Forex Analysis & Today's Strategy EURJPY 17July 08

EURUSD broke lower on inflation data and hawkish Fed comments, but not able to close below 1.5825 -50% fibo (1.5610-1.6038). Quiet session overnight with USD little lower. US banking stock rally and crude oil drop bring additional relief to the USD and carry trades yesterday. Is this the real thing or just a rally on short covering?... Overnight News Bullets § SZ Adusted Retail Sales YoY (May) out at 7.4% vs. 3.4% expected. Prior at -9.4% § UK Claimant Count Rate (Jun) out at 2.6% as expected. Prior at 2.6% § UK Jobless Claims Change (Jun) out at 15.5K vs. 10.0K expected. Prior at 14.3K § E-Z CPI MoM/YoY (Jun) out unchanged at 0.4%/4.0% as expected. § E-Z CPI Core YoY (Jun) out at 1.8% as expected. Prior at 1.7%. § US MBA Mortgage Applications out at 1.7% vs. 7.5% prior. § US Bloomberg Global Confidence (Jul) out at 10.30 vs. 21.01 prior. § CA Manufacturing Shipments MoM (May) out at 2.7% vs. 0.5% expected. Prior at 2.0%. § US CPI MoM/YoY (Jun) out at 1.1%/5.0% vs. 1.7%/4.5% expected. Prior at 0.6%/4.2%. § US CPI Core MoM/YoY (Jun) out at 0.3%/2.4% vs. 0.2%/2.3% expected. Prior at 0.2%/2.3%. § US CPI Index SA at 215.526 vs. 214.832 prior. CPI Index NSA at 218.815 vs. 217.903 expected. Prior at 216.632. § US Total Net TIC Flows (May) out at -2.5B vs. 60.6B prior. § US Net Long-term TIC flows (ay) out at $67.0B vs. $70.0B expected. Prior at $111.9B. § US Industrial Production (Jun) out at 0.5% vs. 0.1% expected. Prior at -0.2%. § US Capacity Utilization (Jun) out at 79.9% vs. 79.4% expected. Prior at 79.6%. § US DOE Inventories: Crude at 2952K vs. -2200 exp., Distillate at 3189K vs. 2000K exp., Gasoline at 2472K vs. -800K exp., Refinery at 0.33% vs. 0.00 exp. § US NAHB Housing Market Index at 16 vs. 18 expected. Prior at 18. § CH GDP Year-to-date YoY (2Q) out at 10.4% vs. 10.6% prior. O/N Data Heat map: EU US JP UK SZ AU CA NZ NO SE FR + - + - + Calendar Today's Highlights: Time (GMT) Region Release Consensus 09:00 SZ ZEW Survey (Expectations) (Jul) -67.0 09:00 E-Z Construction Output MoM/YoY (May) -/- 12:30 CA Int’l Securities Transactions (May) C$3.500 12:30 US Housing Starts (Jun) 960K 12:30 US Building Permits (Jun) 965K 12:30 US Initial Jobless Claims (Jul 12) 380K 12:30 US Continuing Claims (Jul 5) 3180K 14:00 US Philadelphia Fed (Jul) -15.0 14:35 US EIA Natural Gas Storage Change (Jul 11) 88 This and Next Week’s Highlights: Date Region Release Jul 18 AU Import Price Index Jul 18 GE Producer Prices Jul 18 UK M4 figures Jul 18 E-Z Trade Balance Jul 18 CA Leading Indicators, Wholesale Sales Jul 18 US Baker Hughes U.S. Rig count What's going on? § Better-than-expected results from Wells Fargo easing credit market concerns and falling oil prices improving the outlook for transportation companies has helped the U.S. stocks to stage a significant come-back, with S&P500 registering steepest gains since April. § Following the strong sentiment in the U.S. session, Asian equities have risen the most in 1-month period with the Asian markets benefiting from speculation that financial firms have taken an account of adverse news. § Crude oil continues has returned to $135 level after visiting the $132 mark in yesterday’s trading as larger-than-expected inventory build-up reinforced bearish demand factors from earlier this week. FX EUR USD JPY GBP CHF AUD CAD NZD NOK SEK PLN - FX Trading Strategies Pair Supp. Resis. Comments EURJPY 165.30 167.10 We have seen a sharp reversal from the highs and we think it is time for an intra-day bounce for this pair. We placed an order to buy at 166.52 stop bid, target is open, but break above 166.85 is key stop at 166.29 offer. MAJOR HEADLINES – PREVIOUS SESSION § US Jul. NAHB Housing Market Index out at 16 vs. 18 expected THEMES TO WATCH – UPCOMING SESSION Key Risk Events (All times in GMT) § Switzerland Jul. ZEW Survey (0900) § Canada May International Security Transactions (1230) § US Jun. Housing Starts and Building Permits (1230) § US Weekly Initial Jobless claims (1230) § US Fed Governor Kroszner to Speak (1245) § US Jul. Philadelphia Fed (1400) § Canada BoC Monetary Policy Report (1430) § Japan BoJ Minutes (2350) § Australia Q2 Import Price Index (0130) § Japan BoJ's Shirakawa to speak (0330) § Japan Jun. Department Store Sales (0530) Market Comments The USD found support yesterday on a raft of developments. US banking stocks saw an enormous rally yesterday, with the Financial Select SPDR ETF rallying more than 13% on two developments. First, the SEC has declared a 30-day ban on "abusive" naked short selling in 19 stocks in the financial sector, including, of course, Fannie Mae and Freddie Mac as well as a number of major financial institutions. While this is not a ban on short selling in general (normal short selling requires that shares are "borrowed" before they are shorted), it certainly is a sudden and intrusive presence in the market and requires that firms involved in short sales tread much more carefully and no doubt triggered some degree of generalized panic buying. A second drive for the buying was the Wells Fargo earnings announcement. The fifth largest US Bank and major mortgage lender, Wells Fargo handily beat earnings estimates and even raised its dividend 10%, a shocking development in an environment in which many are running around talking about mass insolvency this and systemic meltdown that. All markets will be watching further key bank earnings reports today, with Merrill Lynch and JP Morgan reporting, and tomorrow, with Citigroup's report on tap. Also supportive of the USD, risk appetite (and therefore a stopper for the carry trade sell-off) yesterday was another deep sell-off in crude oil on large weekly US inventory builds in crude oil and the major refined products. Still, yesterday was the expiry day for August crude options and the front contract found support at the 55-day moving average, so the jury is still out on the trajectory of oil prices. Yesterday, Bernanke delivered the same testimony to a House panel that he had delivered to a Senate committee the previous day. During the question and answer session, however, Bernanke was asked for the first time about whether intervention against the weak USD might be necessary. He answered the question very carefully, but did state that a disorderly market may justify intervention, even if intervention should be "rare". We must remind ourselves that USD intervention is a distinct possibility soon if the greenback is not able to find support in its own right and falls to new lows. In other Fed developments, the minutes of the latest FOMC minutes showed that some Fed officials favor a rate hike very soon. (Meanwhile, articles abound arguing that the Fed will end up cutting rates further by year end.) Despite all of the developments we've listed, the EuroZone/US rate differentials have hardly budged since the beginning of the month. The best plan may be to assume that this is a short squeeze and to look for good entries on a further rally in the carry crosses in the coming sessions. Lost in the maelstrom of news was the US CPI, with the core reading at a higher than expected 0.3% on a MoM basis, and YoY headline inflation at 5.0% - the highest level in nearly 20 years... Technical Impressions Technically speaking the USD remains broadly weak, even if momentum is very low and we saw a couple of reversal formations in USD/JPY and USD/CHF yesterday and EURUSD is officially rangebound for now as long as it remains below its recent highs. In the bigger picture, USD bulls need to see EURUSD back below 1.5600, GBPUSD below 1.9700, AUDUSD below 0.9500, and USDCAD above 1.0300 again to gain any measure of longer term confidence that the bottom is in for the USD. We leave out USDJPY because we feel the JPY is a wildcard and its negative correlation with the USD could flip at some point. For today only, the short term resistance level at 1.5865 looks like an important pivot point for EURUSD and 1.5800 looks like important support level. In GBPUSD, 1.9958 looks like an important short term support, with the 200-day moving average coming in this area and as it was previous high and then yesterday's low. USDJPY has a resistance zone at 105.30/50 (0.382 Fib retracement and Ichimoku cloud on daily respectively) followed by key 55-day moving average up at 105.75 area. EURJPY resistance comes in around 167.00 and first support below yesterday's 165.43 low comes in at the 165.19 55-day moving average and the major old high at 164.96.

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