Euro Sees Whipsaw Action in Tuesday Trade But Remains Well Offered

FUNDYS

Although there hasn’t been a lot in the way of any form of fundamental prop for the Euro over the past few days, the single currency is managing to find some relative bids into Tuesday on the back of the news out of China that the vice-premier has pledged to provide concrete action to help the EU with its debt problems. These comments have come out of the EU-China summit in Beijing and are also helping to bolster risk appetite across the board. Meanwhile, geopolitical tensions from Monday have now eased after North Korea said it would not take any action following South Korea’s firing drills in contested territory.

Relative Performance Versus USD Tuesday (As of 10:45GMT)

1. KIWI+0.43%
2. SWISSIE +0.43%
3. AUSSIE+0.24%
4. EURO+0.21%
5. YEN+0.11%
6. CAD+0.01%
7. STERLING-0.05%

However, Eurozone debt problems are far from gone, and any relief for the currency could very well be short-lived with overall bearish sentiment in the region and a slew of ratings downgrades proving too tough to ignore. Moody’s has been on a rampage, most recently putting Portugal’s ratings on review for a possible downgrade. This follows Monday’s headlines that the rating agency was placing Spanish banks on review, and speculation of a potential French downgrade. It is worth noting that Spanish T-Bill auction results came in solid considering the current wave of Eurozone uncertainty.

Elsewhere, the Bank of Japan ended its 2-day policy meeting today, and although there had been signs of further deterioration within the economy, there were also enough positive signs to at least justify keeping the central bank’s policy and outlook unchanged as was widely expected. Usd/Jpy remains locked in a tight consolidation just over the daily Ichimoku cloud, and needs to break and close back above 84.50 to open a fresh upside extension.

Meanwhile, after outperforming on Monday, we have seen some mild relative underperformance in the Australian Dollar (at least against the Kiwi and Swissie) in Tuesday trade, after the RBA coming out with an on the whole slightly dovish Minutes, after saying that rates were “mildly restrictive” but that policy was “appropriate.” The RBA cited concerns over the escalating Eurozone debt situation, but also somewhat offset these concerns on an expectation for stronger growth in China and India, as well as an improvement in the pace of US economic recovery. On the domestic front, the RBA mentioned that there was some room for worry with constrained household consumption and borrowing. Still, Aussie does track higher against the buck on the day.

Of all of the Aussie related crosses, Eur/Aud stands out the most to us, with the market in a virtual freefall over the past several months, continuing to post fresh multi-year lows. Of course the relative outperformance in the Australian Dollar in recent years also can be reflected through other overdone markets including; Aud/Cad, Gbp/Aud, and Aud/Nzd to name a few.

As far as other currency cross rates are concerned, it is the Swiss Franc crosses which really stand out, with both Eur/Chf and Gbp/Chf trading by record lows as relative outperformance in the Franc also dominates trade. We continue to find it fascinating that two currencies which have outperformed dramatically in recent months have been currencies that traditionally stand at opposite ends of the spectrum in terms of their respective risk profiles. It seems as though this price action can be attributed to a broader negative US Dollar sentiment which leaves the Franc as a more attractive safe haven alternative in investment portfolios, while the Aussie benefits as the most attractive risk positive option.

On the data front, the only key release in Asia came from UK GfK consumer confidence which managed to come in slightly better than expected, while at the same time matching the previous print. But in the end, the data offered little room for inspiration and still remained at depressed levels. In Europe, UK public finances and public sector net borrowing numbers were very weak, and market participants could not ignore this data series which weighed heavily on the Pound (weakest major currency on day). Swiss trade balance and money supply numbers hardly factored into price action with flow related demand for the Franc dominating price action.

Looking ahead, the US economic calendar is all but empty with Canada data taking center stage as CPI (0.3% expected) is released at 12:00GMT, followed by retail sales (0.5% expected) at 13:30GMT. US equity futures are tracking moderately higher on the day thus far, while commodities have given back some of their overnight gains with oil slightly higher and gold trading flat.

GRAPHIC REWIND

TECHS

EUR/USD:Friday’s break back below the recent platform base at 1.3165 is significant and helps to increase the probability for a bearish resumption back towards and eventually below next key support by 1.2970. A bearish outside day on Friday and confirmed bearish outside week also has helped to strengthen our core downside bias. Look for any rallies to now be well capped below 1.3300 on a close basis, with a lower top sought ahead of the next drop below 1.2970 over the coming sessions. Ultimately, only a break back above 1.3500 would negate bias and give reason for concern.

USD/JPY:Although the market continues to recover with prospects for a material base looking more and more encouraging following the recent break back above the daily Ichimoku cloud, inability to establish any meaningful upside momentum beyond 84.00 suggests that the recovery could be on hold for a bit, with the market now in the process of consolidating. Ultimately however, while the pair holds above 82.00 on a close basis, we retain a constructive outlook. Only a daily close back below 82.00 will negate and open the door for a resumption of the broader underlying downtrend, while a break and close back above 84.50 will mark and end to the consolidation and open a fresh upside extension towards 86.00.

GBP/USD:The sharp pullback in the previous week signals an end to the latest corrective channel, with the market breaking back below the recent 1.5595 base and exposing the next drop towards 1.5295 over the coming sessions. A lower top now looks to be firmly in place by 1.5910, and any intraday rallies are expected to be well capped in the 1.5700 area going forward. Ultimately, only back above 1.5780 gives reason for concern.

USD/CHF: We contend that the market is in the process of carving a material base by 0.9460, and any setbacks should be very well supported in favor of a sustained recovery. The market should now look to rally beyond parity towards our next key topside objective in the 1.0280-1.0500 area over the coming weeks. The 1.0280 resistance represents the highs from September, while the 1.0500 area is the 200-Day SMA. Any intraday setbacks are expected to be well supported ahead of 0.9500. While recent bearish price action certainly threatens recovery outlook, ability to hold above 0.9460 keeps the structure intact.

FLOWS

A Swiss real money account leading sellers that pushed Eur/Chf to fresh record lows. Asian Central Banks seen on the bid in Eur/Usd.