Forex - Prospect Of Carry And Protectionism Put Dollar Under Pressure

Forex News and Events: An interesting but little-used adjective is ‘kafkaesque’, a word meaning “marked by a senseless, disorienting, often menacing complexity”, and one that seems appropriate to describe the confusion that has pervaded FX themes in recent weeks. Established relationships have diverged and interpretation of the interaction between the most liquid currencies, equity markets and economic data have digressed; defying our most determined efforts to apply logic to the scenarios. This week however, it seems the market has returned to some semblance of rational sense, and USD weakness is the new buzz. Protectionist face-offs with China have added some spice to the usual headlines, and despite Obama’s defiance, you can be sure that China is one country loathed to lose face. That combined with record-low libor levels in the US really make selling the USD a no-brainer for most traders. EURUSD squeezed to a high of 1.4653 in the NY session, followed later by AUDUSD to a high of 0.8640, and even the lowly GBP has managed to surge higher against the USD; despite an apparent absence of decent reasons why anyone would want to buy that particular currency. Perhaps some may come from Mervyn King later today as he gives evidence to the Treasury Committee; however given his outspoken support for even more QE going forward, he may spoil the party for the GBP. In the commodity space, gold has broken back above $1000/oz, echoing the inverse relationship of the USD and oil that played out so saliently last year. In addition, the RBA minutes gave the strongest indication yet they’ll be the first central bank to tighten policy out of this recession, possibly before the end of this year. For the first time in a while, the story seems clear; carry trades are back in fashion, but with the USD now featuring as the funding currency of choice.

Today's Key Issues (time in GMT): 07:15 CHF Industrial Production, % q/q (y/y) Q2 8.2 (-10.6) exp 08:30 GBP CPI, % m/m (y/y) Aug 0.3 (-1.4) exp 08:30 GBP RPI, % m/m (y/y) Aug 0.2 (-1.5) exp 08:30 GBP RPIX, % m/m (y/y) Aug 0.2 (1.2) exp 08:45 GBP BoE Governor Mervyn King and other MPC members give evidence on the August Inflation Report at the Treasury Committee 09:00 EUR Hourly labour costs, y/y Q2 3.4 4.0 3.7 3.0 - 09:00 EUR Germany: ZEW economic expectations index Sep 61.0 exp, 56.1 prior 12:30 USD Retail sales, % m/m (y/y) Aug 1.7 (-6.5) exp, -0.1 (-8.3) prior 12:30 USD Retail sales ex autos, % m/m (y/y) Aug 0.4 (-7.1) exp, -0.6 (-8.5) prior 12:30 USD Producer price index, % m/m (y/y) Aug 0.8 (-5.3) exp, -0.9 (-6.8) prior 12:30 USD Core producer price index, % m/m (y/y) Aug 0.1 (2.2) exp, -0.1 (2.6) prior 12:30 USD Empire State mfg. index Sep 15.00 exp, 12.08 prior 14:00 USD Business inventories, % m/m (y/y) Jul -0.8 (-11.1) exp, -1.2 (-9.9) prior 14:00 USD Fed Chairman Bernanke speaks on the financial crisis 15:00 EUR ECB Executive Board member Stark speaks on "Monetary and fiscal policy: criteria and timing for the phasing out of crisis measures"

The Risk Today: EurUsd Not expecting any notable long interest until we test the breakout level at 1.4445 or the uptrend at 1.4360. Moreover the pair is under pressure from the Wave 1 resistance between 1.4684 and 1.4876. GbpUsd GBPUSD failed to advance above 1.6745 and currency facing significant headwinds in overbought conditions. Sterling came under significant selling pressure as BoE Governors words spooked the market. The Cable sold off from 1.6630 to 1.6500. Support now stands at 1.6425 breakout level. UsdJpy USD/JPY is unwinding an oversold condition. The lethal combination of verbal intervention and the psychological 90.0 lvl has sent seller packing. Focus is now on 92.60 (61.8% retracement) yet below 93.30 remains bearish. Strong support now stands at 90.20. UsdChf The pair has been trading higher since the open off 1.0340 support. Mid term the trend is bearish but intraday we are seeing oversold conditions however with no sign of divergence implies a range bound trading. Expect a period of consolidation before the SNBs meeting then focus will be on 1.0210.

Resistance and Support: EURUSD GBPUSD USDJPY USDCHF 1.4725 1.6900 92.47 1.0700 1.4684 1.6840 92.30 1.0550 1.4635 1.6750 91.80 1.0452 1.4606 1.6621 91.03 1.0373 1.4510 1.6480 90.10 1.0340 1.4445 1.6445 89.90 1.0264 1.4381 1.6365 89.20 1.0265 S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot