In our view the two situations most prone to a flare up and would be the Ukraine and EU political vote. In recent days, tensions between the Ukraine and Russia have deescalated. Allowing RUB and MICEX to improve markedly. Yet should the Ukrainian election results stir up deeper divisions and potential violence, the already fragile peace could spiral out of control. In addition there is the xfactor which is clearly Russian President Putin who seems more than willing to reshuffle the deck at any moment. Next is the clear win by Euro-skeptic parties and calls for slowing down the European experiment.
We suspect that this situation is more like an accident in slow motion, therefore near term market impact will be limited but with profound effects. Much depends on the interpretation of a gray clause in the Lisbon Treaty which say EU leaders will propose a candidate "taking into account the elections of the European Parliament". However there is no guarantee. We should expect to see power struggle between those who want a “more Europe” and advocates for a managed approach and reining in the powers of Brussels. On that front this week’s EU Summit (26-27 May) will discuss result of the EU Parliamentary elections. Trader will be listening for any clues on the future EC president.
We are looking forward to a subdued week, due to US and UK holidays and limited tier 1 economic releases, historical low and falling volatility is the defining theme. You can sit around and theorize why pricing is incorrect all you want but we would continue to pick strategies which historically have performed in these conditions. Mean reverting and yield seeking strategies in FX (and across asset classes) continue to perform well.
Data To Watch:
For this week: In the US, GDP should be revised flat against a 0.1% prior increase. The winter weather clearly has had a stronger adverse effect than previously thought. However, the Fed has made it very clear that they see the weak trend in Q1 growth as a one off and should be overlooked. Hence there will be no adjustment to forward expectations and no implication on policy. On this note Durable goods orders should contract. Japan will release April inflation numbers which could jump to 2.8% from 1.30% in Feb. The size of the jump will be examined for clues on the effect of taxes on inflation. In the BoJ's Semi-annual Economic outlook reports, it was confirmed that the central banks see inflation hitting the 2 target by 2015 so this VAT spike will provide evidence on attainability. And finally, Swiss growth is expected to improve further in Q1 to 0.5% putting y/y at a respectable 1.9%.
Today's Key Issues (time in GMT):
T07:30:00 SEK Apr PPI MoM, exp -0.30%, last -0.20%T07:30:00 SEK Apr PPI YoY, exp 1.80%, last 1.00%
T07:30:00 SEK Apr Retail Sales MoM, exp -0.50%, last 1.10%
T07:30:00 SEK Apr Retail Sales NSA YoY, exp 3.90%, last 5.10%
The Risk Today:
EUR/USD
EUR/USD has breached the strong support at 1.3643 (see also the 200 day moving average), suggesting persistent short-term selling pressures. The technical structure is negative as long as prices remain below the resistance at 1.3734 (19/05/2014 high). Another resistance can be found at 1.3775 (12/05/2014 high), whereas another support lies at 1.3562 (12/02/2014 low). In the longer term, EUR/USD has broken its long-term rising trendline (see also the support at 1.3673), indicating a clear deterioration of the underlying bullish momentum. A decisive break of the key support at 1.3643 (27/02/2014 low) is needed to confirm a long-term bearish trend reversal (potential double-top).
GBP/USD
GBP/USD continues to move within its rising channel. However, in the shorter-term, prices have failed to decisively break the resistance at 1.6903. An hourly support can be found at 1.6802 (20/05/2014 low). Another support stands at 1.6732 (15/05/2014 low), whereas another resistance lies at 1.6996. In the longer term, prices continue to move in a rising channel. A bullish bias remains favoured as long as the support at 1.6661 (15/04/2014 low) holds. However, a major resistance stands at 1.7043 (05/08/2009 high).
USD/JPY
USD/JPY has successfully tested the strong support at 100.76. A break of the resistance area defined by the declining trendline (around 102.14) and 102.36 (13/05/2014 high) is needed to suggest something more than a short-term bounce. An hourly support lies at 101.35. A long-term bullish bias is favoured as long as the key support 99.57 (19/11/2013 low) holds. Monitor the support area provided by the 200 day moving average (around 101.26) and 100.76 (04/02/2014 low). A major resistance stands at 110.66 (15/08/2008 high).
USD/CHF
USD/CHF has thus far failed to make a decisive daily close above the resistance at 0.8953. However, a bullish bias is favoured as long as the support at 0.8883 (15/05/2014 low) holds. Another resistance lies at 0.9038 (12/02/2014 high), whereas an initial support can now be found at 0.8924 (22/05/2014 low). From a longer term perspective, the structure present since 0.9972 (24/07/2012) is seen as a large corrective phase. A decisive break of the key resistance at 0.8953 is needed to validate a bullish reversal pattern (see potential double-bottom formation).
