Markets Shake-Off Negative News

News and Events:

EURUSD was able to shake off yesterday's Moody downgrade of Ireland and the speculation that a German Bank would fail the stress test to rally to 1.3028. The Hungarian decision to halt talks with the IMF/EU remains risk negative but was not able to weigh on the Euro. While none of the events are on-their-own monumental or unexpected for the Euro, we still believe that the there is a growing fundamental argument that the recent EUR run is losing momentum and should reverse in the near-term.

The key catalyst should be the inadequacy of the bank stress test due to be released Friday. We doubt that this report will provide the clarity investors need and participants will potentially find significant flaws in the methodology. Even with EU officials throwing a few well-publicized 'sick' banks under-the-bus such as German lender Hypo Real Estate Holding AG, we suspect the market will remain nervous.

The path to the next resistance at 1.3093 looks heavily congested which should provide the barrier we are looking for.

In Australia the published RBA minutes were slightly less hawkish than the markets had anticipating prompting traders to cut their long AUDUSD spec positions. The language was broadly in line with the policy statement released two weeks ago but highlighted two core issues that is on the market's mind.

The RBA stated that the 'critical medium-term question was the extent to which economies in Asia could continue to grow strongly in the face of what could be an extended period of subdued conditions in the major North Atlantic economies' and discussing the EU stress test stated 'it's critical that the stress tests be regarded as credible and that plans be in place to deal with any capital shortfalls identified.' Questions we too would like to see addressed and convincingly answered. Given the overall tone we suspect that the RBA will opt to pause in August but will raise rates another 25 basis points in September.

As for the AUD prospects, clearly there has been little decoupling from risk which will be the key determinate for the currency's movement.

Today, markets are expecting that the Bank of Canada will continue to tighten monetary policy when they meet on Tuesday, with the median forecast for a hike of 25 bps to 0.75%. After holding interests rates at 0.25% for over a year, the central bank finally submitted to restarting monetary tightening at the last meeting and since then data from Canada has been rather encouraging, including a surprisingly strong June employment report (+93.2K) that has brought the unemployment rate back below 8% to 7.9%. There is still a small probability that the BoC might choose to wait on raising rates till after the EU banks stress tests, however we now believe this is a long shot. A lack of scheduled economic data and events will place the short term focus on GS and BONY earning releases.

Today Key Issues:

• 06:00 EUR GER PPI
• 06:15 CHF Trade
• 08:00 EUR ITA Ind orders
• 08:00 EUR ITA Ind sales
• 08:30 GBP Money supply
• 08:30 GBP PS new brwing
• 08:30 GBP PSNCR
• 09:00 EUR ITA Trade non-EU
• 10:00 GBP CBI orders -23 exp
• 12:30 USD Housing starts, thous saar Jun 580 exp, 593 prior
• 12:30 USD Building permits, thous saar 570 exp, 574 prior
• 13:30 CAD Interest rate announcement, % .75 exp vs. 50 prior
• 14:00 USD Fed Governor Tarullo (FOMC voter) testifies on financial regulation

The Risk Today:

EurUsd The rally continues for EURUSD, with today's surge clocking up a high of 1.3028. Over the last few sessions our focus has predominantly been on the hourly chart (and the 4-week uptrend channel that has guided up from 1.2150), but today it is worth taking a look at the bigger picture revealed by the daily chart as it appears we may be approaching a significant juncture where the bears may start to exert their force once more. Since touching the lows of 1.1876 back on 7 Jun, EURUSD has taken a mere 6 weeks to rally over 9.5% (!), but a formidable resistance zone is now on the horizon which would prompt us to start getting short and selling on any rallies towards 1.3050 (we may not even get to see that level though so our preference is to scale into the position gradually above 1.3000). For one thing, the 4-week uptrend channel resistance we've been monitoring on the hourly chart now comes in at 1.3080, and is backed up by a significant former high at 1.3095 (seen on 10 May). The added information the daily chart can give us is that at 1.3125 there is also the 38.2% fibonacci retracement of the entire sell-off from 1.5145 to 1.1876 which should present a major hurdle for this relief rally to overcome. We still expect some buyers to lie around 1.2905 (100-day moving average), 1.2871 (yesterday's low), 1.2780 (a former pivot), and 1.2683 (last Wednesday's low).

GbpUsd A 1-week downtrend channel appears to be the main driver of GBPUSD so far this week, but the pair still hasn't posed a serious threat to the significant support down at 1.5230. Indeed, as mentioned yesterday, we have been using that 1.5230 level as a pivot to buy off and after picking up some cheap GBPUSD late yesterday afternoon we have managed to scalp 50-60 pips of upside this morning. With the 1-week downtrend now imposing its effect even lower down today (trendline resistance 1.5305) we won't attempt to go long again just yet –at least until the price action is able negate that downtrend and make the risk-reward profile more attractive. Once the bulls can break above that downtrend we'd be more confident of a continued rally to targets around 1.5350 (yesterday's high), 1.5472 (last Thursday's high), and 1.5525 (15 Apr high). Should the downtrend actually outlast the support at 1.5230, we would be willing to flip to a shortbias andexpect next supports at the 1.5080 former neckline, 100-day moving average 1.4989, then the 12 Jul low 1.4949.

UsdJpy USDJPY has managed to consolidate for the last 24 hours despite the recent break of major support at 86.97 (1 Jul low) which has opened up the possibility of another plunge back towards the November 2009 low of 84.83. The potential bearish pennant we highlighted on the hourly chart yesterday failed to activate (so no position entered), and indeed the move back above 86.97 has negated the possibility of that pattern playing out later on. Instead, we now see the possibility of an ascending triangle in play which would become active on a break above 87.22 and which would look to target 88.15. We are slightly wary that resistance may come into play around 88.00 so will have to use discretion on perhaps taking profit a little earlier than the pattern's defined target. Further supply remains at 89.15 (12 Jul high) and 89.50 (28-29 Jun high).

UsdChf The 3-week downtrend channel continues to direct price action in the short term, but thus far the bears have not managed to muster a decent attempt at breaking below 1.0400 despite a couple of attempts late last week. We think that current levels (1.0530) actually look pretty attractive for short entry given the previous price action around 1.0550-60 is now bolstered by downtrend resistance at 1.0535. We'd be satisfied using 1.0580 as our stop, and set a first target on the downside of 1.0450 (yesterday's low), with 1.0400 (double bottom seen last week) as a possible extended target. Some bulls may favour buying on the dips towards, 1.0400, but should they be wrong the landscape below 1.0400 is only dotted with stale support levels at 1.0365, 1.0315 (trendline support), then 1.0230 –could be a nasty plunge with few buyers to slow the descent.