FUNDYS
We were not at all surprised to see the sell-off in the Euro on Tuesday, following an early surge above 1.3400. Technically, we have been talking of the expected formation of a medium-term lower top by 1.3500, with any rallies above 1.3400 to be very well capped. The latest sharp pullback reaffirms our outlook and once again puts the pressure back on the downside with the market eying a retest and break of the critical lows by 1.2970 over the coming sessions.
Relative Performance Versus USD Wednesday (As of 11:20GMT)
- STERLING-0.12%
- YEN -0.13%
- CAD-0.29%
- KIWI-0.34%
- SWISSIE-0.39%
- AUSSIE-0.49%
- EURO-0.71%
Fundamentally, the initial Euro selling was triggered by some bearish comments from the PBOC president on the outlook for the Chinese economy, while DIW’s negative views over the prospects for a healthy German economy were also seen weighing. Additionally, Greek-German spreads have widened out to record levels, while market participants have also been digesting the latest Portuguese auction. Meanwhile, economic data out of the US has continued to show impressive recovery, with the most recent releases coming in the form of solid ISM manufacturing and factory orders. The resurgence in the US economy has also now been reflected in the latest FOMC Minutes from December with the Fed outlining that it is expecting growth to pick up. As we have already talked about in previous commentary, Fed monetary policy can only really go in one direction from here, and as the central bank becomes less accommodative, the USD Dollar should find additional support.
Another interesting point of note is that the latest IMF COFER (Currency Composition of Foreign Exchange Reserves) data which shows the aggregate of FX reserves for 106 countries shows an increase in the amount of USD reserves, while at the same time also showing that central banks have been moving away from the Euro. While data like this should be taken with a grain of salt, as there are a number of factors that need to be considered, we definitely would give it some recognition in terms of the general negative sentiment shift in the Euro.
On the data front, Eurozone releases haven’t been all that Euro negative, with Germany and EC services PMIs coming in better than expected, while Eurozone PPI was higher than consensus. However, it seems broader macro forces are at play, with this data failing to prop intraday. A much softer Eurozone industrial new orders could also be weighing on the single currency. Meanwhile in the UK, the story has been quite different with UK construction PMI disappointing but failing to factor into what has been a very well bid Pound in recent trade. As a result, the EUR/GBP cross has come under some intense pressure over the past couple of days and eyes next support by 0.8430.
Moving on, as we glance at developments in the other major currencies we see that USD/JPY has been recovering, but still needs to establish back above the Ichimoku cloud top to officially secure the latest bounce; USD/CHF has finally accepted a fresh record low for now by 0.9300, and could be in the process of carving out a major base; The Australian Dollar has been showing some relative weakness and AUD/USD is now threatening further retreat well below parity; and USD/CAD has once again rejected the notion of being comfortable below parity, with the market mounting and impressive recovery and once again looking to extend gains back towards 1.0200 initially over the coming days.
Looking ahead, US ADP employment (100k expected) is out at 13:30GMT, along with Canada industrial product (0.3% expected) and raw materials prices (2.0% expected). US ISM non-manufacturing (55.7 expected) is then out at 15:00GMT, with oil and gas inventory data shortly after at 15:30GMT. On the official circuit, Fed Hoenig is scheduled to speak at 18:00GMT. US equity futures and oil prices are tracking a good deal lower, while gold trades flat.
GRAPHIC REWIND
TECHS
EUR/USD:The market has mostly been locked in a choppy consolidation over the past several days, but a lower top looks to have carved out by 1.3500, with a break back below 1.2970 over the coming sessions to confirm and open the next major downside extension towards the 1.2585 platform base from August 2010. As such, any intraday rallies above 1.3400 should be used as formidable sell opportunities. Only a close back above 1.3500 negates bearish outlook.
USD/JPY:The latest setbacks have stalled out after the market had come under some intense pressure in the previous week to break back below the daily Ichimoku cloud and threaten a retest of the multi year lows from November 2010 just shy of 80.00. However, we have since seen a formidable bounce by the 78.6% fib retrace off of the November-December move and this could warn that the market is once again poised for a rally. Look for a break and close back above the top of the Ichimoku cloud by 83.00 to confirm.
GBP/USD:The market remains under pressure and now seems poised for a retest of the platform base from early September at 1.5295. Daily studies are however in neutral territory so we would not rule out the possibility for more of a bounce towards the 1.5700 area over the coming sessions from where a fresh lower top will be sought out ahead of an eventual drop to challenge and break 1.5295. In the interim, we remain sidelined and await a clearer signal.
USD/CHF: The latest price action is certainly concerning for our basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. Our strategy is to continue to take shots at buying, but ultimately, look for a break and close back above 0.9650 to confirm short-term reversal and relieve immediate downside pressures.
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