Top 5 10.16.12

DATE: Oct. 16, 2012

1. NZD/USD – Any Surprise from CPI?


FUNDAMENTALS
NZD CPI @ 0.5% (5:45PM ET / 21:45 GMT)
Our View – Neutral, Trade Post Data if there is a Big Surprise
Reason – Tough Call, Food Prices Decreased in Q3 but Commodity Prices Rose
If CPI is Greater than 0.8% = Buy NZD/USD
If CPI is Less than 0.2% = Sell NZD/USD

New Zealand consumer prices are scheduled for release at 5:45PM ET / 21:45 GMT. CPI numbers are only released from New Zealand on a quarterly basis, so when they are on the calendar, NZD/USD traders will watch the data closely. However this quarter, predicting the directional surprise of CPI is difficult because food prices decreased in Q3 but commodity prices rose. This suggests that producers could be having a tough time passing higher prices onto consumers. Yet the level of inflation is important to every central bank and softer inflationary pressures builds the case for a rate cut from the Reserve Bank of New Zealand. Therefore if CPI rises by less than 0.2% or turns negative, the NZD/USD will fall sharply as traders position for easing from the RBNZ. If CPI rises by more than 0.8%, we expect only a modest rally in NZD/USD because at a yoy rate of 1%, inflationary pressures are extremely modest in general.

TECHNICALS
Big Recovery Off the 81.00 support
Breaks out of the BB “Sell Zone”
.8229 20 SMA next resistance

Kiwi made a very strong recovery off the session lows showing that the .8125-.8100 support remains in place having been tested thoroughly over the past several weeks. The pair has a turn out of the Bollinger band sell zone and now encounters the next resistance level at the 20 SMA overhang at .8229. A break below the key .8100 however would be extremely bearish suggesting a run to .7900 support.

SENTIMENT
Mild Bullish Bias to Risk Equities: Dow 0.65% Eurostoxx 0.63% Nikkei 0.51% Oil 91.74 -0.18 Gold 1,738 -20.00

Equities held up well in all three regions providing mild bid for risk sentiment

2. AUD/USD – Look for Clues on Further Cuts from RBA

FUNDAMENTALS
FUNDAMENTALS
RBA Minutes @ (8:30PM ET / 20:30 GMT)
Our View – Bearish for AUD
Reason – Expecting Dovish Tone Since RBA Cut Interest Rates by 25bp
Dovish RBA Minutes = Sell AUD/USD
Neutral RBA Minutes = Buy AUD/USD

The minutes from the most recent Reserve Bank of Australia monetary policy announcement is due at 8:30PM ET / 20:30 GMT. This one of those event risks that will most certainly trigger volatility in the currency. The RBA cut interest rates by 25bp this month and investors will looking for reasons why. The rate cut was not widely expected and we all want to know what pushed the central bank over the edge. Given the RBA’s decision to ease, we believe that the minutes will most likely be dovish and in turn negative for the AUD/USD. However what is important is not just what the central bank has done but what they plan to do in the future. If the RBA hints that more easing is necessary, the AUD/USD could fall sharply but if the statement is neutral, the AUD/USD will rally because right now, the market has priced in another 25bp rate cut in November. While there’s opportunity to enter the trade before the release, the smarter decision may be to wait because central bank minutes tend to lead to continuation in currencies because they can reset monetary policy expectations for days to come.

TECHNICALS
Strong recovery off Asian session lows
Break of BB “Sell Zone”
MACD on the verge of positive

The Aussie put in a surprisingly resilient performance today recovering off the session lows to close near days highs on a bullish daily candle that put it once again outside of the Bollinger Band sell zone. MACD is on the verge of turning into positive territory providing further evidence of turn in momentum. A break below 1.0200 negates the bullish bias.

SENTIMENT
Mild Bullish Bias to Risk Equities: Dow 0.65% Eurostoxx 0.63% Nikkei 0.51% Oil 91.74 -0.18 Gold 1,738 -20.00

Equities held up well in all three regions providing mild bid for risk sentiment

3. GBP/USD – Softer CPI Will Drive GBP/USD Lower

FUNDAMENTALS
UK Consumer Prices @ 0.4% (4:30 AM ET / 8:30 GMT)
Our View – Neutral
Reason – Could be Market Moving but Tough Call because PPI Released at Same Time
If CPI Exceeds 0.6% = Long GBP/USD
If CPI is Less than 0.2% = Short GBP/USD

U.K. Consumer Prices are scheduled for release at 4:30 AM ET / 8:30 GMT. As an inflation fighting central bank, CPI is always an important release for the British pound. This is particularly true for this week’s release because the Bank of England is widely expected to be the next central bank to ease. If consumer prices rise less than 0.2%, then the case for more Quantitative Easing hardens significantly, which will be bearish for GBP/USD. However if CPI rises by more than 0.6%, then the BoE may keep policy unchanged for longer because annualized inflation is still running above their 2% target. Typically PPI is used to forecast CPI but in the case, these reports are released simultaneously. According to a survey from the British Retail Consortium, price growth slowed last month so if we had to take a punt, it would be for softer and not hotter CPI. Either way, the lack of any clear leading indicators means it may be smarter to enter the trade post release.

TECHNICALS
1.6100 still caps rally
Decent recovery off days lows
1.6000 remains key support

GBPUSD remains supported just above the 1.6000 line as it makes its way above the BB “Sell Zone”. Momentum however remains negative with MACD showing little movement towards the zero line.

SENTIMENT
Mild Bullish Bias to Risk Equities: Dow 0.65% Eurostoxx 0.63% Nikkei 0.51% Oil 91.74 -0.18 Gold 1,738 -20.00

Equities held up well in all three regions providing mild bid for risk sentiment

4. EUR/USD – ZEW in Play



FUNDAMENTALS
German ZEW Economic Sentiment Index expected @ -14.9 (5AM ET / 9 GMT)
Our View – Neutral
Reason – Investor Confidence is Always a Tough Call
If German ZEW Exceeds -10 = Buy EUR/USD
If German ZEW is Less than -18 = Sell EUR/USD

The German ZEW survey is scheduled for release at 5AM ET / 9 GMT. Investor confidence is always difficult to predict especially in this current market environment where the outlook for Spain and Greece are still uncertain. However the ZEW survey can be a market moving release for the euro, particularly if there is a big surprise. If the German ZEW Economic Sentiment index, which measures the expectations of investors rises from -18.2 to -10 or better, the EUR/USD should rally. If the data shows deterioration in sentiment with the index falling to -18 or lower, the EUR/USD should sell-off sharply. This is definitely one piece of economic data that should traded after the number is released and not before.

TECHNICALS
1.2990 still cannot be broken to upside
Nice rebound of 1.2900
Small range continues for 2nd day break either way suggests directionality

The euro remains trapped between 1.2990-1.2900 for the 2nd day in a row with the pair recovering nicely off Asian session highs but unable to take out the key 1.3000 level. A break either way could connote more directional momentum ahead.

SENTIMENT
Mild Bullish Bias to Risk Equities: Dow 0.65% Eurostoxx 0.63% Nikkei 0.51% Oil 91.74 -0.18 Gold 1,738 -20.00

Equities held up well in all three regions providing mild bid for risk sentiment

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

FUNDAMENTALS
US CPI expected @ +0.5% (8:30AM ET / 12:30 GMT) & Industrial Production @ 0.2% (9:15AM ET / 13:15 GMT)
Our View – Bullish USD
Reason – Gas Prices Increased Significantly Last Month and Manufacturing Activity Improved
If CPI Exceeds 0.9% or Industrial Production Exceeds 0.6% = Buy USD/JPY
If CPI is Less than 0.2% or Industrial Production is Less 0%= Sell USD/JPY

US Consumer prices are expected at 8:30AM ET / 12:30 GMT followed by Industrial Production at 9:15AM ET / 13:15 GMT. We have good reasons to believe that consumer prices and industrial production will surprise to the upside. Gas prices increased significantly in the month of September, which will contribute positive to headline CPI. However producer price growth eased, giving us only a medium level confidence on this trade. Industrial production on the other hand should rebound given the improvement in the ISM manufacturing report last month. If CPI exceeds 0.9%, the case for an earlier withdrawal of monetary stimulus increases, which is positive for USD/JPY. However if CPI grows by 0.2% or less, USD/JPY could decline as lower inflationary pressures supports the case for prolonged easy monetary policy.

TECHNICALS
Remains in tight 78.85-78.00 Range
Break above 78.50 mildly bullish
Break out above 79.00 needed to confirm upside bias

USDJPY remains in tight carved out range as 78.85 continues to cap to the upside, although the move above 78.50 today can be viewed as bullish for now. However the pair needs to take out 79.00 before any upside bias can be established.

SENTIMENT
Mild Bullish Bias to Risk Equities: Dow 0.65% Eurostoxx 0.63% Nikkei 0.51% Oil 91.74 -0.18 Gold 1,738 -20.00

Equities held up well in all three regions providing mild bid for risk sentiment

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