Forex Trading Sentiment Seems To Be Driven By Swine Flu Concerns

Developments surrounding the Swine flu continued to grab the spotlight, as the WHO raised the global alert from phase 3 to 4 last night. The renewed concern over the virus reportedly decreased risk appetite, causing global equity markets to decline. While analysts have begun extrapolating how growth and asset prices will be affected, we caution traders to take these reports/theories with a grain of salt.

First of all, it is near impossible to accurately forecast, with the current information in circulation, how the virus will spread and the effects it will have. Second, it is a fact that in 2003 the SARs (close comparison) virus, after a knee jerk reaction in the fx markets, the lasting impact in the G10 currencies was barely visible. Canada with over 250 cases should have been more affected than Australia with 1 case. Yet, the negative price movement of CAD and AUD was comparable. That said, risk aversion is clearly driving prices and the strong equity / FX / commodities correlation is still very relevant.

According to a WSJ report, regulators have told BofA (BAC) and Citi (C) that they may need to raise more capital based on early results of the government’s stress tests, which has weighed on risk appetite. In addition, the FT reports that bulge UK banks could face higher capital ratios than the industry average, as a penalty for their implicit reliance on bailouts (taxpayer funded). Overall, in this current risk adverse environment (a function of swine flu, stress test results and ECB meeting on May 7th) we favor buying JPY and USD. The USD/JPY continued to break lower trading, to 95.63 low in the Asian session. The AUD/USD broke the 0.7050 key support, as commodity prices traded lower. The Mexican Peso continues to come under selling pressure as 149 reported swine flu deaths have investors heading for the exits. USD/MXN has appreciated roughly 6.0% since the weekend virus disclosure.

Perhaps the most interesting story in FX is the EURCHF, which is now trading at post intervention levels. The SNB has been very clear as to its views on the CHF and its right to intervene directly on the currencies behalf. With SNB’s Roth speaking at 15.00gmt, markets will be focused on how the central bank will respond. We expect the SNB to protect the 1.5000 level and will be looking for opportunities to short the CHF. On the heels of last week’s mid month ECB council meeting, yesterday’s comments by Governing Council member Nowotny shook up the EUR. Mr Nowotny said, “We will keep the interest rate very low for as long a time as is required and stand ready to use unconventional measures of quantitative easing to assure European firms and consumers have access to credit at appropriate conditions”. This statement follows a string of similar comments, reinforcing our view that the ECB will follow the US , UK , BoJ’s lead and cause the EUR to further weaken.

In Japan, data showed large retailers’ sales falling by more than expected at -8.1%, but retail trade figures were better at y/y -3.9 vs. -4.7% exp. The BoJ is meeting this week but no market moving events are expected. With alight economic calendar today market will be focused on equity markets and swine flu developments.

The Risk Today:
Eur/Usd With risk aversion dominating trading and failure to hold above 21d MA ( 1.3202) we expect another test of 1.2980 then 1.2880 support. Bear channel resistance at 1.3270 will cap any upwards move.

Gbp/Usd Pressure is clear mounting on the sterling with the bull rally off of 1.3656 (march 11th) lows fading. RSI has a neutral tone so expect a choppy move down lower to 1.4400/40 cloud support and 1.4389 horizontal support. Trendline resistance at 1.4720 will cap rallies.

Usd/Jpy Heavy pressure on 95.96 key support. Expect a move to daily cloud support and Fibo retracement near 95.70/96.00 to come into play, and break to open 95.43. Initial resistance at 97.56 (congestion area).

Usd/Chf The SNBs commitment to a weak CHF will be challanged due to EUR/CHF move towards 1.5000. Strong rally off of 1.1359 (200 day ma) to 1.1550 gives scope for a test of 1.1670. Until we see a reaction by the SNB expect 1.1350/1.1800 range to remain intact. <!–

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