by: Mark De La Paz
Market Review
Across-the-board dollar dumping continues on two themes, the idea that equity markets are not done with their 3-month rally following a quick turn-around of last weeks pullback, and the FOMC’s latest (April 28/29) minutes where the Fed seems to have considered further monetization of debt.
In the equity front after last weeks pullback in the indices we find ourselves once again poised to see new highs after Tuesday’s sharp bounce. The thinking here is that with financial markets typically front running the real economy by 6 to 12 months we may have seen a bottom and are turning around instead of being in a bear market rally. Consequently, low yielders, ie dollar and yen, are being dump fitting into the role of funding currencies.
Concern over the Fed minutes revolved around the question of further expanding the current $1.75 trillion asset purchase program to spur growth in the economy. While in the end preferring to adopt a wait and see stance the fact that this was under consideration underscores the idea of lingering downside risks to the economy and the policy preference for printing more money that would in the long-run degrade the value of the currency.
While not eliciting much of a response from the market Eurozone numbers continue to underscore how policy makers may have significantly underestimated the severity of economic conditions. This as German PPI figures for April came in -1.4% month-on-month well below the -0.2% consensus and an annualized -2.7% to suggest there could be further scope for policy easing and expanding the money base in the Eurozone should region wide numbers follow the German example.
From Canada economic numbers seems to have been shrugged off, given the general theme of dollar dumping allowing the loonie to gain ground over the greenback. Still we should point out that loonie gains are to be viewed as selective as a -0.1% month-on-month headline read for April CPI and a -1.1% leading indicator puts the Canadian economy in similar straights as that of the US.
In Radar Screens
Thursday will be a long day for the markets with second liner type data coming out from all over but very few in the way of hard hitters. Of the latter attention should be focused on April Retail Sales numbers out of the UK where consensus forecasts points to an 0.5% read month-on-month, a figure that should provide further upside for the rallying Cable.
Trading Filter
Despite the mixed close, proximity to bear rally highs among the equities suggests this should remain as the key barometer of risk taking appetite. With the DAX index already seeing new highs we look forward to the rest of the key European and US indices showing similar moves going into Thursday trade with new highs among them suggesting we stick to and be ambitious about Euro, Cable, Aussy and Loonie objectives.
Technically in a day of trading breakouts of particular interest for the markets will be our EURGBP cross, while previously a dull pair. Action on this over the last six months have seen extreme volatility and we find ourselves again at a possible watershed event. In daily charts EURGBP is poised for a sub 200day ma close taking with it the 50 Fib retracement level for the 10/20/08 to 12/30/08 rally paving the way for a possible return to the ranges of the first half of 2008 in the coming weeks. And further underpinning Cable against the other currencies.
EURUSD
The breakout from our descending wedge continues managing to move beyond the 38.2 Fib level for the sell-off from historic highs. At this point path of least resistance going forward should be for the upside with an immediate swing objective at 1.3965 before the next Fib level at 1.4182. Intraday signals however are mixed the loss of momentum suggesting the need for a pullback particularly given the long wicks we see in the 4H candles.
Preferred scenario: Bottom picking around 1.3693 the 23.6 Fib of the current rally from 5/07 with immediate objective calling for a retest of the 1.3829 highs before 1.3965 with stops under 1.3670.
Alternative view: Buy stops at the break of 1.3829 with immediate objective of 1.3965, stops under 1.3745 (38.2 Fib of the 7/15/08 selloff).
GBPUSD
Cable remains our preferred currency for a position trade as we keep a close eye on the EURGBP cross. A convincing break of the floor on that pair will likely stall the EURUSD rally and allow GBPUSD itself to move quickly towards the next key threshold 38.2 Fib at 1.6413. Currently we are trying to push through a previous high at 1.5738/40 our next resistance likely to be the psychological 1.6000. At the moment intraday charts are presenting a confluence of shorts suggesting a pullback may be imminent with key pullback points for the weeks rally at 1.5532 (38.2 Fib and congestion resistance), minor pullback points may also be seen out of 1.5630 23.6 Fib for the weeks rally.
Preferred scenario: Bottom picking around fib pullback points of 1.5630 (23.6 Fib) and / or 1.5532 (38.2 Fib) with tight stops under these. Immediate objective for such a move will be retest of highs at 1.5789.
Alternative view: Buy stops at the break of 1.5789 highs for a run to the psychological 1.6000.
