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Daily Forex Commentary EUR/USD, GBP/USD, EUR/JPY, GBP/JPY May 2, 2012

May 02
04:32 2012

ISM Data Halts EUR/USD Stop Run

The low volume and ISM Manufacturing data put a halt to any stop run to the upside on the Euro yesterday and now we have the decoupling theory creeping back into the markets. How long it will last is the real question here. I have my doubts it will be that long but considering the picture in Europe gets worse by the day I am having doubts there will be a significant push higher on the Euro now. It could still happen as I am still rather sure there are stops to be had above the 1.3300 level but not so sure they will be worth spending the money to get now.

The chart is still a mess but if we can get a good push below the 200EMA (blue) today I will be expecting the 3 push drop. As for any trades today on this pair I am keeping an open mind and has a small bias to the downside. I will be most happy to short off some upside manipulation during the London session. With the decoupling and European problems in favor of the short here it could be a significant move and if it does happen may be worth holding for the longer term swing trade down. Just going to have to wait and see what the market brings today.

The GBP/USD has made a significant push to the downside for well over 100 pips and shows a possible 1st push down. However I am a little concerned that it hasnt broke below any significant support and is finding it at a break out level rather than a bottom. There seems to be a desire to retest the highs here and has more probability of chopping here for awhile. So when in doubt we treat this as the 3rd push chop and trade the intraday pushes along with confluence of Smart Money habits. Yesterdays high will be where I start to look and see if there is a good reason to short this pair today but will be better to see it hit a more significant level.

The EUR/JPY has made the weak reversal at this point due to some JPY weakness off the PMI data from the US yesterday but is seemingly having trouble on a clear push due to the Euro being weak also. With that in mind I will be focused more on the GBP/JPY today as it is holding the correlation with the USD/JPY pretty tight.

The GBP/JPY looks the most interesting today with a not so clear direction on the GU and potential reversal coming with Yen weakness this will be the pair I watch close today. Some decent manipulation into the 4hr 200EMA and I will be looking for the long on this pair today as long as the tight correlation with the USD/JPY is still there which I think will be likely.

Forex News Today

News releases are busy today starting with the PMI and Retail Sales from the Switzerland. I usually dont talk about Swiss news but this could be something that adds to some USD strength since the Swiss Franc is a safe haven currency if these figures show a deteriorating economic outlook then the safe haven status may go with it. What will be most interesting is if the PMI release drops below the 50 level signaling shrinking business conditions from purchasing managers.

Next in line is German employment numbers the EZ Unemployment Rate and for icing on the cake the ECOFIN Meeting that lasts all day.

The potential for tape bombs today are high with this meeting. From what I have been reading lately this will be an attempt to pressure Germany and the other financiers of the major portion of the ESM to agree to changing the law that created the bailout fund to be able for the money there to be used to bail out European banks directly. If they do this it will significantly change the outlook for the EZ. They will be able to kick the can alot further down the road and it will seem for awhile that all is well again in Europe.

With allowing the ESM to bail out banks directly it will also create an environment where the governments that are failing will not have to undergo the harsh austerity and get their financial houses in order. Therefore will create the look of everything being well in the EZ until of course the markets realize its not which will take time and they will focus on other countries like the US and Japan for example.

Having said that I highly doubt the Germany will agree to this especially with elections coming up next year and the German people already quite upset with them being the main funder of reckless spending European governments that  are up to their eyeballs in debt. However the chance of some finance minister coming out of this meeting and saying to the effect of “we are getting closer to an agreement on the ESM” will have a boosting effect for the Euro. Of course a statement like that will likely be shot down by Schauble but if the market believes this has a chance of coming to fruition the Euro will get the boost they want. Her is an excerpt from the Business Insider article with a little more detail.

Even at the highest levels, the can of worms has now been acknowledged as open—just as the rift that zigzags through the Eurozone has become deeper and wider: according to information the Süddeutsche Zeitung obtained, the ECB and a group of Eurozone countries are trying to make it possible for the permanent bailout fund, the ESM, to bail banks out directly. The countries remained unnamed but, given the nature of the topic, would have to include Spain.

Any such effort would violate the two fundamental principles of the ESM—that a country will get bailed out if, and really only if, it commits to the reforms necessary to make its economy competitive and to reduce its deficit; and that only countries will receive funds, and not banks. The goal was to alleviate the causes of the debt crisis—high deficits and uncompetitive economies. It was how German parliamentarians had been persuaded to vote for the bailout packages.

Nevertheless, a working group will determine over the next two weeks—lightning speed by EU standards—how, not if, banks could receive bailout funds directly from the ESM. Cause for the rush: Spain.

Spanish banks have been ravaged by the implosion of a real-estate bubble that they caused with their reckless lending practices. Now they needed an immediate injection of at least €50 billion, and much more later, as bad loans and collapsing real-estate values on their books would finally have to be dealt with.

By having the ESM bail out banks directly, a debt-sinner government could avoid painful reforms and deficit reduction programs; and it could avoid having to bail out its own banks, highly unpopular when “austerity” is being imposed on the citizens. This just happened in Greece where banks reported €28.2 billion in losses. 13% of GDP! But €25 billion in rescue funds had already been transferred to the government—to bail out the banks, not the Greeks themselves. Yet it’s almost over. Read….  “Drachma Clauses” For Greece’s Exit from the Eurozone.

Spain could have asked for bailout funds long ago, but it didn’t want to do that because it didn’t want to subject itself to the painful reforms that had been imposed on Greece, Ireland, and Portugal. It would be much easier if the banks could get bailed out directly.

Now with all that out in the open I should also mention that it is entirely possible that Germany refuse to discuss the ESM at all which will kill any thoughts of changing the structure it and the house of cards will be that much closer to falling. I will be the first to say that nothing will surprise me and I have absolutely no clue as to what will come of this.

The news from the UK is Construction PMI and Net Lending to individuals and both are expected to drop and I dont expect much movement from these unless the is a big surprise from the PMI numbers.

Lastly is the US news with ADP Nonfarm Payrolls and Factory orders. ADP is expected to drop and if it does surprise down then the euphoria from the good ISM figures yesterday will be wiped out and the decoupling theory fade yet again. Otherwise if it does miraculously surprise to the upside then the euphoria will continue as it will create some small expectations for Non Farm Payroll on Friday to be better also.

The safest trades today considering all this together is play the extremes where we see manipulation or a stop run.

Happy trading




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1 Comment

  1. Karim
    Karim May 02, 23:00

    Perfect match and same cycles as yours.

    Reply to this comment

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