FOREX analysis Asia overview 20090324

OVERVIEW

Stock markets heartily endorsed a plan to help lift $1 trillion in hard-to-value assets from the balance sheets of financial institutions, giving the main indexes their best day since October. Treasury Secretary Timothy Geithner pledged to spend up to $100 billion in TARP funds for the Private Public Investment Program, which could help purchase $1 trillion in toxic assets. The Dow Jones industrial average closed up 497 points, or 6.8%, to 7776, the S&P 500 up 54 points, or 7.1%, to 823 and the Nasdaq up 99 points, or 6.8%, to 1556. It was the largest percentage gain in the S&P 500 since Oct. 28.

The plan involves creating five different public-private funds that will bid on toxic assets. Bill Gross, co-chief investment officer at Pimco, said his firm intends to participate as a manager and buyer. "This is perhaps the first win/win/win policy to be put on the table," Gross said in an emailed statement. He also said the returns could be "in the teens". Financials were among the chief beneficiaries of the plan. Shares of Citigroup gained 17%, Bank of America climbed 19% and JPMorgan added 18.6%. Analysts at Capital Economics said the plan deserves a cautiously optimistic welcome because it is unclear how enthusiastic banks will be to sell the troubled assets. "There is still plenty of uncertainty surrounding how the pricing of these assets and loans will occur. In particular, banks may prefer to continue to sit on the assets rather than accept a substantial loss," they wrote in a client note. Also helping stocks was a strong report on existing home sales. Sales grew 5.1% in February against expectations for a 0.9% decline, and following a 5.3% drop in January, according to the National Association of Realtors. The optimism from the plan spilled over to international stock markets. In Canada, the S&P/TSX composite index closed up 424 points to 8930 and the main European bourses gained 2-4%.

It was a volatile day for USD/CAD following the announcement of the U.S. Treasury's plan to purchase toxic assets, and better than expected U.S. housing data. Early in the session, the currency pair traded in a one-cent range and had little reaction to surging equity markets. But as stocks made gains and oil hit a 10-week high, the Canadian dollar surged. Late in the session, USD/CAD was down 0.0165 to 1.2243. Most of Monday's volatility is due to the news that the U.S. Treasury will invest up to $1 trillion to purchase mortgage-backed securities and other toxic debt. Over the weekend, the Wall Street Journal published a story releasing some of the proposed details. USD/CAD moved higher following the release of the official report. Currency strategists said the stronger U.S. dollar reflected some uncertainty over the plan. Steve Butler, director of FX trading at the Bank of Nova Scotia, said he sees the rally in the U.S. dollar as short covering, as investors take some profits off the table. "It sounds like a great plan but I think people might have some questions as to exactly how this would work," he said. The Canadian dollar recovered some of its losses following a better-than-expected U.S. existing home sales report.

Marc Chandler, senior currency strategist from Brown Brothers Harriman, said he is looking for the U.S. dollar to continue to weaken as risk appetite continues to improve. The U.S. dollar also weakened against the other currencies as Treasury Secretary Timothy Geithner detailed the program. The U.S. dollar was up 1.11 to 97.06 against the yen and the Dollar Index was down 0.415 to 83.426. The euro was up 0.0063 to 1.3645 against the U.S. dollar, down 0.0171 to 1.6682 against the Canadian dollar, down 0.0028 to 0.9361 against the pound sterling and was higher by 2.15 to 132.42 against the yen. The pound sterling was up 0.0110 to 1.4575 against the U.S. dollar and down 0.0136 to 1.7819 against the Canadian dollar.

The U.S. Treasury's plan to purchase toxic assets and stronger-than-expected existing home sales helped to boost oil on Monday, sending it to a two-and-a-half month high. The rally in oil prices started at 10 a.m. EDT. Prices dropped to near session lows ahead of the existing home sales report and rebounded sharply following the better-than-expected data. The positive news helped WTI crude break through $54 per barrel, hitting session highs at $54.03. Most recently, WTI crude oil was up $1.78 to $53.85. Also helping to boost risk appetite is the latest news from the U.S. Treasury, which announced it would invest up to $1 trillion to purchase mortgage-backed securities and other toxic debt. Colin Cieszynski, market analyst from CMC Markets, said rising risk appetite could suggest that underlying investor confidence is improving. He added the commodities market could also be moving higher in anticipation that global supply and demand will move back into balance.

"U.S. crude oil has broken through $53.00/bbl today, and out of a trading channel that has been in place since December. While a measured move suggests $71.00/bbl may be attainable over time, nearer term resistance looms near $60.00/bbl," he wrote. Analysts from Citigroup said the technical indicators are pointing to further gains in oil prices. They noted that last week oil prices closed above $50 per barrel, and they believe this opens the way for $68. The powerful rally in equities left the Treasury market in limbo on Monday. Lowered risk aversion argued for higher rates but the Federal Reserve's pledge to buy Treasuries capped the gains. "Monday's session was lackluster at best," said David Ader, head of government bond strategy at RBS Greenwich Capital. "The Treasury Department's long-awaited bad-bank bailout program failed to create enough selling pressure to push yields meaningfully higher." On the session, U.S. two-year yields were up 4.1 bps to 0.91%, with five-year yields up 5.6 bps to 1.70%, 10-year yields up 4.1 bps to 2.68% and 30-year yields up 3.9 bps to 3.70%. "The lack of any further details from the Fed on the Treasury-purchase plan has left the market in a bit of suspense," Ader said. Elsewhere, yields on two-year Canadian government bonds were up 2.8 bps to 1.04%, with five-year yields up 2.6 bps to 1.76%, 10-year yields up 2.9 bps to 2.77% and 30-year yields up 1.5 bps to 3.61%. The September 09 BAX contract was down 3.0 ticks to 99.45. In Germany, returns on two-year German bonds were up 1.5 bps to 1.33%, with five-year yields up 3.6 bps to 2.25%, 10-year yields up 4.5 bps to 3.02% and 30-year yields up 2.0 bps to 3.89%. Yields on UK two-year bonds were down 3.4 bps to 1.31%, with five-year yields up 6.4 bps to 2.31%, 10-year yields up 9.6 bps to 3.12% and 30-year yields up 2.6 bps to 4.10%.

ASIA

The Bank of Japan's minutes from the February 18-19 meeting revealed the bank felt that buying corporate bonds was necessary to stabilise financial markets. At the meeting, the central bank held the target rate unchanged at 0.1% as expected, but also announced further measure to boost corporate financing. The bank said it would begin purchases of corporate bonds and extend the period of time they will buy commercial paper. The bank has met since then and expanded their purchases of Japanese government bonds. Japan's money market had been nervous," the minutes read, citing several irregularities on interest rates and exchange rates. The Bank of Japan members agreed they should support a decline in term rates through a special funding, but also acknowledged that an exit strategy from the programs was needed. One member, Miyako Suda, said the purchase of corporate bonds was unnecessary and would have limited impact.

The Reserve Bank of Australia's Assistant Governor Philip Lowe said Tuesday that the country needs to revamp its electronic payment systems. Speaking in Sydney, the central banker made no reference to the Australian economy or interest rates. The bank is working on reforming online purchases and setting a cap on the fees a merchant's bank pays a customer's bank when the merchant accepts credit cards such as Visa or Mastercard.

COMMODITIES

Oil price remains strong in European morning as driven by rallies in stock markets. Sentiment has improved significantly after central banks around the world showed efforts to revive the economy. Currently trading at 55.5, the May futures should trade firmly above 50 in the neart-term. However, we doubt if it can head for 60 without much volatility as investment demand has grown since last week. Any bad news, such as another week of inventory gain, will trigger profit-taking.

In Asia, the MSCI Asia pacific Index added almost 4%, the biggest jump since Dec 15 while Japan's Nikkei 225 Stock Average climbed d3.4%. In China, stocks have risen for the 6th consecutive day as investors speculate the nation will be first economy to recover from global recession with the Chinese government's stimulus plans.

Sinopec, Asia's largest refiner, gained 4.6% after the corporation said its profit may double to RMB 46.2B in 2009, following a first-in-7-years decline in net income in 2008. Other oil stocks also surged. Petrochina also gained 7.5%, which CNOOC (the largest offshore oil producer in China) also added 6.8%.

In European morning, UK's FTSE 100 Index climbed 1.7% as driven by banking stocks. In Germany and France, DAX and CAC 40 added 1.9 and 1.6% respectively. Market's focus today is on Treasury Secretary Timothy Geithner introduction on Public Private Investment Program. The dollar's weakness continues to support gold. After the 3% intraday decline after the Fed's asset buying plan, the USD index's outlook remains bearish. Yesterday, the index dropped 0.5% further to 83.31

CURRENCIES

Yesterday ECB Trichet said that the bank will continue to take "non-conventional" measures through the banking channel. IMF managing director Strauss-Kahn urged further action to be taken to prevent a "wasteland of unemployment" Also, he called for more stats to reduce tax rates and spending as monetary policy has "reached its limit". Australian Treasurer Swan said that it's "virtually impossible" for Australia to avoid economic contraction given the slump in global economy. Japan Finance Minister Yosano urged a new fiscal stimulus of more that $200b to revive the economy of Japan.

The Bank of Japan released minutes for last week's meeting. The central bank increased purchase of long term JGB up to 21.6trillion yen from 16.8 trillion yen in order to revive the economy. Despite this, the BOJ still lags BOE and Fed in terms of balance sheet expansion. Technically, with 4 hours MACD staying well above signal line, intraday outlook in dollar index is turned neutral for the moment. However, note that another decline cannot be ruled out as long as 84.61 resistance holds. We'd maintain the view that 81/82 level is critical to the long term up trend in the dollar index. As discussed before, there is an important cluster support of 61.8% retracement of 77.69 to 89.62 at 82.24 and 38.2% retracement of 70.70 to 89.62 at 82.39. In addition, the long term rising trend line support is now sitting at 81.40 level. Strong rebound from that level, followed by break of 84.61 resistance will keep the long term up trend intact. However, as noted before, sustained trading below 81/82 will strongly suggest that the long term up trend has completed with bearish divergence conditions in both daily and weekly MACD and RSI
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TECHNICAL ANALYSIS

DOW JONES INDEX

The Dow closed sharply higher on Monday as it extended this month's rally. The high-range close sets the stage for a steady to higher opening on Tuesday. Stochastics and the RSI are overbought but remain neutral to bullish signalling that additional gains are possible near-term. If the Dow extends this month's rally, the reaction high crossing at 7970 is the next upside target. Closes below the 20-day moving average crossing at 7090 would confirm that a short-term top has been posted. First resistance is today's high crossing at 7780. Second resistance is the reaction high crossing at 7970. First support is the 10-day moving average crossing at 7280. Second support is the 20-day moving average crossing at 7090.

S&P

The June S&P 500 index closed sharply higher on Monday extending this month's rally. The high-range close sets the stage for a steady to higher opening on Tuesday. Stochastics and the RSI are overbought but remain neutral to bullish signalling that sideways to higher prices are possible near-term. If June extends this month's rally, the reaction high crossing at 833.20 is the next upside target. Closes below the 20-day moving average crossing at 737.69 would temper the near-term friendly outlook. First resistance is today's high crossing at 820.30. Second resistance is the reaction high crossing at 833.20. First support is the 10-day moving average crossing at 761.60. Second support is the 20-day moving average crossing at 737.69.

NASDAQ

The June NASDAQ 100 closed sharply higher on Monday as it extended this month's rally. The high-range close sets the stage for a steady to higher opening on Tuesday. Stochastics and the RSI are overbought but remain neutral to bullish signalling that sideways to higher prices are possible near-term. If June extends this month's rally, February's high crossing at 1285.25 is the next upside target. Closes below the 20-day moving average crossing at 1139.11 would confirm that a short-term top has been posted. First resistance is today's high crossing at 1258.00. Second resistance is February's high crossing at 1285.25. First support is the 10-day moving average crossing at 1175.85. Second support is the 20-day moving average crossing at 1139.11.

TAIWAN INDEX

The Index is moving according to our expectation as mentioned yesterday. With the successful break of the resistance level at 189.54, we anticipate a possible test at with targets at 200.57 (38.2% Fibonacci - 15/10/08 low) and if this level is able to hold successfully, we may see subsequent move higher towards the 215.22 (50% Fibonacci - 30/9/08 low). On the downside, if 180.31 breaks, we will likely see a move lower towards the 178/175 cluster zones subsequently.

COMMODITIES

Daily Pivot PointsNormal Range Last Bar
CommodityR3R2R1PPS1S2S3HLCDate
Crude Oil57.1155.5854.6853.1552.2550.7249.8254.0551.6253.7824/3
Gold974.43966.27952.33944.17930.23922.07908.13958.10936.00938.4024/3
Silver14.07813.98213.80813.71213.53813.44213.26813.88513.61513.63524/3
Copper1.96301.91901.88801.84401.81301.76901.73801.87501.80001.857024/3

GOLD

Gold was affected by "monster rally" on Wall Street last night as investors moved into equities. However by closing the price was able to hold above 925 (above the ichimoku cloud) and this supports our previous explained scenario. We expects some incline and keep our overview towards upside bias as far as 925.00 remains unbroken.
The trading range for today is among the key support now at 925.00 and key resistance now at 1000.00.

The general trend is to the upside as far as 820.00 remains intact with targets at 1035.00 and 1060.00.

Support: 935.00, 925.00, 916.00, 9132.00, 907.00
Resistance: 952.00, 963.00, 977.00, 988.00, 995.00
Note: We will monitor closely and will update in our evening note.

COPPER

News : Copper touched a 4-1/2 month high before easing back on Monday, as a U.S. plan to cleanse the banking sector of toxic assets boosted the outlook for the economy and demand, and after data showed robust Chinese import demand. Copper for three-month delivery on the London Metal Exchange was last bid at $4,060/$4,065 a tonne in official rings, from Friday's close of $3,955. It earlier touched a day's high of $4,135, its highest level since Nov. 10.
Technical : We expect of the continuation of the bullishness in copper. As mentioned yesterday, 1.85 is a key benchmark level that we are focusing. Currently our upside bias remains unchanged towards targets at 2.00. However we would be watching cautiously of any potential signs of correction.
The trading range for today is among the key support now at 1.8355 and key resistance is now at 1.9135 level.
The general trend is to the upside as far as 1.6460.00 remains intact with targets at 1.8785.
Support: 1.8555, 1.8425, 1.8355, 1.8230, 1.8145
Resistance: 1.8750, 1.8885, 1.8940, 1.9075, 1.9135
Note: At point in time we keeping close watch of the movement and any indications of a possible start short term correction. We will update in our evening note.

SILVER

Similar to gold, price was affected by the rally that we witnessed on Wall Street as of last night. However silver was able to hold above above the 13.60 Fibonacci expansion level. Our overview will be towards upside bias as far as 13.00 zones remains unbroken
The trading range for today is among the key support at 12.95 and key resistance now at 14.60.
The general trend is to the upside as far as 12.00 remains intact with targets at 16.50.
Support: 13.55, 13.40, 13.25, 13.00, 12.95
Resistance: 13.95, 14.08, 14.23, 14.40, 14.60
Note: According to our analysis, a close above 13.88 open the path towards targets at 14.15.

MAY CRUDE

Momentum indicators are still showing overbought case supporting a possible retracement towards the downside targeting 53.85 and 52.00 to cover the Gap. We notice that a clear close of the daily candle below 56.20 will confirm our expected bullish scenario.
The trading range for today is among the key support at 51.75 and the key resistance at 54.55.
The general trend is still support upside for the time being however we expect downside actions if a clear 4h close occurred below 53.55 targeting 52.30 and 45.90.
Support: 54.80, 54.60, 53.90, 53.25, 53.00
Resistance: 55.85, 56.25, 56.60, 56.95, 57.35

Note: We will update our observation in our evening note.

DXY

The June Dollar closed lower on Monday and below the 62% retracement level of the December-March rally crossing at 84.10. The mid-range close sets the stage for a steady opening on Tuesday. Stochastics and the RSI are oversold but remain neutral to bearish signalling that sideways to lower prices are possible near-term. Closes below the weekly uptrend line crossing near 83.00 would confirm that a major top in the Dollar has been posted while opening the door for a larger-degree decline this spring. Closes above the 20-day moving average crossing at 87.83 would temper the near-term bearish outlook in the market. First resistance is the 10-day moving average crossing at 86.56. Second resistance is the 20-day moving average crossing at 87.83. First support is last Thursday's low crossing at 83.14. Second support is the weekly uptrend line crossing near 83.00.

FX
IMM POSITIONING

The latest IMM data cover the week from 10 to 17 March.
The data, which was collected ahead of the last Fed meeting, show a further increase in net long USD positions, primarily at the expense of positions in JPY. This implies that at the beginning of last week, speculative investors had the largest long USD positions since October. This could explain the sharp USD sell-off on the back of Fed's bold initiatives, the latter causing a major shift in sentiment towards the greenback.
Yen positioning has now turned negative, for the first time since September 2008. The JPY is no longer the safe-haven currency it used to be, and long positions have continually been reduced since February, turning short last week.
Speculative investors added to their AUD and NZD positions, reducing NZD shorts while turning AUD positioning neutral. This coincided with a pick-up in risk appetite.
USD/CAD shorts were added as USD/CAD traded above 1.30 on poor data and concerns of the BoC adopting unconventional measures at the next monetary meeting in April.
Dollar index: The June Dollar closed lower on Monday and below the 62% retracement level of the December-March rally crossing at 84.10. The mid-range close sets the stage for a steady opening on Tuesday. Stochastics and the RSI are oversold but remain neutral to bearish signalling that sideways to lower prices are possible near-term. Closes below the weekly uptrend line crossing near 83.00 would confirm that a major top in the Dollar has been posted while opening the door for a larger-degree decline this spring. Closes above the 20-day moving average crossing at 87.83 would temper the near-term bearish outlook in the market. First resistance is the 10-day moving average crossing at 86.56. Second resistance is the 20-day moving average crossing at 87.83. First support is last Thursday's low crossing at 83.14. Second support is the weekly uptrend line crossing near 83.00.

EUR/USD

The pair's consolidation from 1.3737 is still in progress. Downside is expected to be contained well above 1.2991 support and bring rally resumption. Above 1.3737 will target 1.3822 next. (61.8% retracement of 1.4719 to 1.2456 at 1.3855). Break will then target 1.4719 resistance.
In the bigger picture, recent development suggests that EUR/USD is still bounded in sideway consolidation that started at 1.2329, with rise from 1.2456 as the third leg. Having said that, current rise might extend further to 1.4719 or above. But after all, such consolidation should be limited by 1.4867 resistance and bring down trend resumption. On the downside, below 1.2991 will turn focus back to 1.2329 low.

GBP/USD

No change in GBP/USD's outlook. Intraday bias remains mildly on the upside as long as 1.4394 minor support holds. Current rise from 1.3654, which is treated as the third leg of consolidation from 1.3503, is expected to extend further towards 1.4984 resistance next. On the downside, below 1.4394 will bring pull back again but downside should be contained well above 1.3843 support and bring rally resumption.
In the bigger picture, a medium term bottom is in place at 1.3503 after GBP/USD completed the five wave sequence from 2.0158 (1.7445, 1.8668, 1.4557, 1.5722, 1.3503). Consolidation from 1.3503 is still in progress and has started the third leg which could extend to 100% projection of 1.3503 to 1.4984 from 1.3654 at 1.5135 or further to 1.5722 resistance. On the downside, below 1.3843 will turn focus back to 1.3503 low. But after all, decisive break of 1.3503 is needed to confirm long term down trend resumption. Otherwise, further range trading could still be seen.

AUD/USD

The pair's rise resumes after brief consolidation and extends further. At this point, intraday bias remains on the upside as long as 0.6815 minor support holds. Further rally should still be seen targeting 0.7267 cluster resistance (161.8% projection of 0.6248 to 0.6849 from 0.6284 at 0.7256). On the downside, below 0.6815 minor support will turn intraday outlook neutral and bring consolidation. But downside should be contained above 0.6564 support and bring rise resumption.

In the bigger picture, the break of 0.6849 resistance suggests firstly that rise from 0.6248 has resumed. Such rise is treated as the first leg of consolidation from 0.6008 low (0.7267, 0.6248, ...) and should target 0.7256/67 cluster resistance. But upside is expected to be limited by 38.2% retracement of 0.9849 to 0.6008 at 0.7475 to complete the consolidation and bring down trend resumption. Below 0.6564 will argue that such rise has completed earlier than we thought will turn short term outlook bearish again for retesting 0.6008 low).

Thank You
Alfred Wang