Closing in on US Election Day

Forex News and Events:

The combination of solid US data and deteriorating news flow out of Europe sent investors to seek safe-havens. However, the rapid appreciation of the USDPY indicates that the justification is not as clear as pundits would have to believe. One of the biggest rationalizations for the shift towards risk aversion has been suggested to be the US elections and potential effects on the “fiscal cliff”. Yet the rotation into USD has given this scenario a spin that would boggle the mind. Despite the negative news flow from Europe we doubt that there will be any significantly change. Greece will eventually get the cash from the Troika and Spain will eventually ask Brussels for a bailout (triggering the OMT). These events might take longer than originally anticipated but we suspect they will eventually occur. Given our base scenario we suspect that risk appetite will return this week. With the US elections just a day away, investors are not taking any chances. The most recent polls show President Barack Obama and Republican challenger Mitt Romney tied within the stand deviations error and the uncertainty prompting traders to hold their fire while they await clearer direction. EURUSD has been under selling pressure since the open. The pair opened at 1.2840 and immediately dropped to 1.2808 before grinding back to 1.2840. However the bulls could not hold the gain and the EURUSD is again threating the 1.2800 handle. There were a series of Europe negative reports that weighed on the EUR. Including news that Greek aid talks will last until the end of November, inching very close to the point when the nation runs out of money. In addition, the Greek government will present a new austerity package to parliament today, which should, if passed clear the way for the release of the Troikas aid. However, the erosion of the people's tolerance of deeper austerity has become evident and these new measures will surely kick-off further protests and strikes. U.S. 10-year Treasuries held steady while Brent inched up after a massive 2% collapse on Friday. The G20 meeting failed to generate any headlines and closed quietly. Perhaps the key take away was the forcefulness of Japan's Finance Minister Jojima who used the opportunity to reiterate that JPY strength was well out of line with fundamentals and would damage the domestic economy if not managed. In addition, BoJ Governor Shirakawa stated his opinion on political matters in the US saying that he expected US politicians to handle the “fiscal cliff” issue shortly after the US election. Post better-than-expected NFPs last week the USJPY broker barriers at 80.50 trading up to 80.67 but with weekly cloud cover ahead, the pair could not hold gains and we traded down to 80.29 in Asia. AUDUSD continued to feel selling pressure as demand for commodities wane and yield seekers take a back seat to risk aversion. Data reported from Australia showed Sept trade deficit A$1.456 bln, vs. A$1.647 bln exports while retail sales rose 0.5% m/m, vs. -0.2% exp. The narrower than expected trade deficits, stronger retail sales and local newspaper articles that indicated that Tuesday RBA expected decision to cut rates was a close call, did monetarily give the AUD strength. We would expect trading to be subdued today (ie. trade the range) with the US election and three major central banks (RBA, ECB and BoE) all on the docket.

Today's Key Issues (time in GMT):

2012-11-05T09:28:00 GBP Service PMI index
2012-11-05T15:00:00 USD ISM Non-Manufacturing Index Oct exp 54.7, prior 55.1
2012-11-05T15:00:00 USD Employment trend Oct 107.9 prior

The Risk Today:

EURUSD EURUSD’s tough support zone around 1.2800 / 1.2830 was obliterated yesterday, as demand disappeared and the pair collapsed on the back of stronger NFP and worries over Europe. We have now hit a low of 1.2777 and look to be negating the range which started in mid-September. Critical support is now at 1.2754 which if breaks could trigger a broader move to 1.2552. But this week trading is all about event risk, so stay vigilant Should we manage to break lower, next supports are eyed 1.2754 (10th & 11th Sept low), 1.2507 (100d MA), 1.2463 (31st Aug low), and 1.2386 (14th & 17th Aug high). The first level of resistance are located at 1.2951 (2nd Nov high), 1.3026 (25th Oct high), 1.3138 (17th Oct high), 1.3172 (17th Sept high) and 1.3283 (1st May high).

GBPUSD GBPUSD sold off to 1.6080 lows overnight, on a combination of broad-based USD-weakness and Shooting Star pattern indicates a correction towards 1.6000. However, a broad uptrend remains in play, so we expect the bargain hunters to step in soon and start pushing the price higher. Above 1.6067, watch for next resistance to come into play at 1.6079 (downtrend top), 1.6143 (20th April & 11th May high), 1.6236 (30th April high) and 1.6454 (29th Aug ’11 top). The support zone is located at 1.6008 (29th Oct low), 1.5979 (9th Oct low), 1.5910 /40 (downtrend & 23rd Aug high), 1.5745/53 (30th July pivot & 100d MA), 1.5665 (uptrend channel floor), 1.5564 (8th Aug low), 1.5656 (intraday low),1.5458 (26th July low), 1.5405 (8th June low), 1.5390 (6th June low), then 1.5266 (13th Jan low).

USDJPY USDJPY has rallied to 80.56 due to the stronger NFP and broader heavy migration into USD. The lack of correction (in spite of pullback in stock and US trsy) and development of uptrend channel reasserts our bullish bias in the short- to medium- term. Above us, resistance remains at 80.62 (2nd May high), 81.60 (failed corrective rally), 82.56 (6th April high), 82.99 (3rd April high), trigger resistance at 83.40. On the downside, some support is eyed at 79.14/20 (21d MA& 19th Oct low), 77.94 (Symmetrical triangle floor), 77.12 (13th Feb low) then 76.03 (3rd & 17th Jan low).

USDCHF USDCHF has rallied sharply in the last few sessions, hitting fresh highs of 0.9445 this morning and reasserting the bullish bias in the short- to medium- term. Momentum indications are all providing bullish signals indicating that the reversal off 0.9215 was more then a mere correction. Consolidation of recovery gains above the 0.9495 (200d MA) would indicate a move to 0.9610. The next levels of resistance are located at 0.9470 (11th Sept pivot high), 0.9580 (7th Sept high), 0.9610 / 20 (26th Aug high), 0.9810 (10th Aug high & uptrend channel), 0.9900 (2nd Aug high), and 1.0000 (psychological resistance). The first levels of support should be located at 0.9395 (200 d MA), 0.9270 (downtrend channel top), 0.9240 (19th Oct low), 0.9194 (7th & 11th May low) and 0.9300 (11th May high).