US Dollar Benefits From Lower Equities Amid Speculation China Stimulus May End

China’s impressive GDP figures overnight ignited speculation that we may be close to a point where stimulus is soon removed from the system, sending Asian equities lower and the USD back from the brink of its lowest levels since the beginning of August last year.

The 4 trillion Yuan stimulus package has certainly been a key factor in helping China emerge resilient from the financial crisis, and in turn, helping to drive the recovery of many of its trading partners. Despite Chinese cabinet ministers being quick to reassure markets that stimulus would remain in place for now, risk appetite has certainly weakened this morning and sent the USD higher.

Meanwhile this morning’s main market-mover has been Sweden’s Riksbank Rate Meeting. As expected the Riksbank kept rates on hold at 0.25%, but reiterated their intentions to keep rates on hold until Q3 2010 and affirmed they would offer another SEK 100bn to banks through 12-month tenders. The central bank they lowered their inflation forecasts for both 2009 and 2010; they now see deflation in running at -0.4% in 2009 (from -0.3% prior estimate), and 2010 inflation reduced to 0.9% (from 1.2% prior). The outcome was perceived as dovish by the markets, and triggered a sharp sell-off in SEK as USDSEK spiked to just below 6.9400, and EURSEK hit a high of 10.3760.

The remaining focus has been on GBP this morning as UK’s Paul Tucker stated the BoE could increase QE “if necessary”. The comments were taken to imply he may be on the side of King and Miles who voted for more QE back in August, and given weekend press that indicated MPC member Posen might also be in that camp, we might be looking at 4 votes in favour of more QE in November (out of a possible 9).

The UK Retail Sales figures this morning have done little to improve the outlook in the UK, posting a disappointing 0.0% MoM in Sep against expectations for a 0.5% rise. That is now 2 consecutive months of zero prints for UK Retail Sales, certainly not encouraging signs of a recovery in domestic demand.

The Risk Today:

EurUsd The bulls are still in charge on a medium term EUR USD with the pair finding support yesterday at 1.4905 before marching straight to 1.5000 where we saw the market move from a 1.5000 bid to a 1.4990 in a split second. Half of those sellers were stopped out later on in the evening as the pair made a move higher to 1.5046 but with this morning’s move back below 1.4967, stops is probably all they were. If they bulls want a chance of taking the pair to new highs then 1.4905 needs to stay in tact and a move above 1.5050 will confirm continuation of the uptrend. There is a good chance of intraday shorting before that at 1.5040 and long interest for the day around 1.4910.

GbpUsd There is hope yet for those playing the head and shoulders on cable as the pair has developed a near symmetrical pattern with a new neck line at 1.5800. For this formation to remain intact the pair’s daily closing prices MUST remain below 1.6663 and intraday preferably below 1.6750. While this conflicts with the short term cup and handle target of 1.70, there is still little to get excited about fundamentally on the pair, with Retail Sales released today showing 0% growth month on month. Most exciting on this new potential set up is that the neckline will coincide with the last of the 10 month uptrend channels so if it is broken then the selling will be that much more dramatic as two groups of sellers kick in at the same time. Keep a close eye on daily RSI which should remain sub 65 to keep this picture alive.

UsdJpy USD JPY continues in its uptrend and in hindsight may prove to be a leading indicator on USD weakness or strength having posted a bottom on the 7th and 8th of October. We will have to wait and see if this is in fact a bottom in the US dollar before making any conclusions but it is fair to say that the typical USD JPY relationship has changed as the USD is just as much a carry currency these days as the JPY. Anyway, 90.20 is looking like the level for intraday long entry and sellers expected at 92.50.

UsdChf The pair finally reached our target of 1.0037 last night (day’s low was 1.00357) where short covering kicked in sending the pair to the downtrend line this morning at 1.0120. A brief period of consolidation can be expected between these two levels and even with a break above the trend line higher I would still be waiting for a 1.0250 clearance to be on the safe side. A break below 1.0037 has obvious psychological support at 1.0000 and below there a whole heap of congestion to stop any falls being too deep. A revisit to 1.0037 may well see further buying as the shorts that missed their exit last night grab the second chance with both hands.

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