FUNDYS

Fed Chair Bernanke has been under some intense scrutiny over the past several days, with pressure and criticisms on the latest injection of liquidity into the system coming both domestically and internationally. Most recently, a letter from the Republicans calling into question the current ultra-accommodative policy has been getting a lot of attention, and the Fed has been forced to step up and defend its actions. The Fed has released the prepared text of a speech the Fed Chair is set to deliver at the European Central Bank conference in Frankfurt today, and the message is clear. The central bank will continue with the current policy as it is the only way to help the economy recovery from the latest crisis. There are two key takeaways from the speech. The first is that the central bank will continue to lower long-term rates, and the second is that foreign central banks are interfering with the Fed’s current policy through intervention efforts to weaken their own currencies.

Relative Performance Versus USD Friday (As of 9:15GMT)

SWISSIE+0.56%
EURO +0.50%
YEN+0.38%
STERLING+0.31%
CAD+0.21%
KIWI+0.05%
YEN-0.02%

The net takeaway from the speech is very USD bearish, and we would expect the buck to come under some more pressure on Friday once market participants take time to fully digest the text of the Fed speech. We have written in recent commentary of the likelihood for some broad based USD selling following the latest rally in the buck, and this should help to put more pressure on the Greenback into the weekend. However, we have still not given up on the buck, and feel that the USD will once again find bids into the early stages of next week.

On the surface, the tone of the speech is certainly very USD bearish, but the speech is also more likely than not in reaction to criticisms of current policy decisions that would only provoke a necessary defense from the Fed of such policy. It therefore stands to reason that the Fed would not come out and make a statement that calls into question their current efforts as that would only serve to undermine their decision making. But we do believe that there is another side to the Fed that is very much concerned with the longer-term threats of current monetary policy actions, and is looking for signs to start to reverse policy and rein in QE. Unfortunately, the Fed believes that current market conditions still do not warrant a reversal in policy, with the recovery still too fragile, and the priority still needing to be on the shorter-term threats to the economy. But irrespective of this latest speech, we have seen signs of a more balanced and reserved central bank in recent weeks. After all, the Fed only pumped in what they felt was necessary despite pressures from the markets to pump in more, and they also made it clear that they could rein in these measures at any time.

In the end, the latest speech is very USD bearish on the surface and we believe should open more USD selling on Friday. At the same time, we believe that the speech should be taken into the proper context as its intention is to highlight and defend current policy efforts. There clearly is another side to the Fed (not included in this speech) that is also very aware of the threat of current policy and looking to see more signs of recovery in the US economy so that it can begin to reverse policy. Economic data over the coming weeks in the US will be critical and this ultimately will determine what direction that Fed takes going forward. We believe that data will continue to show signs of improvement and this will allow the Fed to begin the long, slow and steady path of reversing policy, which should ultimately narrow yield differentials back in favor of the Greenback.

Elsewhere, it is worth noting that the Australian and New Zealand Dollars have been relatively underperforming Friday on the back of the latest moves by China to rise its banks’ reserve requirments by 50 basis points to a record high 18.0%. Meanwhile, as the USD comes under pressures, concerns over the state of Ireland and other beleaguered Eurozone economies have faded into the background.

Looking ahead, the economic calendar on Friday is basically non-existent, and the key focus will be the many central bankers that are slated to speak throughout the day, with many coming from the ECB conference in Frankfurt. US equity futures are trading flat into the European open, while commodities are mixed.

GRAPHIC REWIND

TECHS

EUR/USD:(See below)

USD/JPY: The market has been in recovery mode over the past several days since confirming a double bottom on the break above neckline resistance at 82.00. However, the risks for additional upside should now be limited to the 100-Day SMA by 84.35, and any rallies into this longer-term SMA should be sold in anticipation of a resumption of the broader underlying downtrend. The focus is still on a retest and break of the record lows by 79.75 from 1995, and only a sustained break back above the 100-Day SMA would negate this outlook.

GBP/USD: Overall, price action has been quite choppy, with the market unwilling to commit in either direction at present. However, the clearest trend over the past few months has been on the constructive side, and a fresh higher low could be in place by 1.5840 ahead of the next upside extension beyond 1.6300 over the coming days. In the interim, we remain sidelined and await a clearer signal. Back below 1.5840 would be required to negate and open the door for deeper setbacks towards 1.5650. Above 1.6300 exposes critical psychological barriers by 1.6500.

USD/CHF: We contend that the market is in the process of carving a material base by 0.9460, and any setbacks should be very well supported in favor of a sustained recovery. A fresh higher low has now been confirmed by 0.9550 following the latest break back above 0.9975, and the market should now accelerate beyond parity towards our next key topside objective at 1.0300 over the coming sessions. Any intraday setbacks are expected to be well supported ahead of 0.9700.

FLOWS

Good two way flows in Cable, a Middle East account lifting the pair to fresh highs but a US prime name is attempting to cap ahead of 1.6100. A German name has been an aggressive seller in Aud/Usd with a European name on the bid in dips, bids said to lie lower down from a Japanese account and UK name. Buying from a NZ exporter and Asian name lifted Nzd/Usd however selling from private clients and an Asian fund keeps things in check, added weight coming from sales in Nzd/Jpy from a major Japanese security house.

TRADE OF THE DAY

EUR/USD: The correction out from the recent 1.3450 lows has begun to accelerate and there is plenty of room for gains to extend back towards the 20-Day SMA before considering the possibility for a bearish resumption. However, any gains beyond the 20-Day SMA on Friday are likely to be well capped with the broader short-term structure now on the bearish side since the market broke back below 1.3695 in the previous week. As such, we like the idea of fading overdone intraday rallies and our sell entry by the 20-Day SMA is well above the projected daily average true range. If the 20-Day SMA is tested, the hourly RSI is also expected to be through the roof and most probably closer to the 80 area, which will further strengthen the prospects for some form of a sharp reversal. STRATEGY: SELL @1.3820 FOR AN OPEN OBJECTIVE; STOP 1.3920. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE ON FRIDAY.

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