Why We Should Have More Answers This Weekend
Patience Pays Off ahead of G7
It was a good way to
round out what was a rather quiet, albeit erratic, month for the FX markets.Â
While it may be too early to say that new trends are being established, the
technical breaks yesterday were the first solid signs in many weeks. The
catalyst was the dollar; it appears the market focused on these themes in late
London trading Thursday morning:
1. FNM. The criminal
probe into the mortgage giant has many concerned with all too recent memories of
Enron and other financial debacles. Japan is the largest foreign holder of FNM
debt, this should not be overlooked, and with rumors of large Japanese selling
in 10-year Treasuries yesterday, there are still too many unanswered questions.
2. G7. Continued rumors
of a call for dollar depreciation to ease the account deficit at this weekends
meeting. While this is unlikely, given that implied volatilities in the options
market have not increased, it is making the rounds on trading desks and needs to
be recognized.
3. The dollar slide
simply brought in the momentum players who are flush with cash and anxious to
hop on a trend.
Purely from a macro and
political standpoint, a dollar depreciation seems unlikely, unless it is versus
the Chinese yuan. Secondly, the trade deficit is a result of unequal demand,
not pricing, and third, a dollar depreciation ahead of an election would simply
be unpalatable.
While we may have more
answers after this weekend’s G7 meeting, we must continue to look at the charts
and rely on shorter-term models as a way to navigate this market. The exception
being solid macro stories like our current long in AUD/NZD and EUR/GBP which
have sprung to life in the past few days.
Technical Notes:
EUR/GBP:Â we received a nice
pop in our long overnight as PMI data in the UK disappointed. Weekly bear
trend-line has been broken at .6890, look for next logical target at .6954.
AUD/NZD:Â a close above 1.0725
places our long back on solid footing as momentum had begun to wane in recent
sessions. Look for the 50 day ema at 1.0768 to provide near-term resistance.
As always, feel free to send me
your comments and questions.
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