Breakfast Blog

Top of the Risk Management Morning,
A lot of significant levels have been broken in the past few trading sessions and again this morning, when the 1.30-1.35 DNT option interest was taken out in the EUR/USD. This is a very significant level which we talked about last week when the EURO pulled back to 1.325. 1.35 is the 50% fibonacci retracement of the 1.50-1.20 fall and it is a psychological number aswell which traders take note of. To briefly explain DNT options and their significance in the currency market. They stand for Double-No-Touch. They are very popular with large central banks especially Asian central banks, and they help to contain a currency inside a range. For example a central bank with one of these options would buy Euro's at the low end of the range and sell at the high end of the range and vice versa. Sometimes they aggresively defend these options and they battled hard with this one but in the end the trend was too strong at it broke through early this morning, tripping stops and sending the Euro towards 1.3515. At month end when the option is about to expire there defense is generally stronger but it nothing is able to stop a strong trend and this was proven this morning.
The break in this level in the EUR/USD coincided with the USD/JPY breaking through a significant level of support and a previous trend line and the S&P 500 futures market breaking through 1500 level, which it had not done since 2007. The JPY weakness, Higher bond yields along with good earnings are driving the American stock market higher. We believe that the market will not correct until JPY strength comes back into the play. The Yen is very weak and oversold and this is allowing the carry trade to take place where Yen can be borrowed at zero percent interest and is being used to buy stocks, thus driving the market higher. The Yen is extremely oversold and will need to correct before going higher because markets never go in a straight line, when this happens the Stock market will take a breather and correct maybe 5% before going higher again.
The S&P 500 trades around 1509 at present and it won't encounter much resistance until 1530-1550 now, we are only 4% below all time highs and the market can see those levels in its horizon now. Support can be seen around 1500 and 1490.  EUR/USD levels to look out for are 1.346 for solid support and offers will be seen at 1.353-5.
Some noteable news on the calendar today is ADP non-farmpayrolls at 13 15 GMT. These are an indicator for the big jobs report on Friday. US GDP is released at 13 30 today and the Minutes of the Federal Reserves FOMC meeting will be released at 19 15 tonight. Look for any hawkish tone to these minutes to see if Bernanke has any thoughts of stopping or slowing the Quantitative Easing program anytime soon, but the market thinks it very unlikely. Trade Well
Lowkey