Intraday Market Outlook for Day Traders

EUR/USD
The pair is still consolidating its higher levels in the European morning, currently trading quietly back a little at 1.2890. We do not expect much trading activity today but see a selling tone coming up, leading to market levels around 1.2820.

GBP/USD
A sudden sell off in the present European morning brought cable to levels 100 pips lower to now 1.5385. We reckon with a consolidation phase now, with not much more downside risk, and see a trading band between 1.5360 and 1.5420.

USD/CHF
Acting only a little stronger against the Swiss franc, the dollar is currently priced at 1.0147. We do not expect much action in this market today and cannot see any specific direction for now.

USD/JPY
Again the dollar was weaker against the yen at the start of the week in Asian trading today and is now about to find a support near 84.00 in the European morning hours. Currently at 84.20, we anticipate some recovery for today, but not above 84.45.

Energy and agricultural goes their separate ways

A deteriorating outlook for world growth following US and Chinese data sent commodities back on the slide. Agflation is still a risk following the surge in the price of grains and soft commodities.

The major catalyst for the market last week was the US Federal reserve lowering their economic outlook and Chinese industrial output slowing down at a time where inflation is rising. In addition the US saw its trade deficit widening as imports from China jumped leading to renewed worries about tensions between the two big economies.

Investors continued to reduce risk with the main beneficiaries being secure government bonds with the yield on two year US government notes dropping below 0.5 percent. Not all bond news was supportive as the indebtedness of some European states where highlighted as spreads over secure German bonds began to rise again.

On currency markets the dollar regained its footing versus the Euro rising by 4.5 percent to 1.2750. Strongest of them all however was the Japanese Yen which rose to a fifteen year high of Y 84.72 versus the dollar.
Corporate Japan is operating on the assumption of a USDJPY above 90 for the next six month so the current levels hurts and some kind of verbal or actual intervention from the Bank of Japan can be expected should this strength continue.

The risk aversion lead to the usual reaction in commodities with the energy and industrial metals losing support while gold got the catalyst to move back to the top of the recent range. The Reuters Jefferies CRB index finished the week 2.2 percent lower on the week with the major movers seen above.

Crude oil crashed back into its 70 to 80 dollar range having failed to gain any upside momentum from the positive break out the previous week. With the two largest consumers of oil both slowing at the same time the upside seems limited and both OPEC and the International Energy Agency have been voicing their concerns about global oil demand growth.

Although they both forecast a growth in demand for 2010 between 1 million and 1.8 million barrels per day the market paid most attention to the statement that concerns about a slowdown in global activity in the second half posed ”a significant downward risk to the forecast”.

WTI Crude oil for September delivery lost more than seven percent on the week with near-term support showing at 73.40 followed by 71.50. Resistance can be found at 80 before 83.40.

Global wheat markets continued to gyrate with the ongoing drought problem in Russian which has now affected an area the size of Portugal and has lead to an export ban lasting until December. The USDA estimates that Russia will produce 25 to 30 percent less this year and the outlook for 2010 is still very uncertain as farmers will sow only 12 million hectares of winter grains compared to 18.5 million in the previous two years.

US farmers will reap the benefit from the Russian export ban and reduced production as export is already surging expecting to reach 33 million tons this crop year from 24 million the previous. Adding to this export surge is the catastrophic flooding in Pakistan, the second largest grower in South Asia, which may have damaged 500,000 tons of wheat and disrupting the winter crop planting which is due to begin in October.

The speculative long position of wheat on CBOT rose to 27,000 lots as of last Tuesday almost equaling the levels seen during the most recent surge in 2008 where the price of wheat reached 13.3 dollar per bushel compared to the current price of just 7.5. It shows how much of the initial rally was caused by short covering after hedge funds and others had been holding a short position during the past 18 months.

Speculative net position in lots on CBOT:

Even more pronounced is the rise of interest in buying corn with many seeing it outperforming wheat during the months ahead.

Gold once again benefitted from “risk off” breaking back above the July high at 1,218 as investors returned to the metal following the recent correction. Investors in gold ETFs held their nerve during the correction with only a small reduction in the total invested.

Continued stock market weakness is required in order to see a new attempt in reaching the record high at 1,265 as the dollar recovery will drag the price in the opposite direction. Technically a move back above 1,224.5, being tested at the time of writing, should open up for an attempt on 1,265 followed by 1,276 while support comes in at 1,190 followed by 1,157.

Weekly Commodity Update

The overall sentiment for this week led most commodities into positive territory. The rally in equities, and selloff in government bonds, helped breathe a sigh of relief for markets in general, which appeared to be over stretched and instilled with some fear. The market appears to have factored in the positive Non-farm payrolls out of the US, however also seems to continuing the positive momentum based on the positive data.

All in all, commodities have been very receptive to the positive data, posting gains in Crude Oil and the grains.
However, the previous negative sentiment has put some pressure on gold prices and has led to some profit taking. The long term daily trend, set back from July, will become significant at the 1.232 USD price level. As uncertainty leaves the market and we enter into a risk-on type scenario, it is not inconceivable that gold could come under some pressure, albeit it stemmed from positive fundamental data.

Crude oil fought off the weekly lows on the longer term trend to post a positive week. This comes on the back of yet another build in the weekly inventory data. The stock levels can typically prove to be poor short term indicators for price direction, which can only be confirmed by this week’s price action. The long term remains intact, with the positive equities markets and economic sentiment once again fueling expected future demand.
The unfortunate new fire at a platform in the Gulf of Mexico also provided support for oil prices, adding to the uncertainty to drilling and production practices being safe enough to handle high levels of capacity utilization.

The move away from the lows beneath USD 71.00 is a sign of inherent strength for Crude Oil. And it would appear that the next level for resistance should be when the market tests the longer term trend indication using the 50 day moving average, which comes into play at USD 76.90. A break of this resistance level set up for a move towards USD 79.20 in the short to medium term. USD 71.00 remains to be major support.

Much attention has been diverted from the popular gold and oil commodities, with stories developing around a global food shortage. The Russian export ban on wheat over the next year, has put a positive spin to an already bullish market.

The ban on wheat export has increased the ton-mile demand for Panamax dry bulk vessels (mostly used for grains and coal) contributing to the hike in the average daily rate from its recent low below 16000 in mid-July to above 25.000 today. The price is still expected to rise with the fourth quarter futures contract currently trading around 28.000.

Especially corn prices have shot into the air, breaking through key resistance levels at 414.00. From here it appears to have been one-way traffic, whilst the rest of the world appears to be adjusting to where there future purchases will be coming from.

USD/CAD. Ranging from 1.00 to 1.10

USD/CAD (1.0550) is up overnight and appears to have taken up residence in a broad 1.00 to 1.10 range.

Technicals:

• Trend: Daily lower; weekly lower.

• Overbought/Oversold (stochastics): Daily overbought; weekly neutral.

• Support/Resistance Levels: Resistance lies at 1.0673 (Aug31 high), 1.0680 (Jun high), 1.0853 (May25 high) and 1.1725 (Jul’09 high). Support lies at 1.0108 (Aug5 low), 0.9931 (Apr21 low), 0.9825 (May’08 low), 0.9712 (Feb’08 low), 0.9058 (Nov’07 low).

Positioning:

• The risk reversal (3m, 25delta) rose overnight along with spot. It looks as if it might be bottoming in the bottom half of the six-month range, which would be consistent with a bottoming in spot.

• Implied Vol (3m) rose overnight and is continuing the uptrend in place throughout Aug.

Cross-asset valuation: In terms of other assets correlating with USD/CAD, watch the SPX (negative), CRB (negative), crude oil (negative), and the 2yr spread (negative).

AUD/USD. Consolidating Wednesday’s rally

AUD/USD (0.9100) is down modestly overnight, consolidating Wednesday’s rally. Something of a wedge formation forming as spot has traded higher lows since May but lower highs since April.

Technicals:

• Trend: Daily higher; Weekly higher.

• Overbought/Oversold (stochastics): Daily neutral; Weekly neutral.

• Support/Resistance: Technical support lies at 0.8771 (Aug25 low), 0.8634 (Jul19 low), 0.8316 (Jul1 low), 0.8067 (May25 low) and 0.7704 (Jul’09 low). Resistance for AUD/USD exists at 0.9117 (Sep 1&2 high), 0.9222 (Aug6 high), 0.9389 (2010 high), 0.9406 (2009 high), and 0.9850 (2008 high).

Positioning:

• The risk reversal (3m, 25delta) rose overnight despite the correction in spot. The reversal lies in the middle of the six-month range, providing little information as to future price action.

• Implied Vol (3m) rose overnight, and it continues to consolidate in the lower 1/3 of its six-month range.

Cross-asset valuations: AUD/USD has correlated most strongly with equities (S&P500, positive), commodities (CRB, positive) and the DXY (negative.)

USD/JPY. Sitting on 84

USD/JPY (84.46) is down overnight and consolidating just above the low of August.

Technicals:

• Trend: Daily higher; Weekly lower.

• Overbought/Oversold (stochastics): Daily oversold; Weekly oversold.

• Support/Resistance Levels: Support lies at 83.60 (Aug24 low) and 79.75 (Apr 1995 low). Resistance lies at 88.12 (Jul28), 89.16 (Jul12 high), 92.89 (Jun4 high) and 94.99 (May4,5 high).

Positioning:

• The risk reversal (3m, 25delta) ticked lower overnight. The skew is still in favor of USD/JPY downside, but is consolidating in neutral territory relative to its range the past six months, thus providing little guidance as to the direction of spot.

• Implied vol (3m): fell overnight but is trending higher from deep in the lower half of its 6-month range.

Cross-asset valuation: The correlations of USD/JPY with the US 10yr yield (positive) the US-JGB 10yr spread (positive) and the S&P500 (positive) are significant.

USD/CHF. Consolidating

USD/CHF (1.0147) is up slightly overnight on positive general market sentiment.

Technicals:

• Trend: daily lower; weekly lower.

• Overbought/Oversold (stochastics): Daily oversold; Weekly oversold.

• Support/Resistance levels: Resistance lies at 1.0641 (Jul27 high), 1.0676 (Jul12 high) and 1.1742 (Apr’09 high), while support lies at 1.0065 (Sep1 low) and 0.9918 (Dec low).

Positioning:

• The risk reversal (3m, 25delta) bounced overnight with the rise in spot. The skew is extreme, suggesting potential for a rally in spot.

• Implied Vol (3mo) slipped overnight from a high since Jun. Vol remains in the middle of its six-month range.

Cross-asset valuation: USD/CHF has correlated mostly strongly during the past 60 days with EUR/USD (negative) and the USD index (positive).

GBP/USD. Sitting below 1.55

Cable (1.5408) rose slightly overnight, with traders unwilling to make bets ahead of non-farms.

Technicals:

• Trend: Daily lower; Weekly higher.

• Overbought/Oversold (stochastics): Daily oversold; Weekly overbought.

• Support/Resistance Levels: Resistance lies at 1.5999 (Aug6 high), 1.6284 (Jan22 high), 1.6458 (Jan19 high), 1.6479 (61.8% retracement of Nov to Dec decline), 1.6722 (Dec 3 high), 1.6878 (Nov16 high) and 1.7043 (Aug high). Support lies at 1.5327 (Aug31 low), 1.50 (psychological), 1.4949 (Jun12 low), 1.4239 (May19 low) and 1.3503 (Jan’09 low).

Positioning:

• The risk reversal (3m, 25delta) ticked higher overnight with the move in spot. The recent retreat from the upper end of its six-month range is consistent with recent decline in GBP/USD.

• Implied Vol (3mo) fell overnight, and it is consolidating in the lower third of its six-month range

Cross-asset valuation: The significant correlates over the past two months for GBP/USD have been the DXY (negative) and EUR/USD (positive).

EUR/USD. Uncertainty ahead of non-farms

EUR/USD (1.2838) is up slightly overnight and consolidating the sharp rally Wednesday. There is caution ahead of the non-farm payrolls report.

Technicals:

• Trend: Daily higher; Weekly higher.

• Overbought/Oversold (stochastics): Daily oversold; Weekly neutral.

• Support / Resistance Levels: Support for EUR/USD lies at 1.2588 (Aug24 low), 1.2152 (Jun 29 low), 1.1877 (Jun7 low), 1.1827 (Mar’06 low), and 1.1640 (Nov’05 low). Resistance lies at 1.2856 (Sep1 high), 1.3334 (Aug 6 high), 1.3692 (Apr12 high), 1.3818 (Mar17 high), 1.4026 (Feb3 high), 1.4194 (Jan25 high), 1.4579 (Jan13 high) and 1.4626 (Nov low).

Positioning:

• The risk reversal (3m, 25delta) rose overnight with the rise in spot. The reversal is in the middle of its six-month range, and it appears to be trading an uptrending channel, providing some support for the move higher in spot.

• Implied Vol (3m) fell overnight, and it is falling into the bottom-third of its six-month range.

Cross-asset valuation: The only significant correlation that EUR/USD has exhibited during the past 60 days is with the SPX (positive).

Political and Economic Developments

The European Central Bank extended its ‘emergency support’ operation to banks, rates at 1.00% for another year, the 17th consecutive month as global unemployment is estimated to have increased by 30 million since 2007. How long is an emergency and what about ‘new normal’? Looming government spending cuts in the UK, banks and building societies have had to write off 70% more consumer debt in Q2 compared to the previous one; credit cards £2.1B out of a total £3.47B, both new records. Not surprising then that lending criteria have tightened, net unsecured loans £173M in July versus closer to £2B in 2003-2005’s boom, 48% of credit card applications turned down last year. Net mortgage lending £86M in July, as low as it got in 2009 and well below 2007’s peak at £10.5B. Note that outstanding household debt at £1,456B, or £23,100 per person, is the highest among G7 countries. Lending to companies shrank again in July, the eleventh month in a row, as non-financial corporations paid back £2.0B cutting net debt by 3.1% Y/Y; some may be resorting to the capital markets and the lucky are hoarding cash. Irish PM Cowen says the immediate windup of Anglo Irish Bank could cost €70B.
Revised data show US households are saving a greater part of their disposable income, on average close to 6%, as they try to repair balance sheets, prospects uncertain as unemployment remains at 9.6%; record low mortgage rates are helping, 30-year fixed rate a record low 4.32%.