Forex Analysis

Currencies: CAD and JPY outperformed overnight, while the EUR underperformed the pack. JPY strength and EUR weakness both emanated from ongoing concerns about the European bank stress tests due this week. CAD strengthened in both Asian and European trading.

EUR/USD. Failing at 1.30

EUR/USD (1.2801) is down overnight, again mostly in European trading, and spot didn’t even both to test 1.30 after runs at the level in the three prior sessions. The EUR is being weighed by concerns about the coming bank stress tests.

Technicals:

• Trend: Daily lower; Weekly higher.

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

• Support / Resistance Levels: Support for EUR/USD lies at 1.25 (psychological), 1.2152 (Jun 29 low), 1.1877 (Jun7 low), 1.1827 (Mar’06 low), and 1.1640 (Nov’05 low). Resistance lies at 1.3029 (Jul20 high), 1.3094 (May10 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 CFTC, EUR, non-commercial, net position (-28K) moderated sharply, in keeping with the EUR/USD rally through last Tuesday.

• The risk reversal (3m, 25delta) ticked lower with spot. The reversal is still heavily skewed for EUR downside, but it lies in the middle of its six month range – suggesting two way price action.

• Implied Vol (3m) rose overnight. It remains in the middle-third of its six-month range – plenty of two-way risk here.

Cross-asset valuation: The significant correlations that EUR/USD has during the past 60 days are the 10yr yield spread (positive), the US10yr yield (positive) and the SPX (positive).

GBP/USD. Upchannel intact

Cable (1.5267) is up overnight, continuing within the uptrending channel since May. GBP was supported by the BoE minutes, which evidenced concern regarding inflation in 2011.

Technicals:

• Trend: Daily lower; Weekly higher.

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

• Support/Resistance Levels: Resistance lies at 1.5472 (Jul15 high), 1.5524 (Apr15 high), 1.5816 (Feb17 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 1.50 (psychological), 1.4949 (Jun12 low), 1.4239 (May19 low) and 1.3503 (Jan’09 low).

Positioning:

• The CFTC, GBP, non-commercial, net-position moderated to -35K, and it has consolidated the past three weeks, consistent with the consolidation of spot just above 1.50 up through Tuesday.

• The risk reversal (3m, 25delta) rose overnight and remains near the highs since Feb. While it remains skewed for GBP losses, it is also in the upper end of its six-month range, which suggests an overbought condition.

• Implied Vol (3mo) ticked higher overnight but remains near the low since Jan.

Cross-asset valuation: The significant correlates over the past two months for GBP/USD have been the DXY (negative), EUR/USD (positive), and S&P500 (positive).

USD/CHF. Holding 1.05

USD/CHF (1.0510) is down slightly overnight and has traded both sides of 1.05 each of the past five sessions.

Technicals:

• Trend: daily higher; weekly lower.

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

• Support/Resistance levels: Resistance lies at 1.05 (psychological), 1.0676 (Jul12 high) and 1.1742 (Apr’09 high), while support lies at 1.05 (psychological), 1.0400 (Jul16 low) and 1.0131 (Jan low).

Positioning:

• The CFTC non-commercial net position jumped into positive territory (+13K) for the first time since Jan. This is significantly positive for CHF relative to the past six months and could suggest a potential turn higher in USD/CHF, especially with spot stalled around 1.04 support.

• The risk reversal (3m, 25delta) rose overnight despite the slip in spot. It remains near its low since Oct’09. This market segment has abandoned its bullish USD/CHF call, but the skew is very close to a six-month low, suggesting potential for a rally in spot.

• Implied Vol (3mo) is up slightly overnight and is showing some signs of rallying from multi-year lows.

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

USD/CAD. Correcting from 1.06 down below 1.04

USD/CAD (1.0372) is down significantly overnight with downward momentum continuing after yesterday’s sharp losses that developed after the BoC rate decision.

Technicals:

• Trend: Daily higher; weekly lower.

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

• Support/Resistance Levels: Resistance lies at 1.0584 (Jul16 high), 1.0677 (Jul5,6 high), 1.0680 (Jun high), 1.0853 (May25 high) and 1.1725 (Jul’09 high). Support lies at 1.0277 (Jul13 low), 1.02 (psychological), 1.0139 (Jun21 low), 1.0110 (May13 low), 0.9931 (Apr21 low), 0.9825 (May’08 low), 0.9712 (Feb’08 low), 0.9058 (Nov’07 low).

Positioning:

• The CFTC, non-commercial, net position rose moderately to 22K, keeping the uptrending channel for this times series since early-2009 intact.

• The risk reversal (3m, 25delta) fell overnight along with the decline in spot. It remains roughly in the middle of its six-month range, providing little direction for the trend in spot.

• Implied Vol (3m) is down slightly, and it lies just below the middle of it’s range so far in 2010.

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).

USD/JPY. Consolidating lows since Dec

USD/JPY (86.99) is down overnight. The market remains wary of BoJ intervention after testing to a low since Dec last week.

Technicals:

• Trend: Daily lower; Weekly lower.

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

• Support/Resistance Levels: Support lies at 86.27 (Jul16 low) and 84.83 (Nov27 low). Resistance lies at 89.16 (Jul12 high), 92.89 (Jun4 high) and 94.99 (May4,5 high).

Positioning:

• The CFTC, non-commercial net position rose to 47K, among the most bullish JPY readings and suggesting limited downside for USD/JPY.

• The risk reversal (3m, 25delta) rose overnight despite the rally in spot. The skew is still in favor of USD/JPY downside, but lies in neutral territory relative to its range the past six months.

• Implied vol (3m): fell overnight and remains deep into the lower half of its 6-month range.

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

AUD/USD. Consolidating near Jul high

AUD/USD (0.8841) rose overnight, and it is holding in near the high established in Jul.

Technicals:

• Trend: Daily lower; Weekly higher.

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

• Support/Resistance: Technical support lies at 0.8634 (Jul19 low), 0.8316 (Jul1 low), 0.8067 (May25 low) and 0.7704 (Jul’09 low). Resistance for AUD/USD exists at 0.8871 (Jul14 high), 0.9389 (2010 high), 0.9406 (2009 high), and 0.9850 (2008 high).

Positioning:

• The CFTC, non-commercial net position rose to 23K, consistent with the rally in spot up through last Tuesday.

• The risk reversal (3m, 25delta) rose overnight along with spot, and it is trending higher in the middle of its 6-month range.

• Implied Vol (3m) is down overnight, just below the middle of its range for 2010.

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

NZD/USD. Rebound after two-day collapse from high since May

NZD/USD (0.7177) is up overnight, continuing to rebound from the sharp losses Friday and Monday, but facing resistance at 0.7200.

Technicals:

• Trend: Daily lower; Weekly higher.

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

• Support/Resistance: Resistance lies at 0.7200 (psychological), 0.7303 (Jul15 high), 0.7326 (Apr30 high), 0.7442 (Jan14 high), 0.75247 (Nov high), and 0.7635 (Oct21 high). Support lies at 0.7030 (Jul19 low), 0.6795 (Jul1 low) and 0.6561 (May25 low).

Positioning:

• The CFTC non-commercial, net position rose to 5K, still a very low reading and still supportive in a contrarian sense of additional Kiwi strength.

• The risk reversal (3m, 25delta) rose overnight, and lies just above the middle of its six-month range.

• Implied Vol (3m) fell overnight and looks to be consolidating in the middle of the 2010 range.

Cross-asset valuations: The strongest correlates for NZD/USD during the past two months have been AUD/USD (positive), stocks (S&P500, positive) and commodities (CRB index, positive).