Trichet Off To Brussels & Markets In A 'Wait & See' Pattern

News and Events:

Markets are still in a hold / consolidation pattern before 1st tier economic data starting Wednesday. However, we are seeing signs of EUR contrarians stepping in and trading on the long side. Markets and media have been lightning fast in jumping on the EU collapse bandwagon and there is speculation that the pair has moved too fast. While risk appetite remains fragile, the EURUSD move above 1.3770 will put additional pressure on shorts and should amplify the rally. Markets quickly shifted from its bearish tone brought about by speculation that fed Chairman Bernanke would announce liquidity tightening efforts, when he testifies in the House tomorrow. The AUDUSD had slipped to 0.8617 while USDJPY dropped to 89.17 just short of daily cloud support, as China press denied the much celebrated Australia-China coal deal reported yesterday. However, a risk-on tone spread midday as news that ECB's Trichet would prematurely leave a meeting of central bankers in Sydney in order to attend a European Council informal meeting scheduled for Thursday in Brussels. The EURUSD got a noticeable boost as rumors spread that Greece was going to get an ear full and prospect of tangible relief to the current situation. Markets have been concerned by the lack of credible discussion around a very serious problem. And, as we discussed yesterday, should the global recovery (led by China and US) stall, the probability that troubled EU nations economic forecasts would be achievable, decreases significantly. Yet news that Trichet was heading to Brussels was really the first sign that the EU has acknowledged that fuzzy math and wishes will not make the problem go away. The ECB will be conscious to stay out of the soon-to-become highly political debate (amplified by tomorrow Greek strike) and be seen as a pure mechanism for price stability. So while we don't expect any sustained rally in the EUR until there is some resolution to sovereign debt concerns, we could see EUR gain in a short squeeze and dire predictions fail to materialize. Clearly overshadowed by the Trichet news, in the UK the BRC reported that retail sales values fell by -0.7%, which was the worst print in 15 years. While bad weather created some distortion, it does highlight the fact that the UK economy is still fragile and should weigh on the GBP ahead of tomorrow's critical Inflation Report (which could accelerate the downside). In the short term, looking at EURGBP could be a decent long trade on a risk to reward basis, as today's move above 0.8800 opens up 0.8940. The calendar is light, with US Wholesale Inventories the main event. While we beleive the USD will remain supported due to Eurozone sovereign risks, we are expecting, in the ultra near term, the USD to unwind slightly from its massively overbought levels.

Today Key Issues:

• 09:30 GBP Trade balance, £ bn Dec -6.7 exp
• 15:00 USD Wholesale inventories, % m/m Dec - 0.5 exp, 1.5 prior
• 16:00 MXN CPI inflation (% m/m) Jan 1.01 exp
• 23:50 JPY Core machinery orders, % m/m Dec 8.0 exp, -11.3 prior
• 23:50 JPY Corporate goods price index, % y/y Jan -2.3 exp, -3.9 prior

The Risk Today:

EurUsd The benign data calendar and lack of noteworthy news headlines yesterday ensured EURUSD has been able to gradually claw back some of its lost ground againt the USD, with a very short term uptrend off the 1.3586 lows dictating price action since the start of the week. At the time of writing we are about to test the 1.3748 major pivot level where decent selling interest is likely to materialize, but given where we are in the larger downtrend channel and the extent of the recent sell-off, it seems highly likely we trigger stops just beyond 1.3748 and get a quick short squeeze higher. At this stage, we could easily rally as far at 1.3900 and still be within the dominant downtrend channel, and given the speed of the descent there are very few areas of noteworthy supply on the radar between here and there. The 1.3855 level would be the main hurdle, and by Thursday, this would coincide with the upper bound of the major downtrend in play. Until that point, it seems worth a shot to try going long off this interim uptrend support (with tight stops), but as soon as we are withing sight of that major downtrend that would be our cue to start rebuilding shorts. The next downside targets eyed are the post-NFP lows of 1.3586, then 1.3510 (next vibration channel support), followed by 1.3484 (61.8% fib retracement of the 2009 rally).

GbpUsd As we highlighted yesterday, the 12 month uptrend support is gradually creeping into the GBPUSD picture, today coming in at 1.5520 and underpinned by the lower bound of the 1 month downtrend at 1.5510. The combination of bids ahead of these levels and significant selling interest at 1.5730 is likely to frame GBPUSD for the time being, so we look to remain nimble and wait for good entry/exit levels to play this range. We remain unbiased at this stage in terms of the medium term direction for GBPUSD, and instead wait for a break-out either way to dictate whether the 12 month uptrend or the 1 month downtrend will prevail. If the uptrend wins out, expect stubborn bears to come back into the market ahead of major resistance at 1.5833 and then the major supply area of 1.6080. Of course, a break of the 12 month uptrend would be extremely significant (we only need to refer to the break of EURUSD's 12 month uptrend last December for evidence of this) and really only the 1.5315 prior technical support and 23.6% fib retracement of the sell-off 2.1161-1.3507 would be expected to stall a major move lower.

UsdJpy USDJPY is still consolidating in a large symmetrical triangle formation after the knee-jerk risk aversion sell-off on Friday failed to break fresh lows beyond the 88.55 floor. Like EURUSD, USDJPY has found short term support from a new uptrend off last week's lows, a trendline that has held on 3 visits so far, and which has pushed us to test the top edge of the triangle once already today. Taken from the widest point of the triangle pattern, the target for a break-out on the topside is approximately 91.10, but there is likely to be plenty of areas of decent supply ahead of there. The prior downtrend vibration today comes in at 90.10, with the 38.2% Fib retracement of 84.83-93.77 just above at 90.35, and the upper bound of the major downtrend channel above at 90.70 will attract significant selling interest. For now, we look at this short term uptrend to attract intraday bids around 89.25, weak support expected at 88.25 (61.8% fib retracement), and major support below there at 88.00 (major trendline support).

UsdChf USDCHF looks to be breaching its 1 month uptrend around 1.0695, which if confirmed would look to visit the 1.0643 post-intervention highs and major pivot level. There is plenty of support on the downside if we do head lower; most notably the back side of the prior downtrend which now comes in at 1.0610 and is underpinned by the prior technical resistance at 1.0603 which now represents a decent area of support. Really, only a break below the major 1.0500 level would threaten our bullish bias from here, and instead we look for dips towards 1.0600 to buy and look for a move back up to 1.0800.

ACM FOREX

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