China's Comments Will Haunt Gold Buyers

Forex News and Events:

FX markets were nervously quiet in Asian session, just waiting for a directional catalysis. Initially, the deputy governor of the PBoC and the head of the SAFE, Yi Gang, at a press conference in Asia, provided some detailed and honest comments regarding China's foreign exchange and reserve policy. These comments reinforce remarks made on Friday from PBoC Gov. Zhou and Prime Minister Wen. On the subject of FX reserve management, he stated that reserves were appropriately diversified in USD, EUR, JPY and emerging currencies taking in account critical factors, such as foreign investment, external debt and payments and trade. On CNY exchange rate, he reiterated PBoC Gov. Zhou and Prime Minister Wen comments, that a “managed float” regime was a long term goal and the approach would be steady and cautious. We would like to point out that while there has always been a plethora of “sound bites” surrounding the CNY, the comments are now coming from people in real positions to make changes. On the question of purchases of US Treasuries, he emphasized that China is a responsible investor and then went on to say that given the size China's foreign reserves, US Treasuries are logically a choice market for China. Perhaps most interestingly was Gang mentioning Gold purchases and the fact that official holdings of gold jumped from 400 tons to 1,054 tons. Yet still accounts for less than 2% of China's foreign reserves. He goes on to say that China will be careful in purchasing gold since any price increase would hurt domestic consumers and that over the last 30 year gold didn't provide a solid rate of return. We would suspect that after the markets have time to digest China's gold remarks we see a market selloff in the precious metal. The comments were mildly supportive of risk correlated trades and support our view that a return to a managed float in the CNY will happened this year. In early European trading the market was hit with comments from Fitch rating agency which shook investor's confidence. First was the news that Fitch maintains a negative outlook on Portugal and might be downgraded should fiscal consolidation be insignificant. Then Fitch stated that UK sovereign credit profile had deteriorated ´Pretty Sharply´. Risk appetite mechanically rushing toward the exits and EURUSD crashed through 1.3600 psychological support. With an empty calendar ahead of us we suspect markets will be stuck in a range bound day.

Today's Key Issues (time in GMT):

07:45 CHF Jan trade balance, E4.0 bln deficit exp; last E4.26 bln deficit.
08:15 GBP Feb CPI, +0.2% m/m, +1.0% y/y exp; last -0.1%,
09:30 GBP Jan trade balance, GBP7.0 bln deficit exp; last GBP7.27 bln deficit.
09:30 USD Jan trade - non-EU, GBP3.4 bln deficit exp; last GBP3.55 bln deficit.
12:30 NFIB small business optimism index prior 89.3
14:30 JPY Chicago Fed President Evans (FOMC non-voter) speaks
23:50 Core machinery orders, % m/m -1.5 exp, -2.1 prior

The Risk Today:

EurUsd It's now been nearly three weeks that we have been locked in this well-trodden range for EURUSD, and yesterday morning's re-test of the old 1.3700 resistance failed once more as bulls capitulated under comments from Greece's Papandreou. However before we simply regurgitate the same old anticipated levels of supply and demand yet again, it's worth highlighting a new development on the hourly chart; namely a potential uptrend channel forming within the range (and broader downtrend). If this is indeed a new uptrend, then the lower bound support can be expected around 1.3580 –an area that has already acted as a pivot point during a number of prior oscillations within the current range. Ultimately we still expect this sideways tussle to be won by the bulls, but to do that, we must first overcome 1.3700 and 1.3735 (false breakout high); even then we see a number of potent resistance levels above. 1.3800 is the long touted 50.0% fibonacci retracement of 1.2457-1.5145, with the significant downtrend resistance seen at 1.3840 currently. Just behind there lies 1.3850 major pivot level from the way down, followed by the 50-day moving average which has finally caught up some ground at 1.3949

GbpUsd A great big head-fake from GBPUSD yesterday, as the breach of the 6 week downtrend channel at 1.5160 was completely reversed in the afternoon session, and even went so far as breaching the lower bound of the nascent uptrend. We still believe there are decent arguments for a bullish correction from here however; firstly, the hammer candlestick on the weekly chart which is suggestive of a reversal of the prevailing downtrend, secondly our 1 hour stochastic oscillator has crossed upwards from deeply oversold territory, and thirdly the decent buying interest around 1.4975 looks to be providing a near-term floor to sell-offs. Nevertheless, expect resistance levels above here to come in the form of 1.5100 downtrend channel resistance, the back side of the former uptrend at 1.5125, then the psychologically important 1.5200 level where we failed yesterday.

UsdJpy USDJPY bulls will be feeling frustrated by the price action yesterday, as the post-payroll surging rally quickly ran out of steam against the back side of the former uptrend channel around 90.75, and since that failure the pair has traded limply back below both the 50-day and 100-day moving averages (90.59 and 90.17 respectively). The pair now rests on prior support at 89.95, but should the buying interest wane we can expect decent bids to come in around 89.50 –the former ceiling of the trading range. Really, for a continuation of the bullish move we need to see the pair overcome that sticky 90.50-80 zone, but as discussed yesterday, if the uptrend is re-broken the skies above there are clear for a trip to 91.90 (200-day moving average) and 92.15 resistance beyond.

UsdChf Not much to add on the technical picture for USDCHF today as the battle between speculators and the SNB keeps EURCHF firmly pinned down in its narrow channel (1.4620-1.4640), and EURUSD continues playing into its own ranges. The support levels on the downside are still seen at 1.0717 (23.6% Fibonacci retracement of 1.0131-1.0898) and 1.0690-1.0700 zone coinciding with prior support and minor uptrend vibration. Within the range we expect some offers around 1.0800 and 1.0830, then of course, the range highs just ahead of 1.0900.

AC Markets
http://www.ac-markets.com

Disclaimer: This report has been prepared by AC Markets (thereof ACM) and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Salesperson or Traders of ACM at any given time. ACM is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.