TOP 5 HOT IDEAS

DATE: Thursday April 25, 2013

Guidelines for Top 5 Trading:
Proactive – Enter trade 20 minutes before data, 25 pip stop, 25 pip first target
Reactive – Enter trade 5 minutes after data release, 20 pip stop, 15 pip target

1. GBP/USD – Q1 GDP

FUNDAMENTALS
Q1 GDP expected @ 0.1% (4:30 AM ET / 8:30 GMT)
Our View – Mildly Bullish GBP
Reason – Retail Sales and Trade Increased
If GDP grows by 0.2% or more = Buy GBP/USD
If GDP Contracts by -0.1% or more = Sell GBP/USD

The biggest event risk for the GBP this week is tomorrow’s GDP report and while we have good reasons to believe that U.K. GDP will surprise to the upside because retail sales and trade increased in the first 3 months of the year, we think the larger reaction will be caused by another quarterly decline in GDP. It is no secret that the U.K. economy is weak but the question before us is whether the U.K. fell back into recession in the first quarter and if so, will the Bank of England finally ease. Based on economist expectations GDP grew 0.1% in Q1 and we agree that the economy expanded between January and March because retail sales and trade activity improved. However not everyone is sure that a triple dip recession has been averted and the skepticism of Bank of England policymaker Weale who must have a good read on the economy has us worried. Weale said earlier this week that there is a risk GDP declined in Q1 and if he is right that would mean the U.K. economy fell into a triple dip recession. Still we believe GDP can be traded proactively or reactively. For those who choose to wait, a drop in GDP growth should drive the GBP/USD below 1.52 and send the pair towards 1.50. Even if a triple dip recession is avoided unless GDP grew by 0.5% or more, we expect GBP/USD to rally but don’t believe it will have the momentum to break above 1.54. PROACTIVE or REACTIVE TRADE

TECHNICALS

5300 still caps
5200 remains near term support
Break of 5180 suggests deeper downside

Cable continues to consolidate within a very narrow 5200-5300 range as it tries to find direction. 5400 remains the main resistance point to the upside while 5180 opens a new downside leg.

2. EUR/USD – ECB Comments

FUNDAMENTALS
ECB Constancio speaking 8 AM ET / 12 GMT & ECB Coeure speaking at 8:30 AM ET / 12:30 GMT
Our View – Neutral
Reason – Neutral
If Constancio and Coeure do not mention rate cut possibilities = No Trade
If Constancio and Coeure do not mention rate cut possibilities = Sell EUR/USD

The focus right now is on whether or not the ECB will cut interest rates and tomorrow’s comments from Constancio and Coeure will help shape those expectations. If either gentlemen say that a rate cut is possible, we expect further losses in the EUR/USD. Their speeches are best traded reactively because no mention of rate cuts would be a nonevent for the GBP. REACTIVE TRADE

TECHNICALS

2950 holds for now
3025 near term resistance
3125 longer term resistance to upside

The EUR/USD just barely held above the 2950 level but remains vulnerable to break lower if that level is breached. Meanwhile 3025 and then 3125 cap the upside for now.

3. USD/JPY – Jobless Claims

FUNDAMENTALS
Jobless Claims expected @ 350K (8:30 AM ET / 12:30 GMT)
Our View – Neutral
Reason – Neutral
If Jobless Claims are less than 335K = Buy USD/JPY
If Jobless claims rise to 360K or more = Sell USD/JPY

With the focus on the U.S. labor market, weekly jobless claims can affect how USD/JPY trades especially if there is a large surprise. Unfortunately week to week data is difficult to handicap and therefore before best traded reactively. If jobless claims drop to 335K or lower, USD/JPY can be bought for a quick trade higher. If claims rise to 360K or more, USD/JPY can be sold. REACTIVE TRADE

TECHNICALS

Still in the 99.50-100.00 corridor
100.00 still awaits
98.50 deeper support

USD/JPY remains within striking reach of the 99.50-100.00 corridor but the 100.00 level still repels for now while 98.50 presents deeper support. A break of 100.10 opens the way for a test of 101.00

4. USD/CAD – Average Weekly Earnings

FUNDAMENTALS
Average Weekly Earnings expected @ 3% (8:30 AM ET / 12:30 GMT)
Our View – Neutral
Reason – Neutral
If Average Weekly Earnings grows by less than 2.0% = Buy USD/CAD
If Average Weekly Earnings grows by 4% or more = Sell USD/CAD

Average weekly earnings is not a huge market mover for the Canadian dollar unless there is a large surprise. Therefore the data is best traded reactively. If earnings grow by less than 2%, USD/CAD can be bought for a move higher. If earnings growth exceeds 4%, USD/CAD can be sold. REACTIVE TRADE

TECHNICALS

Same 1.0250-1.0300 range prevails
1.0350 deeper resistance
1.0200 acts as support

USD/CAD remains mired in the very narrow 1.0250-1.0300 range for now and only a break above 1.0350 or below 1.0200 will give traders some clue to directionality. In the meantime the pair consolidates.

5. S&P and USD/JPY

FUNDAMENTALS

With no additional data on the calendar, we take this opportunity to show you a chart of the S&P 500 and USD/JPY. The chart above shows how strong the correlation has been over the past 6 months. This tells us that new highs in the S&P 500 could help drive USD/JPY above 100. However if stocks come crashing down for whatever reasons (maybe weak US GDP), USD/JPY will have a very tough time breaking above this key level.