Carry trade "off" day, as negative sentiment regarding Greece

Carry trade "off" day, as negative sentiment regarding Greece

Fri, Feb 12 2010, 13:53 GMT
by T J Marta

Marta on the Markets

Currencies: Carry trade “off” day, as negative sentiment regarding Greece and poor data in New Zealand and Europe cause risk trade unwinding. USD and JPY outperformed while AUD and NZD lagged.
EUR/USD. Sliding towards 1.35

EUR/USD (1.3555) is down overnight on a combination of poor data and Germany showing recalcitrance towards bailing out Greece. Merkel repeatedly brushed off insinuations that European countries would provide a bailout package for Greece.

Data Releases: GDP and production disappointed. German Q4 GDP remained unchanged q/q (consensus +0.2%), as weak consumption and investment offset growth stemming from exports. The times series suggests that the mid-2009 surge is waning, and the question now is whether growth simply remains weak or the economy experiences a double dip. Eurozone Q4 GDP rose less than expected (0.1%, consensus 0.3%). This represents a moderation from the 0.4% growth in Q3. The long-term average for Euro zone growth is 0.4%. At best, the recovery appears to be pointing at subtrend growth. However, the risks are to the downside given the austerity budgets in place in Greece and Spain. Eurozone Dec production collapsed 1.7%(consensus 0.1%). For perspective, but for the past 2 years, this print marks the 5th worst print on record back to 1985. The recovery of 2009 looks at risk.

Technicals:

* Trend: Weekly down; Daily up.
* Overbought/Oversold (stochastics): Weekly oversold; daily oversold
* Support / Resistance Levels: Support for EUR/USD lies at 1.3537 (Feb12 low), 1.3424 (May18 low), 1.3330 (Jan27’09 high). Resistance lies at 1.3761 (downtrend resistance from Jan high), 1.4026 (Feb3 high), 1.4194 (Jan25 high), 1.4579 (Jan13 high) and 1.4626 (Nov low).

Positioning:

* The CFTC net non-commercial positioning appears particularly extreme for EUR. The short position has grown to -38.4K, near the record -43K established in Sep’08, weeks before EUR/USD bottomed around 1.25.
* The risk reversal (3m, 25delta) has begun collapsing again, consistent with the move lower in the euro, but it is also nearing the Dec’09 low, suggesting a stabilization in the currency.
* Implied Vol (3m) has retreated even as the downtrend in EUR/USD continues.

Cross-asset valuation: EUR/USD is re-establishing short-term correlations with other assets: Crude oil (positive), S&P (positive) and US 10yr yield (positive).
GBP/USD. Steady in 1.55-1.58 range

Cable (1.5598) is down overnight and appears to be stabilizing in the 1.55-1.58 range.

Technicals:

* Trend: Weekly lower; Daily lower
* Overbought/Oversold (stochastics): Weekly neutral; daily oversold
* Support/Resistance Levels: Resistance lies at 1.5765 (Feb10 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 1.5536 (Feb8 low) and 1.5373 (Jan’09 high).

Positioning:

* The CFTC non-commercial net position neutral to low at -34.9K
* The risk reversal (3m, 25delta), is grinding lower, suggesting the options market is pushing lower on GBP. However, it is also nearing the low in late-Dec, which marked a bottom in GBP/USD.
* Implied Vol (3mo) is settling again after jumping higher from very low levels.

Cross-asset valuation: The only strongly significant correlates over the past two months for GBP/USD have been the DXY (negative) and EUR/USD (positive).
USD/CHF. New high on suspected intervention

USD/CHF (1.0820) is up sharply overnight, and has traded a new high since Aug’09. While not confirmed, the sharp price action in EUR/CHF suggests that the SNB was in intervening again overnight to prevent excessive appreciation of the CHF versus EUR. SNB policymakers have warned that they would intervene, so the move is not a surprise.

Technicals

* Trend: Weekly higher, daily lower
* Overbought/Oversold (stochastics): Weekly neutral; daily overbought
* Support/Resistance levels: Resistance lies at 1.0825 (Feb12 high) and 1.1023 (Jun high), while support lies at 1.0643 (Jan29 high) and 1.05 (psychological).

Positioning:

* The CFTC non-commercial net position declined to -2.1K and is consistent with the rise in USD/CHF.
* The risk reversal (3m, 25delta), at +0.87, the skew is near an extreme in favor of USD/CHF. The options market went bullish back in Oct and hasn’t abandoned that view since.
* Implied Vol (3mo) has is stabilizing at a quite low 11.2775%.

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

USD/CAD (1.0575) is up sharply on the poor European data overnight, but remains in corrective downtrend from early Feb highs.

Technicals:

* Trend: Weekly up; Daily lower
* Overbought/Oversold (stochastics): Weekly neutral; daily overbought
* Support/Resistance Levels: Resistance lies at 1.0781 (Feb5 high), 1.0870 (Nov2 high), 1.0959 (Oct high), 1.0993 (Sep high), and then 1.10 (psychological). Support lies at 1.0480 (Feb12 low), 1.0225 (Jan14 low), 1.0207 (Oct low), and 1.00 (psychological).

Positioning:

* The CFTC, non-commercial, net position retreated from overbought territory, consistent with the rally in USD/CAD. It is now relatively neutral.
* The risk reversal (3m, 25delta), at 1.115, is lower but remains massively overbought.
* Implied Vol (3m) has stabilized and remains relatively muted.

Cross-asset valuation: In terms of other assets correlating with USD/CAD, watch the SPX (negative), DXY (positive), CRB (negative), and crude oil (negative).
USD/JPY. Testing downtrending channel

USD/JPY (89.93) is up overnight and testing the top of the downtrending channel in place since early Jan.

Technicals:

* Trend: Weekly higher; Daily crossing higher.
* Overbought/Oversold (stochastics): Weekly neutral; Daily oversold.
* Support/Resistance Levels: Support lies at 88.56 (Feb4 low) and 87.38 (downtrend channel bottom). Resistance lies at 90.31 (downtrend channel resistance), 90.35 (Feb12 high), 91.28 (Feb3 high), 91.88 (Jan21 high) and 93.77 (Jan8 high).

Positioning:

* The CFTC, non-commercial net position: The rise in the position to +8.4K is consistent with the recent decline in USD/JPY.
* The risk reversal (3m, 25delta) is relatively low, suggesting limited USD/JPY downside.
* Implied vol (3m): Has jumped from very low levels.