Saxo Bank

Bernanke fails to offer further clues on rate trajectory. Situation in Iraq re-introduces the concept of geopolitical risk.  

Risk appetite showing signs of over-extension. Carry trades may finally see a decent correction ahead of G7 this weekend.
 
MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• NZ Non Resident Bond Holdings for Sep. ou at 74.3% vs. 73.0% prior.

THEMES TO WATCH – UPCOMING SESSION

Key data today:

• UK CPI/RPI (0830 GMT)
• Germany ZEW (0900 GMT)
• Canada Manufacturing shipments (1230 GMT)
• Canada Bank of Canada rate announcement (1300 GMT)
• US TICs data (1300 GMT)
• US Industrial Production and Capacity Utilization (1315 GMT)

Market Comments

The latest developments in Iraq reintroduced the market to the concept of geopolitical risk, which has practically left our lexicon previously. The combination of a US threat to pass a resolution reprimanding Turkey for WWI-era atrocities and a Turkish parlimantary consideration of possible incursions into Kurdish areas of Iraq aimed at attacking PKK forces is creating ugly tensions to say the least. TRY has been a poster child of the boom in risk and appetite for EM currency and it consolidated sharply weaker yesterday. This could be a warning sign for other EM currencies, and could support the USD across the board in the days ahead if the EM currencies continue to weaken, as the USD is normally the funding currency of choice for EM trades.

Looking across the markets, it would appear that the time is right for some consolidation of the recent tremendous move higher in risk appetite from the depths of the credit crunch. Crosses like AUDJPY and AUDCHF have been back near their pre-crunch highs, equities know no fear despite $85+ oil and EM currencies have only corrected a bit of their recent huge run. All of these are basically the same trade - as cross-market correlations are very high. And they will likely all fall together or rise together. The JPY could be a big winner in the short term, as statements/noise level from around the world from various officials about the degree to which currencies will be discussed at the upcoming G7 meeting has increased sharply. (Bernanke failed to provide any clues of note on the rate trajectory, but spent considerable time discussing the USD, so the issue is clearly at the center of every official's radar screen). If you are looking for the "high-octane" trade, have a look at shorting NZDJPY, as NZD failed to find bids despite nominally supportive bond holdings data. In fact, this trade is already unfolding as we are writing this...

One sign of divergence that was revealing yesterday was the fact that the huge extension in crude prices and gold failed to offer support for AUD and CAD. This is likely due to the fact that the move in those commodities was driven by FEAR rather than by a belief in strong fundamentals/booming markets/demand, etc.  as has been the case previously. This may be a key sign that a sharp correction in some of the recent strength in commodity currencies may be in order. Could the Bank of Canada announcement provide the trigger for a weaker CAD unit? No change expected, but watch the rhetoric.... If you want to stay away from the USD, have a look at CADCHF...

Also, remember that today is the kick-off for the flurry of UK data all week - may be tough to trade the pair, but we look for a weaker GBP unit in the aftermath....

Charts: AUDUSD and USDCAD

Just a brief look at the AUDUSD chart, which once again showed signs of discomfort above the 0.9000 level and could see a continued sharp correction towards basic Fibo retracement levels - the major one coming in at 0.8540 for the 0.382 retracement. The vicious price action shows that trading this may be difficult (screen grab taken almost at morning low, and the pair subsequently bounces back above 0.8900 within minutes!)

A similar look at the USDCAD chart, which shows that we were trading at flatline resistance at 0.9785 when the screen grab was taken.  The first Fibo for the big move down from 1.0865 comes in at 1.0150 area, with parity (1.0000) an obviously important psychological level.

Note: the support/resistance levels used in the matrix’s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.