EURUSD, Euro Saved Again

Recap
Cyprus's week of fame is over. The pair dipped down briefly to 1.2850 and closed the week by recovering about half of it's opening gap at 1.2988. It's currently quoting 1.3040 and has nearly touched 1.3050 on the Cyprus bailout package news, as of midnight Sunday EST.

The week was dominated by Cyprus, but there was some key data points that should not be glossed over. The EZ service PMIs all came in well below estimates - France's economy continues it's stunning contraction, and even Germany's service PMI was barely expansionary. Manufacturing indicators across the EZ were also dismal and price indices continue to show less inflation than projected. Rate cut anyone...?

Where From Here
As we called the neutral positioning on Friday for a weekend gap/break to the upside on positive Cyprus news, we are sitting long and looking for a spot to close out and return to shorting the pair based on the poor fundamental situation and the likelihood of an ECB rate cut. I'm favoring 1.3125 as a reversal point, but I feel the relief rally risks running out of steam before then. This week is relatively light on EZ data, so watch USD data releases for possible catalysts. I will be looking to find a decent exit by Tuesday's USD durable goods release.

Mon
Everyone's favorite PhD economist, Benny Bernanke is on the docket for a speech on Monday at the London School of Economics at 13:15 EST. I can't see anything new happening here, except maybe more of a discussion of Benny's new QE Tool: the ratchet. In case anyone missed last week's Fed monetary policy event, the Fed will employ use of the ratchet to dial down QE as conditions improve (or dial up if they headfake... hmmm). I'd expect the EURUSD to close NY somewhere within 25 pips of the session high.

Tue
USD durable goods for Feb at 8:30 EST is the big USD data release for the week. Given the extreme recent volatility in this figure over the past 6 months, plus the sharp decline in Jan, it seems like this release has potential to create waves.  Expectations are for a 2.5% increase.  Given the govt spending reductions, the recent FedEx earnings miss and the Walmart February "disaster" situation, I would favor a miss here.  But on the other hand, retail sales, which are more of a lagging indicator beat estimates soundly last week, so I remain cautious with my bearish sentiment.  If these numbers come in line or better, I think this is a solid signal to short EURUSD.

Wed

<too tired to finish right now>

EURUSD, Weekend Trade

EURUSD looks to be positioned pretty neutrally after a day of covering in anticipation of Cyprus news.  My weekend trade will be to get long a few small lots around 1.2975-1.2990 before today's close.  Then when Asia opens on Sunday, watch for the following:

• If Cyprus situation resolved -> there should be a relief gap up, maybe as high as 1.3150.  I'll sell into this gap, selling out of my position and reversing all the way to a short position.  This relief rally is bound to be beat down early in the week, due to the market's refocus on the dismal fundamental situation in EZ (recession + Italy)
• If Cyrpus situation not resolved -> stay long and flatten out at discretion.  Depending on the news flow, there may be a small gap up, or no gap at all.  Unless Cyprus decides over the weekend to leave the EZ (seems much less possible given the reports of the last few days) this is a low risk trade.

EURUSD, Cyprus

EURUSD Trading Gameplan, Cyprus + Fed

So far
Pair was trading around 1.3050 prior to weekend announcement of depositor haircut.  Gapped 130 pips down Monday and touched almost 1.2875.  Started rebounding at London open towards 1.2975.  Hit almost 1.3000 at London close.  Consolidated back to 1.2950 at US close and quoting there currently.

Cyprus
Cypriot parliamentary vote on bail-in postponed Tuesday indefinitely.  Banks tenatively set to re-open Thursday, so ostensibly this makes Wednesday seem like the deadline.  It is unclear if the government has enough support to pass this.  Shifting the burden mainly onto 100K+ and 500K+ depositors would alleviate some of the mass outcry against it, and may allow enough parliamentary support for passage.  Bail-in outcome:

• Passed
• Cyprus EZ exit avoided
• Precedent set for peripheral bank capital flight - WATCH SOVEREIGN YIELDS for an indication of this over the longer term
• Buy Euro short term, but assess capital flight
• Not Passed
• Cyprus banking system collapse
• Cyprus EZ exit, redenomination to Lira. 
• Sell EUR to at least 1.2650 and re-assess.

Action: I can see the pair testing the bottom again around 1.2875 on Tuesday, but I can't see any catalyst for it breaking thru.  Sell rallies up to around half of the weekly gap, say 1.3025.  Cover close to the short term bottom at 1.2875, keep a little on to see if it breaks beneath, pending the news out of Cyprus.  Cover most prior to the Fed's 2:30 EST monetary policy release.

Fed

Since the timing of the Fed's monetary policy release is set to closely follow action in Cyprus, watch for a reversal on dovish tone.  I personally expect the same language from the Fed about assessing risks of QE, blah blah blah, but the reality is that Benny and the FOMC NY open market desk are not going to be selling anytime soon.  How could they POSSIBLY sell treasuries/mortgage backed securities into the market right now and expect real buyers?  Sorry, but it's a complete fcking joke.  And forget selling, I can't even see the current buying binge coming to an end in 2013.

Last Thursday, it looked like the market was starting to unwind its long dollar index trades after the US CPI came in over expectations and there was no trend continuation.  The unwinding appeared to be continuing into Friday.  And then the EZ/Cyprus situation happened, so it's hard to get a feel for real positioning.

Action: I'm favoring getting out of my EUR shorts prior to the FOMC announcement and getting long another currency like CAD or possibly even MXN.  CAD appears to be slightly oversold at this point and would seemingly benefit from dovish tone.

USDCAD, 3/10/2013

Recap
The Canadian dollar has spent most of February and March tightly correlated to the EUR.  While Canadian data hasn't been overwhelming for much of the year (excluding last Friday's employment and housing data), it's far from the EUR.  My guess is that this is due to 1) dollar index (DXY) buying on the back of the strong dollar trade and 2) low CAD volume.  The pair hit 1.0336, its highest mark in 9 months on Wed after the Bank of Canada published slightly more dovish language on removing monetary stimulus from the economy.  The retreat from this high was swift back to 1.0315 and then comfortably back below 1.0300 for the rest of the week.

Outlook
There is very little in the way of data releases from Canada this week.  There appears to be significant selling interest at 1.0300, so it will be interesting to see if there is a divergence from the EUR at this level if DXY starts taking off again this week.  I will watch this correlation and possibly enter short for a quick 10 or 20 pips if it breaks.  I am very short this pair on a long term basis, but it may take another few good data releases before any significant reversal to the downside emerges.  That said, if advances above 1.0300 are consistently resisted in the London/NY sessions, I may put some more short on for the long-term.

EURUSD, 3/10/2013

Recap
A volatile week for the EUR, closing slightly lower at 1.3004 from the week's open at 1.3014.  Longer term downtrend can be seen as still well intact.  On Wednesday dropped about 65 pips to 1.3000 on widely expected contraction in EZ GDP. Then saw a 130 pip or so spike on ECB decision to hold rates.  This gain was promptly wiped out less than 24 hours later with the BLS's expectation exceeding non-farm payrolls print.

The fundamental data flow continued to show contraction across the EZ core and periphery, with Germany bucking the trend specifically in its powerhouse services sector (roughly 70% of its economy).  France continues its downward spiral with unemployment making new highs.  Unemployment there is now its highest since approximately 2000.  Price indices across the EZ remain subdued, with the exception of energy.  Primary sovereign auctions were surprisingly, if not suspiciously stable with France and Spain both issuing solidly into the middle of the yield curve.

The USD fundamentals are showing growth, if anemic.  The Fed's monthly beige book showed almost no contraction in any sectors of the economy (employment, real estate, retail sales, manufacturing, banking), however there were no signs of robust growth.  Market sentiment was very much pro-USD and has been markedly since Feb 1, according to the DXY dollar index, primarly due to the thumping of the EUR,JPY and GBP.

Our previous week's trading strategy to fade rallies in the low 1.30s up to 1.32  proved on track..

Outlook
Mon/Tue
Monday and Tuesday are relatively light news days for both USD and EUR.  I'd expect negative pressure to continue on EUR following last Friday's rout down to 1.2900 (currently quoting 1.2987 at time of writing).  The Italian downgrade by Fitch, plus the IMF's (Lagarde specifically) call for an ECB rate cut should maintain the negative tone for the beginning of the week.  The Italian QoQ GDP print on Monday 5am could stir up some EZ exit talk.  Expectations are already quite low, but if it misses even further, consider trying to squeeze out 20-25 pips to the downside.  The German CPI on Tuesday 3am could be another good low risk setup for a downside move.  This print can only further rate cut speculation if it misses, and be benign if it comes inline or beats.  Bottom line for the beginning of the week is that strong USD sentiment abounds in the market, and there's not much on the docket to dent that.

Wed
 The first big USD data release of the week will be US retail sales at Wed 8:30am.  Expectations are 0.3% increase over Jan, which was a 0.1% increase over December.  This feels like a setup for disappointment to me.  US consumers are getting squeezed so far this year with the payroll tax, Walmart has referred to this quarter as a "disaster" and my general gut feeling is that not much has changed in the economy at large.  I plan to have all my short term speculative EURUSD shorts closed by this point, and be setting up to sell the remnants of a rally.

Also on Wed is the beginning of the European Council's monthly meeting.  Surely there will be some pandering for monetary easing which can only be EUR negative.  If the pair is between 1.28-1.30 this will likely be immaterial.

Thu/Fri
The ECB Monthly Report due at Thu 5am has only significant downward potential on the EUR, in its ability to allude to rate cuts for price stability.

The US has producer and consumer price indices due out on Thu 8:30am and Fri 8:30am respectively.  Both are expected to be higher.  This should play nicely into everyone's strong dollar story, where the Fed's inflation/unemployment targets are closer to getting hit. Watch for continuation of any negative EUR move on these.  If either of these miss, consider the magnitude of the miss.  If significant enough, cover some and wait for a better short entry.

Absent any major news out of Italy, I can't see the pair trading this week outside of 1.2875 - 1.3050.