Forex Trading Outlook: Q3 Earnings Season Begins

Today kicks off Q3 earnings season; with market sentiment buoyed by yesterday’s RBA meeting, expectations are high for earnings releases to carry the baton of risk appetite going forward. The main release today will be aluminium producer Alcoa (AA) (expected to post its fourth consecutive quarterly loss at -0.088 cents per share), but the real market movers will be financial firms; the bulk of which will report next week. It still remains a tricky task to predict which way these releases may go.

On the one hand, the market’s perception of the improved global outlook coupled with last quarter’s sensational upside surprises has set the bar quite high for this time round, and the scope for further surprises may be limited. But that’s assuming these earnings releases are genuinely a reflection of corporate profitability, when in actual fact, the subtleties of creative accounting mean there’s actually quite a lot of leeway for headline numbers to be tweaked.   Nevertheless, we believe yesterday’s RBA rate hike was a deal-changer in terms of market confidence in the global recovery. It not only indicates that the Australian economy is out of the crisis, but that it is returning to trend growth and believes that the recovery of its trading partners is also satisfactory enough to begin a tightening cycle.

The USD has suffered accordingly (DXY 76.28) and spurred a rally in equity markets and commodities; the latter led by gold’s powering rally to new all-time highs above $1043. From a technical perspective there is certainly scope for a further push higher into new territory, but we maintain our stance that the fundamental belief it has anything to do with inflation is misplaced. The commodity currencies are unsurprisingly some of the biggest beneficiaries of current conditions, though we feel it’s a little late to try chasing the AUD and NZD moves.

The Norwegian economy too seems to be relentlessly marching towards a hike at the end of the month, and today’s Industrial Production figures again impressed (1.5% MoM, -0.5% previously) leaving no scope for buying some NOK on a dip. However, we do believe there is still good value in CAD. USDCAD is teetering around 1.0560, and below here there is very little support until 1.0300.

The BoE also kicks off its MPC meeting today ahead of tomorrow’s announcement; once again no expectation for a move in rates, but instead focus will be on the extent/expansion of QE going forward. The ECB meeting tomorrow also poses a risk if any mention of EUR strength precipitates in Trichet’s press conference.

The Risk Today:

EurUsd The major resistance zone around 1.4750 / 1.4850 seems to be keeping a lid on EURUSD as EUR-crosses supress any upside for now. Good support should come in around 1.4675-50.

GbpUsd GBPUSD still feels vulnerable, but with most GBP crosses in oversold territory (RSIs between 20-30) the USD sell-off leaves room for a correction back towards 1.6030-50. Assuming no shocks at tomorrow’s MPC we’d look to re-short the pair around that level targetting 1.5800, but expect stops at 1.6080 on the upside.

UsdJpy USDJPY broke yesterday’s triangle formation to the downside, and on the open today took out support at 88.60. Minor support at 88.20 seems to have slowed the sell-off for now but a close below this 88.60 level opens up the 87.10/15 lows, with stops en route below 88.00.

UsdChf USDCHF bounced off the below support between 1.0227/44 but was capped at 1.0300 as remaining longs looked to exit. Continue to expect strong resistance between 1.0284 and 1.0324; with the longer term downtrend still dominating, if we breach 1.0227/44 again look to target 1.0190.

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