Squaring and paring of positions ahead of ECB risk event

The stumble and tumble continues in expectation of yet another “risk event”, this time of course with the market lying in wait of tomorrow’s European Central Bank meeting.

News overnight was generally of a softer tone and felt most again in the land of Oz (Australia), where GDP prints came in softer than expected and Chinese HSBC data was equally mild (to say the least). Net/net we saw the AUDUSD continue its path lower not surprisingly but as highlighted in this piece yesterday the rot seems to have come to a halt (temporary or otherwise) this morning in and around that 1.0160/80 zone. Whether there is a small lift/bounce out of here remains to be seen on the day as the USD in general adds to its recent upside momentum.

This morning’s raft of PMI data was in general of a softer tone and now has pundits and market commentators debating whether Europe is once again slipping into recession. The only question I have is whether or not Europe was actually ever out of recession into which it could slip again...

In terms of price action, it seems the market is currently paring and squaring positions ahead of tomorrow and as I may (or may not) have mentioned, I think tomorrow will bear a great resemblance to the meeting last month wherein, we’ll take out whatever short term/intraday stops might be resting around as soon as Super Mario starts speaking and then when he reveals that he in fact has nothing to reveal there will be a significant slump and washout of the longs (model funds included) that have amassed in the last two or so weeks. Once we have this, we settle most likely in the 1.2380/1.2430 area with a small tolerance either side, before the market starts to look at Nonfarm Payrolls on Friday and of course the German court ruling on the European Stability Mechanism on September 12. All in all I would expect a higher path for the EURUSD in this instance as hope overrides rationality and a poor NFP print sees the USD sold in expectation of QE3 next week and a positive German outcome. The waiting game for “the risk event beyond the risk event” theme continues.

The Cable, despite a dodgy release/leak yesterday afternoon of Service PMI data (originally due this morning) holds nicely for the time being, while the downward momentum in the EURGBP is certainly helping maintain the underlying bid tone there. I still like the Cable for a buy on dips into the 1.5790/1.5800 area with stop going in under and joining the plethora already there at 1.5745/40. The topside I look for 1.5900/15 to cap again.

One other thing I think worth flagging is that I have a niggling feeling Q4 this year will rapidly begin to resemble Q4 of last year. What I mean is that the “risk on/off” dynamic will begin to fail, correlations will begin to decouple and it will become (sadly not for long enough I feel) a situation of every currency (man) for itself. Fundamentals should start to play a more important role and thus (fingers crossed) relative value plays might once again begin to function... Just flagging folks, certainly not holding my breath though...

As always, helmets firmly attached and good luck.