUSD resistance at 1.3200/40 was well anticipated and has been sticky, as the market tries to weigh which Central Bank balance sheet is likely to balloon the most going forward. The risk correlation has not been consistent of late. A bout of positive US data could lead to a further squeeze higher to perhaps 1.34/35, but this does not alter the longer term outlook for lower levels. To the downside, a clear close below the recent range and persistent move below 1.30 are needed to re-energize the bearish outlook.
GBPUSD
GBPUSD has seen a very persistent and sharp run higher after teasing below the old 1.5400 support area at the beginning of the year. The slight deceleration in the BoE aggressiveness on QE, a couple of positive data points and the non-signing of the new fiscal compact have given the pound a boost. The obvious upside resistance is the 200-day moving average around 1.5950, while there is plenty of room for consolidation until to the downside for some consolidation on a mediocre to negative batch of US data today.
USDCAD
Pivotal test of 200-day moving average going on in recent days – a failure risks much lower levels if the US data is positive and the carry trade mentality continues. Don’t forget we’ve also got the Canada employment report out today which adds an extra twist here. The pair needs to pull sharply back through the 1.0050/75 zone if momentum is to shift back to the upside.
AUDUSD
AUDUSD is within reach of the old 1.0760 resistance area. I have an old rule of thumb that says resistance and support are far less reliable on the second test, so positive US data could see the pair squirt higher. The Aussie is in a bubble phase and as long as global risk markets don’t shift back onto a more negative footing, the currency can go much higher from here even if in the long run these levels prove unsustainable. The pair retains its structural upward bias unless the 200-day moving average (rather far away in the 1.0400 area) is taken out.
USDJPY
USDJPY is the wild card as we mention above. Technical analysis is futile when the question is whether the market decides to test the central bank’s resolve. I would suggest that resolve is rather strong and that the pair won’t be allowed to push much lower before the MoF/BoJ acts. I would also that “here be dragons” for traders, even in other crosses as any intervention will inevitably spill over into other crosses. One interesting scenario – USDJPY rises of its own accord as US data proves very positive and the JPY suffers relatively speaking as bond markets sell off.
