Risk Off Trade ~ Forex Special

Forex Special

Currencies: Risk off trade. AUD, NZD and CAD all underformed, while JPY outperformed. AUD was weighed by poor data and the RBA holding rates steady. GBP was buoyed by Northern Rock Posting a profit. The USD underperformed on concerns about more quantitative easing.

EUR/USD. Rally Continues
EUR/USD (1.3246) is up overnight, continuing the uptrend since early-June and posting another new high since May.
Technicals:
Trend: Daily higher; Weekly higher.

Overbought/Oversold (stochastics): Daily overbought; Weekly neutral.

Support/Resistance Levels: Support for EUR/USD lies at 1.30 (psychological), 1.2733 (Jul 21 low), 1.2152 (Jun 29 low), 1.1877 (Jun7 low), 1.1827 (Mar’06 low), and 1.1640 (Nov’05 low). Resistance lies at 1.3262 (Aug 3 high), 1.3692 (Apr12 high), 1.3818 (Mar17 high), 1.4026 (Feb3 high), 1.4194 (Jan25 high), 1.4579 (Jan13 high) and 1.4626 (Nov low).

Positioning:
The risk reversal (3m, 25delta) rose along with the rally in spot. The reversal is still heavily skewed for EUR downside, but it has rallied sharply towards the top of its six-month range – suggesting the rally is increasingly at risk of stalling or failing.

Implied Vol (3m) rose overnight, although it remains in the bottom-third of its six-month range.

Cross-asset valuation: The significant correlations that EUR/USD has during the past 60 days are the US10yr yield (positive) and the SPX (positive).

GBP/USD. Accelerating Rally
Cable (1.5950) is up overnight, boosted by Northern Rock earnings and building on yesterday’s sharp gains. The uptrend since May remains is accelerating at a seemingly unsustainable pace.
Technicals:
Trend: Daily higher; Weekly higher.

Overbought/Oversold (stochastics): Daily overbought; Weekly neutral.

Support/Resistance Levels: Resistance lies at 1.5969 (Aug3 high), 1.6284 (Jan22 high), 1.6458 (Jan19 high), 1.6479 (61.8% retracement of Nov to Dec decline), 1.6722 (Dec 3 high), 1.6878 (Nov16 high) and 1.7043 (Aug high). Support lies at 1.50 (psychological), 1.4949 (Jun12 low), 1.4239 (May19 low) and 1.3503 (Jan’09 low).

Positioning:
The risk reversal (3m, 25delta) rose overnight and is near the high since Feb. While it remains skewed for GBP losses, it is also in the upper end of its six-month range, which suggests an overbought condition.

Implied Vol (3mo) rose overnight but remains near the low since Sep 2008.

Cross-asset valuation: The significant correlates over the past two months for GBP/USD have been the DXY (negative), EUR/USD (positive), and S&P500 (positive).

USD/CHF. Drifting Lower
USD/CHF (1.0370) is down overnight, drifting to a new low since Jan set Friday.
Technical:
Trend: daily lower; weekly lower.

Overbought/Oversold (stochastics): Daily oversold; Weekly oversold.

Support/Resistance levels: Resistance lies at 1.0641 (Jul27 high), 1.0676 (Jul12 high) and 1.1742 (Apr’09 high), while support lies at 1.0348 (Aug2,3 lows) and 1.0131 (Jan low).

Positioning:
The risk reversal (3m, 25delta) fell overnight along with spot to a new low since Oct’09. This market segment has abandoned its bullish USD/CHF call, but the skew is extreme, suggesting potential for a rally in spot.

Implied Vol (3mo) is up overnight, rebounding modestly from multi-year lows.

Cross-asset valuation: USD/CHF has correlated mostly strongly during the past 60 days with EUR/USD (negative) and the USD index (positive).

USD/CAD. Rebounding Off 1.02
USD/CAD (1.0250) is up overnight after testing 1.02 yesterday and overnight.
Technicals:
Trend: Daily lower; weekly lower.

Overbought/Oversold (stochastics): Daily oversold; weekly neutral.

Support/Resistance Levels: Resistance lies at 1.0584 (Jul16 high), 1.0677 (Jul5,6 high), 1.0680 (Jun high), 1.0853 (May25 high) and 1.1725 (Jul’09 high). Support lies at 1.0205 (Aug2 low), 1.02 (psychological), 1.0139 (Jun21 low), 1.0110 (May13 low), 0.9931 (Apr21 low), 0.9825 (May’08 low), 0.9712 (Feb’08 low), 0.9058 (Nov’07 low).

Positioning:
The risk reversal (3m, 25delta) ticked lower overnight with the decline in spot. It remains roughly in the middle of its six-month range, providing little direction for the trend in spot.

Implied Vol (3m) is down slightly and is trending into the lower half of it’s range so far in 2010.

Cross-asset valuation: In terms of other assets correlating with USD/CAD, watch the SPX (negative), CRB (negative), crude oil (negative), and the 2yr spread (negative).

USD/JPY. Breaching Below 86
USD/JPY (85.77) is down overnight. It has breached 86 and established a new low since Nov’09.
Technicals:
Trend: Daily lower; Weekly lower.

Overbought/Oversold (stochastics): Daily neutral; Weekly oversold.

Support/Resistance Levels: Support lies at 85.73 (Aug3 low) and 84.83 (Nov27 low). Resistance lies at 88.12 (Jul28), 89.16 (Jul12 high), 92.89 (Jun4 high) and 94.99 (May4,5 high).

Positioning:
The risk reversal (3m, 25delta) slipped overnight. The skew is still in favor of USD/JPY downside, but lies in neutral territory relative to its range the past six months.

Implied vol (3m): rose overnight but remains deep into the lower half of its 6-month range.

Cross-asset valuation: The correlations of USD/JPY with the US 10yr yield (positive), the Nikkei (positive), and the S&P500 (positive) are significant.

AUD/USD. Down Within Uptrend
AUD/USD (0.9110) fell overnight weighed by weak retail sales and building approval data, as well as no hike from the RBA.
Technicals:
Trend: Daily lower; Weekly higher. Overbought/Oversold (stochastics): Daily overbought; Weekly neutral.

Support/Resistance: Technical support lies at 0.8634 (Jul19 low), 0.8316 (Jul1 low), 0.8067 (May25 low) and 0.7704 (Jul’09 low).

Resistance for AUD/USD exists at 0.9146 (Aug2 high), 0.9389 (2010 high), 0.9406 (2009 high), and 0.9850 (2008 high).

Positioning:
The risk reversal (3m, 25delta) rose overnight, and it is trending higher in the middle of its 6-month range.

Implied Vol (3m) fell overnight and is trending lower below the middle of its range for 2010.

Cross-asset valuations: AUD/USD has correlated most strongly with equities (S&P500, positive), commodities (CRB, positive) and the DXY (negative.)

NZD/USD. Fighting To Regain Jul High
NZD/USD (0.7330) is up slightly overnight, holding tough despite the weakness in Aussie.
Technicals:
Trend: Daily lower; Weekly higher.

Overbought/Oversold (stochastics): Daily overbought; Weekly neutral.

Support/Resistance: Resistance lies at 0.7397 (Jul27 high), 0.7442 (Jan14 high), 0.75247 (Nov high), and 0.7635 (Oct21 high). Support lies at 0.72 (psychological), 0.7030 (Jul19 low), 0.6795 (Jul1 low) and 0.6561 (May25 low).

Positioning:
The risk reversal (3m, 25delta) rose overnight along with spot and it trending higher above the middle of its six-month range.

Implied Vol (3m) slipped overnight, trading a new low since May.

Cross-asset valuations: The strongest correlates for NZD/USD during the past two months have been AUD/USD (positive), stocks (S&P500, positive), the DXY (negative) and commodities (CRB index, positive).