Top 5 11.06.12

DATE: Nov 6, 2012

1. AUD/USD – RBA Rate Cut Very Close Call

RBA expected to cut rates by 25bp to 3% at (10:30PM ET / 3:30GMT)
Our View – Bullish AUD
Reason – Recent Improvements in AU and Chinese data
If RBA Cuts Rates = Sell AUD/USD
If RBA Leaves Rates Unchanged = Buy AUD/USD

We have strong reasons to believe that the RBA will leaves interest rates unchanged at 3.25%. Having just cut rates by 25bp in October, there needs to be very good justification for back to back rate cuts. Since the last monetary policy meeting, we have seen consistent improvements in Australian and Chinese data leading us to believe that the RBA will stand down. A very small majority of economists are looking for another rate cut in November so it will be a very close call. With monetary policy announcements, it is generally advisable to wait for the outcome before taking the trade because central bank actions aren’t always predictable. However fundamentally, the Australian economy is very sensitive to the changes in monetary policy and the last rate cut from the RBA has already lent to support to the housing market, manufacturing and service sectors. According to AiG, service sector activity contracted at a slower pace in October with the PMI index rising to 42.8 from 41.9. Retail sales also rose a more than expected 0.5% while the trade deficit narrowed to -1456 million from -1876 million in the month of October. Although HSBC reported a slower expansion in China’s service sector, the official government data reported faster growth and both releases see service sector activity expanding, which is good for China and Australia. If the RBA keeps rates steady, the AUD/USD should rise. If they cut, AUD/USD will most likely fall steeply. REACTIVE TRADE

Break of 1.0400 ablsolutely key to upside case
Momentum on verge of turning positive
Close below 1.0350 signals test of 1.0300

The Aussie has remained relatively resilient in wake of risk off flows over the past several days refusing to close below 1.0350. However only a clear break of 1.0400 opens the prospect of strong rally clearing the key overhang over the past month

Risk turns positve as day proceeds Dow up 0.15% Eurostoxx-1.15% Nikkei -0.48% Oil 85.79 +1.00 Gold $1684 +10

2. GBP/USD – Potential for more Weakness in Manufacturing

Industrial Production expected @ -0.6% (4:30AM ET / 9:30 GMT)
Our View – Bearish GBP
Reason – Manufacturing PMI Index Declines
If IP is -0.4% or Better = Buy GBP/USD
If IP is -0.8% or Less = Sell GBP/USD

We have strong reasons to believe that manufacturing activity continued to contract in the month of September and most likely at a faster pace. According to the PMI report, the manufacturing sector lost further momentum in the recent months with particular weakness in new orders and export orders. Given the decline in PMI, there’s an opportunity to trade this data proactively or reactively. If industrial production falls by 0.4% or less, the GBP/USD will rally in relief but if it falls by more than 0.8%, GBP/USD will extend its recent losses. REACTIVE TRADE

Another re-test of 1.5950?
Momentum negative but pattern still suggests range
Break of 1.5950 opens way to 1.5800

Another weak session for cable with downside momentum clearly accelerating but the overall chart pattern still suggest range rather a full downside break unless the 1.5950 support goes in which case it opens the way to possible test of 1.5800


Risk turns positive as day proceeds Dow up 0.15% Eurostoxx-1.15% Nikkei -0.48% Oil 85.79 +1.00 Gold $1684 +10

3. EUR/USD – Improvement in Factory Orders?

German Factory Orders expected at -0.4% (6:00AM ET / 11:00GMT)
Our View – Mildly Bearish EUR
Reason – Decline in Manufacturing PMI
If Factory Orders -0.2% or Better = Buy EUR/USD
If Factory Orders -0.8% or Worse = Sell EUR/USD

There are a number of European economic reports on the calendar tomorrow including the final Eurozone service sector PMI reports, producer prices and Factory orders. We believe factory orders will be one of the more market moving releases for euro. With demand in Europe continuing to slow, we have good reasons to believe that factory orders will decline but the EUR/USD will only react if there is a meaningful surprise. Therefore if factory orders fall by less than 0.2%, the EUR/USD should rally. If it falls by more than 0.8%, the EUR/USD will most likely fall sharply. The EUR/USD will be in play and best traded reactively. REACTIVE TRADE

Ugly break of 1.2800 keeps negative bias in play
But a hold above 1.2750 shows stalled momentum
Possible retrace to 1.2900 if 1.2800 retaken

The euro remains in a broad downtrend with the latest break of the 1.2800 level echoing the bearish sentiment. Short term however the downward momentum has slowed and the inability to test 1.2750 suggest a possible retrace to 1.2900 if the 1.2800 figure can be retaken with conviction.

4. USD/CAD – More Weakness Could Drive Return to Parity?

IVEY PMI expected @ 58.2 (10AM ET / 15 GMT)
Our View – Bearish CAD
Reason – Job Growth Slows Materially in October but wholesale sales up
If IVEY Greater than 62 = Sell USD/CAD
If IVEY 57 or Less = Buy USD/CAD

We have good reasons to believe that manufacturing activity in Canada continued to slow in October. Last week we saw job growth retreat significantly in the month of October and employment is a key component of IVEY PMI. However wholesales increased which gives us only a level 2 confidence on this trade. Despite the Bank of Canada’s bias to raise rates, the Canadian economy has taken a turn for the worse and a weak IVEY PMI could be all USD/CAD needs to rise back above 1.0 or parity. If IVEY improves, it would be a major surprise that should be fairly bearish for USD/CAD. PROACTIVE or REACTIVE TRADE

1.000 looks to be near term top
Series of lower highs suggests 9900 in sight
Momentum negtaive but stalling

Since taking out parity USDCAD has done nothing but give back the gains putting in a series of lower highs as the pair looks to unwind back to .9900. One possible negative factor for the shorts is the stall in momentum as MACD looks to turn positive on 4hr charts.

Risk turns positive as day proceeds Dow up 0.15% Eurostoxx-1.15% Nikkei -0.48% Oil 85.79 +1.00 Gold $1684 +10

5. NZD/USD – Fonterra Auction and RBNZ Financial Stability Report

Fonterra Auction at (12PM ET / 17GMT) & RBNZ Financial Stability Report at (3PM ET / 20 GMT)
Our View – Neutral
Reason – Neutral
If Dairy Prices Rise = Buy NZD/USD
If Dairy Prices Fall = Short NZD/USD

Fonterra is the largest company in New Zealand and the price of milk powder at their auctions can often times impact how NZD/USD trades. If dairy prices at the auction increase, it is generally positive for the NZD/USD. If it falls, it is generally negative for the NZD/USD. The RBNZ is also publishing its twice a year Financial Stability report which includes their views on the economy, inflation and other important factors. As a result, this key report could have a big impact on the NZD/USD. However both are difficult to predict, so best traded reactively. REACTIVE TRADE

Consolidates at 8250
8300 and 8350 present serious challenge to upside
Turn lower would create negative pattern

The kiwi has been consolidating at the 8250 level for the past several days and momentum suggests that it may try to turn higher, but 8300 and 8350 stand as serious overhead resistace and failure to take those levels out would produce a bearish pattern for the pair.


Risk turns positive as day proceeds Dow up 0.15% Eurostoxx-1.15% Nikkei -0.48% Oil 85.79 +1.00 Gold $1684 +10

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