USD leans to the weak side again - are we headed for another try above 1.6000 in EURUSD or just endless range trading?

USDCAD threatening parity again ahead of Canadian Retail Sales and GBPUSD rejected another dip below 2.0000 yesterday.

MAJOR HEADLINES – PREVIOUS SESSION

THEMES TO WATCH – UPCOMING SESSION
Key Risk Events (All times in GMT)

• UK BOE's King, Gieve and others to testify in parliament (0835)
• US Treasury Secretary Paulson to speak (1210)
• Canada May Retail Sales (1230)
• Us Fed's Plosser to speak (1230)
• US Jul. Richmond Fed Manufacturing Index (1400)
• US May House Price Index (1400)
• US Weekly ABC Consumer Confidence (2100)
• Australia Q2 Consumer Prices (0130)

Market Comments

The USD weakened again yesterday on no dramatic catalysts. Oil prices saw a mild recovery on hurricane fears (due to a tropical storm Dolly that is likely to turn into a lesser hurricane before striking the northern Mexico/southern Texas on Wednesday/early Thursday but cause no significant damage to oil production facilities in the Gulf of Mexico). More importantly for the EURUSD rate, European yields at the front end of the curve have torn higher in recent days, putting the interest rate spreads at the highest side of the recent range versus US yields. EURUSD pulled above the resistance created by the last few days of range trading and could set up a test of the 1.6000 top and beyond if the 1.5890/1.5900 area now holds as support. Needless to say, after four months of range-trading, seeing is believing as the market has turned momentum and trend traders into a band of cynics. Elsewhere, we again have USDJPY finding resistance at the 200-day moving average just above 107.00 yet again (there must be huge stops beyond that moving average...), see USDCAD toying with parity, and GBPUSD pulling itself back to its feet after a yet another try below the 200-day moving average just below 1.9960. AUD traders are talking up parity again.... So status quo is a weak USD, but we note again that momentum is non-existent and ponder whether there are any catalysts here in the summer doldrums period to trigger anything interesting either way for the market.

One positive news item out yesterday for the pound that was perhaps drowned out by the stark Blanchflower recession rhetoric yesterday was news of Chancellor Darling's imminent move to repeal planned rules that would have taxed UK companies' foreign profits. Had these measures been implemented, it likely would have resulted in an exodus of British companies to foreign shores. Looking at EURGBP, we note the interesting rising line of consolidation from early May that has been touched three times and also comes in just below the 55-day moving average. It looks like 0.7900 is a key level if EURGBP is to break lower. Watch out for BOE speakers today.

EURJPY traded again to new highs, and as long as panic doesn't break out on the equity exchanges and yields continue to head back higher, we wonder if anything is going to stop this pair from trying towards 175.00 (Note: GBPJPY is pushing up against its 200-day moving average here after trading below it since November of last year. But positioning must be getting rather extreme in these JPY crosses now that EURJPY, for example, has closed higher 10 weeks in a row. Once again, we note that we are alarmed at the complacency in the JPY crosses considering the setup for global growth and risk outlook going forward. Have a read of Mr. Evans-Pritchard's commentary at www.telegraph.co.uk if you'd like a bracing dose of the worst case scenarios - ones we find reasonably plausible or at least worth consideration. His latest article is titled "The global economy is at the point of maximum danger." The carry trades certainly don't seem to think so! Whenever the party stops there, the sell-off is likely to be extremely intense.

Chart: EURUSD
We have another look at this rangebound chart, again noting the key round figure of 1.6000 as important resistance, though it is interesting that the last small resistance ahead of this level at 1.5890/1.5900 gave way late yesterday, which now becomes the shortest-term support. The 20-period ATR is close to falling below its lowest level for the whole of 2008 as conviction seems to have left the building in this pair. Central banks are likely shying away from bidding up EUR at these levels and other players are likely waiting for the 1.6000 level to trade before reacting. These large round numbers are tough nuts to crack in EURUSD. To the downside, we also note the reasonably well defined rising trendline.