Rallies in the Euro have stalled out as we had anticipated above 1.3700 with the market once again looking to roll back over in favor of a more meaningful decline. Last week, we wrote in our commentary that we wouldn’t have been surprised to see initial Euro declines stall out on a close basis above 1.3570 in favor of a potential head & shoulders topping formation. Sure enough, the market failed to close below 1.3570 last week and rallied back above 1.3700 in what now looks to be an attempt to carve the right shoulder of the H&S top. From here, we see any additional rallies well capped by 1.3800 ahead of a fresh downside extension back below 1.3505 and towards the 1.3200 area further down.
We believe that any future weakness in the Euro, will ultimately translate into broader currency weakness and we also contend that this will result in some relative underperformance in the commodity bloc. Earlier in the week the Canadian Dollar started to weaken, and the Australian and New Zealand Dollars are also really starting to show signs of vulnerability at current levels. A combination of softer economic data out of Australia, softer economic data out of China and tighter monetary policy from the PBOC should all continue to weigh on the antipodean going forward.
While the latest employment data out of Australia was on the surface relatively in line with forecasts, the 8k decline in full-time jobs is nothing to smile about and we believe is a red flag for an impending slowdown in the Australian economy. Regrettably, we exited our short AUD/USD from 1.0100 on Wednesday just above cost, and will have to wait for another opportunity get involved. We are however still short the Australian Dollar though the Euro and have greatly benefited from that exposure in recent sessions.
Wednesday’s Bernanke reiteration of higher unemployment and lower inflation did not help the Dollar, but at the end of the day, nothing new was really said, and any selling of the Greenback on the back of the Fed Chair’s remarks, was easily offset by broader market flows. Comments later in the day from Fed Lockhart also helped to generate some fresh bids in the buck after the Fed official said that QE3 was not needed.
Looking ahead, the key event risk for the day comes in the form of the Bank of England rate decision out at 12:00GMT. No change is expected on either the rates or asset purchase target, although we could see some volatility on any accompanying headlines that provide additional insights into the direction of policy going forward. In our opinion, the risks are tilted to the downside for Sterling, with the growing expectation for the start of a tightening cycle perhaps too aggressive. While economic data has certainly been improving, and inflation is elevated, we believe there is still a critical need for ultra accommodative policy (just like in the US).
On the data front, Swiss SECO consumer confidence (10 expected) is out at 6:45GMT, followed by Swiss inflation data (-0.2% expected) at 8:15GMT. At 9:00GMT, the ECB publishes its monthly report, while UK industrial production (0.5% expected) and manufacturing production (0.4% expected) then follow at 9:30GMT. In North America, Canada house prices (0.2% expected) are out at 13:30GMT, along with US initial jobless claims (410k expected) and continuing claims (3900k expected). US wholesale inventories (0.8% expected) are then out at 15:00GMT, with the monthly budget statement (-$60B expected) capping things off later in the day at 19:00GMT. On the official circuit, Fed Lockhart is back on the wires on the topic of fiscal policy at 17:45GMT.
TECHNICAL OUTLOOK
EUR/USD:The latest rallies have stalled out well ahead of 1.3860 with the market finding some resistance by an ideal right shoulder top in the mid-1.3700’s ahead of the latest minor setbacks. From here, the risks are tilted to the downside, with a break and close back below 1.3570 to like trigger the H&S topping formation and open a fresh downside extension towards the 1.3200 area over the coming days. Any rallies should continue to be well capped ahead of 1.3800 with only a break back above the figure to give reason for concern.
USD/JPY: Despite the latest setbacks below 82.00 which had put the pressure back on the downside, the market remains well bid on dips. Last Friday’s price action was highly constructive and significant, with the market putting in an intense bullish outside day which consumed the previous 4 daily ranges. From here, we look for continued upside back towards 83.70 over the coming sessions, with a break above to accelerate towards more critical resistance at 84.50. Any setbacks should be well supported ahead of 81.50 with only a daily close back below 81.00 to negate.
GBP/USD: The market looks to have once again found a meaningful top by the 1.6300 barrier, with the latest setbacks resulting in a series of daily lower tops. From here we look for a break and close back below 1.6025 to confirm bias and accelerate declines back towards 1.5800 over the coming sessions. A daily close back above 1.6200 would give reason for concern, while ultimately only back above 1.6300 negates.
USD/CHF: Although the longer-term market remains under some intense pressure with the latest declines stalling just shy of the late 2010 record lows at 0.9300, inability to establish fresh record lows followed by a break back above 0.9500 leaves us constructive with our outlook from here. Lat Friday’s daily close above 0.9540 confirms and should help to accelerate gains towards 0.9785. Any intraday setbacks should now be well supported ahead of 0.9450.
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