New Zealand Dollar, Gold And Risk Correlated Trades On A Tear

Risk appetite continues to be the core driver in fx pricing and right now positive sentiment surrounding risk assets remains intact. The CRB index in on the verge of breaking the 269 critical resistance, as commodities, including Gold and crude, continue to rally. Interestingly, oil has lagged the recent move in EUR and commodity prices and traders have begun to price in a surge higher. AUDJPY and EURJPY, two strong barometers of risk appetite, have been trading higher and the AUDJPY in particular is looking to retest the 82 key resistance. The recent strings of corporate earnings led by Philips have surprised expectations, giving equity markets the reasoning for their bullish tone.

Today brings more earning with Johnson & Johnson (JNJ) and Intel Corp (INTC) reporting, but it will be tomorrow’s financials in JPMorgan (JPM) and Morgan Stanley (MS), which will be an important driver for sentiment. Interestingly, while the EUR and S&P500 (^GSPC) correlation remains strong, equities and GBP have broken down a bit, perhaps foreshadowing a greater emphasis on policy expectations over pure risk. We are still buyers of risk correlated / high beta FX trades, especially in the commodity bloc. The CAD has rallied significantly since the better than expected labor data on the back of commodity prices and the speculation that the BoC could hike rates sooner than its conditional commitment to hold rates through Q2 2010. The CAD’s six day run was unabated, with the USDCAD trading down to 1.0325.

Today the global run of better than expected as retails sales continued as New Zealand posted above-consensus m/m 1.1% vs. 0.5% exp,-0.5% prior reading. Given July’s disappointment, we doubt this will be an RBNZ game changer, but market viewed this as a positive development and NZDUSD advanced strongly, hitting a 0.7380 high. Today on the economic calendar, markets will be watching the ZEW Survey (economic sentiment) expected to print at 61.2 vs. 59.6 prior reading.

Tomorrow, the FOMC minutes will be the core focus. Fed Chairman Bernanke recently stated that monetary policy will remain accommodative “for an extended period”, but there is speculation that the mechanism for liquidity withdrawal has already been developed. Risk will continue to drive pricing today, but the expectations of policy tightening between the Fed and ECB will have a growing importance.

The Risk Today:

EurUsd - The pair bounced strongly off first support at 1.4680 before stalling again at resistance around 1.4818 (post-ECB press conference highs). Since then we have traded sideways, with a floor of intraday support at 1.4760. Still looking for uptrend to continue (RSI still only 61 indictaing not in overbought terrain), resistance remains intact around 1.4820, 1.4845 and thereafter major resistance at 1.4876. Support should come in at 1.4680 and 1.4615, and below there the 10 month uptrend comes at around 1.4570.

GbpUsd - The sell-off yesterday looked to have punctured 1.5771 support (Sep 28 lows), before bouncing off support that lies at 1.5724 (touched a low of 1.5729). There will be good selling interest between 1.5800/1.5815 which should cap any rallies, and yet more supply at 1.5860. If we penetrate 1.5724, next downside target comes it at the 200dma 1.5479, but GBP-crosses now look to be firmly in oversold territory according to 14-day RSIs so expect some headwind to further sell-offs.

UsdJpy - Since breaking above 89.40/50 resistance, USDJPY climbed towards the 90.40 resistance (Sep 30 high), touching a high of 90.46 before good supply pushed the pair lower. 89.65 has held as minor intraday support, whilst a break above 90.40/50 would target the strong resistance at 91.65.

UsdChf - USDCHF tumbled through 1.0280 levels yesterday to test downside support at 1.0235 (1.0233 the low). It has since been capped by supply just below 1.0280, and above there has struggled repeatedly in the face of good selling interest around 1.0350-65. A breach of the 1.0235 support would open us up to a revisit to the low at 1.0186.

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