Top 5 10.17.12

DATE: Oct. 16, 2012

1. AUD/USD – Only Trade a Large Surprise


FUNDAMENTALS
Leading Indicators at (7:30PM ET / 23:30 GMT)
Our View – Neutral
Reason – Tough Call, Not Market Moving Unless There is a Big Surprise
If Leading Indicators is Greater than 0.7% = Buy AUD/USD
If Leading Indicators is Less than 0.1% = Sell AUD/USD

Australian leading indicators are scheduled for release at 7:30PM ET / 23:30 GMT. This is not an extremely market moving release for the AUD/USD unless there is a major surprise. Since there are no forecasts, the benchmark will be the previous report. In July, leading indicators rose by 0.4%, so if they increase by more than 0.7% in August, the AUD/USD should rally but and if it rises less than 0.1%, the AUD/USD should fall. If we had to a punt, our bias would be for a slightly stronger report because the main components include things like U.S. industrial output and Australian building approvals, which increased in the month of August. However the better opportunity may be to wait to see if there is a large surprise before taking the trade. The neutral RBA minutes makes the AUD/USD vulnerable to short squeeze so if leading indicators surprise to the upside, we could see a nice rally in the currency.

TECHNICALS
Aussie holds 1.0250
Recovery late day turns structure mildly bullish
Reverse H&S?

Aussie bounced off the 1.0250 support in morning US trade and turned a decidedly negative structure into a mildly bullish one as it appears to be forming a reverse head and shoulders pattern. The pair needs to clear 1.0300 in order to consolidate the bullish posture. A break through 1.0250 takes us to 1.0200 and lower.

SENTIMENT
Bullish Risk Al Around: Dow 0.95% Eurostoxx 2.53% Nikkei 1.44% Oil 92.13 +0.23 Gold 1,748 +11.00

Strong day in risk assets suggests sentiment remains positive

2. EUR/USD – Who will Win the US Presidential Debate? Romney or Obama?

FUNDAMENTALS
U.S. Presidential Debate @ (9PM ET / 13 GMT)
Our View – Neutral
Reason – First Debate had a meaningful impact on the euro
If Romney wins debate again = Buy EUR/USD
If Obama wins debate = Sell EUR/USD

U.S. Presidential Candidates Romney and Obama will be squaring off in another debate this evening. The last time they debated, Romney was the clear winner. The markets cheered because his business friendly Republican policies are good for stocks and in turn risk appetite. Both the S&P 500 and the EUR/USD rose strongly on October 4th (the day after the debate) with the euro enjoying its strongest rally against the U.S. dollar in more than 2 weeks. If Romney wins again and Obama appears tired and uninterested, the EUR/USD could extend its rise. If Obama wins, gains in the EUR/USD and stocks could be pared. When it comes to Presidential Debates, where personality could be part of the strategy, it is much better to wait for the debate to be over before taking any trades.

TECHNICALS
1.3000 taken out but 1.3065 caps
Momentum remains positive on RSI and MACD
Next resistance level swing high of 1.3150

The euro traded well today ending near the highs of the session as the 1.3000 level finally gave way. But the pair once again ran out of gas at minor swing high resistance of 1.3065 and will need to clear that in order to make an assault on swing highs of 1.3150. A break below 1.3000 will put in a lower top in place which would change the near term structure to negative.

SENTIMENT
Bullish Risk Al Around: Dow 0.95% Eurostoxx 2.53% Nikkei 1.44% Oil 92.13 +0.23 Gold 1,748 +11.00

Strong day in risk assets suggests sentiment remains positive

3. GBP/USD – BoE Minutes and UK Employment Promise Action

FUNDAMENTALS
BoE Minutes & U.K. Employment Expected @ 0.0k (4:30AM ET / 8:30 GMT)
Our View – Bearish for GBP
Reason – Expecting Bias to Ease in BoE and Weaker Employment Numbers
Dovish BoE Minutes or Jobless Claims Rise More than 10k = Sell GBP/USD
Neutral BoE Minutes, Jobless Claims Decline = Buy GBP/USD

The Bank of England meeting minutes and September employment numbers are due at 4:30AM ET / 8:30 GMT. This is one of those event risks that will most certainly trigger volatility in the currency and we have good reasons to believe that the outcome of both events will be negative for the GBP/USD. Economic data in the U.K. has taken a turn for the worse with manufacturing and service sector activity contracting at a faster pace last month. House prices are also on the decline along with the annualized pace of consumer price growth, which supports the case for more stimulus. We believe that the BoE minutes will show a bias to ease, which should drive the GBP/USD lower. We also anticipate weaker employment numbers because the employment component of the manufacturing and service sector PMI indexes declined. UK data can be traded either proactively (Short GBP/USD) ahead of the releases or reactively (after the data is released) because continuation is expected in both cases.

TECHNICALS
1.6100 taken out but follow through fails to reach 1.6150
Continues to follow risk but lagging
1.6200 next major resistance

GBPUSD followed the rest of the risk complex higher but in a lagging fashion failing to even reach much less take out the 1.6150 level. Momentum however remains up and the next zone of resistance is at 1.6200

SENTIMENT
Bullish Risk Al Around: Dow 0.95% Eurostoxx 2.53% Nikkei 1.44% Oil 92.13 +0.23 Gold 1,748 +11.00

Strong day in risk assets suggests sentiment remains positive

4. USD/JPY – A Lift from Housing Data?



FUNDAMENTALS
US Housing Starts Expected @ 2.7% & Building Permits Expected 1.1% @ (8:30 AM ET / 12:30 GMT)
Our View – Neutral to Mildly USD/JPY Bullish
Reason – Low Interest Rates Should Support Housing
If Housing Starts & Building Permits Exceed 3% = Buy USD/JPY
If Housing Starts & Building Permits is Less than 1% = Sell USD/JPY

U.S. Housing Starts and Building Permits are scheduled for release at 8:30 AM ET / 12:30 GMT. The first set of housing data is tough to predict but low interest rates should continue to lend support to the housing market. Starts rose a mere 2.3% in August while permits dropped 1.0% and a rebound is now expected. If starts and permits both beat expectations and one or the other rises by more than 3%, we could see USD/JPY rally. However if both rise less than 1%, USD/JPY will fall. According to the last Beige Book report, there has been evidence of improvements in the sector. Housing starts and building permits can have a meaningful impact on USD/JPY but only if there is a large surprise.

TECHNICALS
79.00 Still Caps
Momentum up slowly but surely
Break of 79.00 augurs 80.00 in view

Same old same old for USDJPY as the pair continues to inch ever so slowly towards the 79.00 level but for now that continues to cap any upside impulse. Today’s rise came just short at 78.97 but the fact that it remains near the highs of the session suggests that momentum is building for upside break.

SENTIMENT
Bullish Risk Al Around: Dow 0.95% Eurostoxx 2.53% Nikkei 1.44% Oil 92.13 +0.23 Gold 1,748 +11.00

Strong day in risk assets suggests sentiment remains positive

5. AUD/USD and NZD/USD -- Divergence

FUNDAMENTALS

Our Top 5 Charts aren’t always about economic data. Oftentimes we will point out big moves in currencies or divergences that are on our radar. Historically, there has been a very strong correlation between the AUD/USD and NZD/USD as shown in the chart above. While the relationship between these 2 currencies have stood the test of time, occasionally there will be divergences like the one that is happening right now. Today, the AUD appreciated against the USD while the NZD declined and this has everything to do with monetary policy expectations. The RBA cut rates earlier this month, leading many traders to position for another move in November. However when the RBA minutes were released, the central bank did not give any signs that more easing is likely. The RBNZ on the other have sat on their hands all year, keeping rates steady at 2.5% but when consumer prices grew at its slowest rate in 12 years, the NZD/USD fell sharply as investors price in the possibility of easing by the RBNZ. Both central banks are in easing mode but in the case of the RBA, investors had plenty of opportunity to price in a rate cut while positioning in the NZD/USD is still relatively fresh. As a result of this divergence, we have seen a really nice rally in AUD/NZD.

TECHNICALS

The divergence between kiwi and Aussie has been particularly notable today with NZDUSD lagging all high beta FX markedly and especially its next door neighbor as it failed to recover ending near the days lows while Aussie bounced off the 1.0250. If this divergence continues into tomorrow kiwi could remain weak on all the crosses despite any continuation in rally in risk.

SENTIMENT
Bullish Risk Al Around: Dow 0.95% Eurostoxx 2.53% Nikkei 1.44% Oil 92.13 +0.23 Gold 1,748 +11.00

Strong day in risk assets suggests sentiment remains positive

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