Top 5 10.15.12

DATE: Oct. 15, 2012

1. EUR/USD – Positioning for a Spanish Bailout?

No Data Expected on Monday, But Watch for Spanish Bailout Speculation

Our Top 5 Charts cover major themes and economic data. Although no market moving Eurozone economic data is on the calendar for Monday, we ended last week with speculation for a Spanish bailout and will start the week with many traders wondering if Spain will finally cave. Economic data from the Eurozone has been horrid and everyone from politicians to central bankers has warned that the next few months will be just as tough for Europe. However the EUR/USD has managed to hold above 1.28 for one key reason. Investors expect Spain to cave and ask for a bailout in the coming days and weeks. Spanish politicians have denied the need for bailout but the market is convinced that they will ask for one. In our opinion, the chance of a bailout before the October 21st regional elections in Spain is slim. Having already waited this long, the party in power won’t want to risk losing more seats by asking for a widely unpopular bailout. Continued uncertainty for Spain should cap any rallies in euro.

Pair couldn’t break 1.3000
1.2800 remains rock solid support of 200 SMA
Break of 1.3000 key to further upside

EURUSD made a strong move through the 1.2900’s in early European trade, but failed in the high 2980’s as 1.3000 remained formidable resistance in North American trade. Still it remains well above the 200 day SMA at 1.2800, but will need to break and hold 1.3000 in order to make a credible challenge toward the 1.3150 swing highs

Mixed to Mildly Negative Risk Equities: Dow 0.02% Eurostoxx -0.72% Nikkei -0.15% Oil 91.86 -0.21 Gold 1,759.70 -10.90

Late session selloff in Europe and dive in commodities start risk sentiment off on a back foot as new trading week begins

2. AUD/USD – Big Week for China Means Volatility for Aussie

Chinese CPI @ 1.9% and PPI @ -3.5% (9:00PM ET / 1:30 GMT)
Our View – Mildly Bearish for AUD
Reason – US Drought Puts Risk of Chinese Inflation to the Upside
If CPI is Greater than 2.3% = Buy AUD/USD
If CPI is Less than 1.5% = Sell AUD/USD

Chinese CPI and PPI are scheduled for release at 9:00PM ET / 1:30 GMT. This week is an extremely busy week for Chinese data and the currency pair that will be impacted the most is the AUD/USD. We start the week off with Chinese inflation numbers. Although Australian new motor vehicle sales, home loans and investment lending numbers are also scheduled for release, Chinese data should have a far greater impact on the AUD because Australia thrives on Chinese demand. Stronger inflationary pressures in China reduces the likelihood of stimulus from the central bank which is negative for the AUD while weaker inflationary pressures gives China the flexibility to ease, which should be positive for the AUD. The drought in the U.S. drove soybean and corn prices to record highs, putting inflation risk to the upside. This is why we believe we are mildly bearish ahead of the Chinese CPI/PPI reports.

Failed to make 1.0300
Series of lower highs continues
A break through 1.0200 opens path to parity

The Aussie continues to perform very poorly, sliding to days lows on Friday’s close as it failed to breach the 1.0300 barrier. With momentum indicators turning lower and a series of lower highs, the downside pressure remains in place. Only a break above the 1.0300 negates near term bearish bias.

Mixed to Mildly Negative Risk Equities: Dow 0.02% Eurostoxx -0.72% Nikkei -0.15% Oil 91.86 -0.21 Gold 1,759.70 -10.90

3. USD/CHF – Hotter Inflationary Pressures Could Lift Swissie

Swiss Producer Prices @ 0.2% (3:15 AM ET / 7:15 GMT)
Our View – Neutral to Bullish for CHF
Reason – Higher Commodity Prices and Weak Franc Could Boost Inflation
If PPI Exceeds 0.6% = Short USD/CHF
If PPI is Less than 0% = Long USD/CHF

Swiss Producer Prices are scheduled for release at 3:15 AM ET / 7:15 GMT. PPI is not an extremely market moving piece of data for the Swiss Franc unless there is a big surprise. Given the increase in commodity prices in September (oil hit a 4 month high before reversing), the weakness of the Swiss Franc, and the low forecasts, the risk is to the upside for Swiss PPI. If producer prices grow by more than 0.6%, the Swiss National Bank may have to reconsider their aggressive attempts to weaken the Franc. If PPI turns negative, the SNB could put the pedal to the metal and think of other ways to ease since inflation is not a problem. Once again, Swiss PPI is only tradable if there is a big surprise.

Long term topping pattern
.9200 Support critical
Momentum shows weakening

USDCHF is approaching a critical juncture as 9200 long term support looms on the horizon. A break to the downside would signal a negative resolution of the long term topping pattern. For now .9300 is near term support for pair.

Mixed to Mildly Negative Risk Equities: Dow 0.02% Eurostoxx -0.72% Nikkei -0.15% Oil 91.86 -0.21 Gold 1,759.70 -10.90

4. USD/JPY– Retail Sales to Kick Off Move in USD/JPY

US Retail Sales expected @ +0.8% and Empire State @ -4 (8:30AM ET / 12:30 GMT)
Our View – Neutral to Mildly Bearish
Reason – Labor market conditions improved by the ICSC and Redbook Surveys Conflict
If Retail Sales Exceeds 1.1% = Buy USD/JPY
If Retail Sales is Less than 0.5% = Sell USD/JPY

The US Retail Sales report and Empire State Manufacturing survey will be released at 8:30AM ET / 12:30 GMT. The consumer spending figures will be far more important than the manufacturing report because it will tell us whether the improvements in the labor market have translated into greater demand. Based on the drop in the unemployment rate and increase in consumer confidence, we have reasons to believe that retail sales will surprise to the upside. However the 2 independent surveys that we typically follow yielded very different results. According to the International Council of Shopping Centers (ICSC), retail sales growth slowed to 0.9% in September from 2.6% in August. Johnson Redbook on the other hand reported a 1.6% increase in spending compared to a 0.4% decline in August. Its a tough call but a big surprise in retail sales should lead to a decent reaction in USD/JPY. If retail sales grow by more than 1.1%, we expect USD/JPY to rally. If growth is less than 0.5%, then USD/JPY should sell off.

Trapped in 78.00-79.00 zone
Momentum neutral
Only a break of 79.00 or 77.50 signals directionality

USDJPY remains in a state of suspended animation as all indicators show neutral readings with only a break above 79.00 or break below 77.50 signaling any real directional impulse. For now a mild bid tone remains as 78.00 holds ground.

Mixed to Mildly Negative Risk Equities: Dow 0.02% Eurostoxx -0.72% Nikkei -0.15% Oil 91.86 -0.21 Gold 1,759.70 -10.90

5. USD/CAD – Existing Home Sales vs. US Data

Canadian Existing Home Sales @ -5.0% (9:00AM ET / 13:00 GMT)
Our View – Neutral to Bullish CAD
Reason – Strong Labor Market Should Drive Demand for Homes
If Existing Home Sales is Greater than -3% = Sell USD/CAD
If Existing Home Sales is Less than -7% = Long USD/CAD

Canadian Existing Home Sales are scheduled for release at 9:00AM ET / 13:00 GMT. Given the strength of the labor market, the increase in house prices and the optimism of the Bank of Canada, we are looking for an upside surprise in existing home sales. The forecasts call for a marginal improvement and another month of negative sales, which is not hard to beat. The more important question is whether a surprise in existing home sales will be enough to trigger a move in the Canadian dollar. We don’t think housing numbers will be all that important for the CAD. Instead, USD/CAD will most likely have a larger reaction to US retail sales. If consumer spending in the U.S. is strong, USD/CAD will most likely decline because what is good for the U.S. is perceived to be good for Canada. However if Americans do not spend as much as expected, USD/CAD could fall.

10 SMA at .9800 caps rally
9850 next point of resistance
A turn down could signal retest of 9550 lows

USDCAD has stalled out at the 10 SMA on the daily with 9850 next point of resistance for the pair as it still chews through there reflex bounce off the .9550 spike low. For now the range holds with 9850 acting as ceiling and turn down could signal a possible retest of recent lows.
Mixed to Mildly Negative Risk Equities: Dow 0.02% Eurostoxx -0.72% Nikkei -0.15% Oil 91.86 -0.21 Gold 1,759.70 -10.90

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