Forex Market Focused On US Treasury Auctions

Yesterday’s (Monday) holidays in the UK and US combined with a lack of fresh data has kept FX markets range bound. However, as European markets open, we are seeing decent demand for the USD. The EUR/USD slipped through the 1.3900 level and the GBP/USD dropped below 1.5800. Traders are selling out of KRW after a 20% appreciation against the USD on the back of its neighbor’s hawkish activities. We expect a continued correction in the greenback’s weakness, as N. Korea acknowledge of nuclear bomb and missile testing and potential for additional test damped risk appetite and a FT article in which China’s advisors assured the market, that its State Administration of Foreign Exchange (SAFE) has not altered investment strategy in US debt.

As we mentioned yesterday, China attempts to diversify out the USD into EUR, gold, copper etc is well known and provides China’s policy makers with false sense of control. But, in reality, this diversification are drops in the bucket for China ’s massive foreign reserves and the only real game in town is the US treasury market. China will undoubtedly continue to use the global media and diplomatic channels to influence the US monetary and fiscal policies. However, given the S&P downgrade in the UK and speculation over the US triple A rating markets will be cautiously watching this week’s heavy US treasury auctions schedule.

Starting today the US will auction $40bn of 2yr then $35bn of 5yr; and $26bn of 7yr debt - an enormous amount of issuance to be absorbed. Both the cover ratio and the level of indirect bidder participation rate will be measured in addition to the yield. Weak demand will spell problems for equities and FX. Recent auction statistics suggests that the appetite for US paper remains stable ( $40bln in 2yr notes released a month ago covered 2.72 times).

The primary risk to the USD is if sovereign bidders finally lose appetite and shift their focus. On a side note, reports overnight suggested that a few Australian states may lose their AAA rating, but for now Australia’s AAA rating should be safe for now.

The Risk Today:
Eur/Usd We fail to break 1.4050 resistance and the dollar fights back, constructive bears below 1.3956 with stops to be triggered at 1.3869. Initial resistance at 1.3905 on retracement move. Floor in at 1.3763, via 1.3838 (previous May 21st resistance).

Gbp/Usd Dollar strength sees pair break from 2 day range. On the downside we are aiming for Last Friday’s support at 1.5756, via 1.5779 (morning’s low). Retracement resistance comes at 1.5819 then 1.5844. Risk aversion creeping back into markets set to bolster dollar demand.

Usd/Jpy Market continues to consolidate as we see dollar rise against majors. Initial support at 94.91 with a floor in for today’s moves 93.85 (Friday’s low) via 94.52. On the upside we can see initial resistance at 95.14, with daily target at 96.69.

Usd/Chf We are heading for 50.00% retracement on 1.1056 - 1.0813 move which stands at 1.0934. A push past this level would put focus on 1.1056 level with a soft resistance at 1.0963. On the downside we see a floor in at 1.0813 with stops to be triggered at 1.0870. <!–

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