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Risk Correlated FX Under Pressure While Franc Surges on Flight to Safety

By Joel Kruger, Technical Strategist
02 June 2011 05:03 GMT

Fears of contagion from the Eurozone peripheral economies and concerns over a constructive resolution to the Greek debt crisis appear to be taking a backseat to the slew of softer economic data seen across the board on Wednesday. Initially, it was a round of softer manufacturing PMIs out of some of the major global economies, and then it was the highly discouraging ADP report out of the US which warned of an even gloomier NFP result on Friday. The price action that has ensued has been overall risk negative, with risk correlated currencies selling off, while safe haven currencies find bids.

The antipodean currencies have accordingly come under some intense pressure, with the drop in equities and commodities doing a good job to weigh these markets down. Kiwi had been looking due for a pullback after breaking to fresh 26 year highs, and we are finally starting to see this necessary correction play out. Meanwhile, the Pound has also been well offered, with its softer economic data ensuring that the Bank of England will stay on hold for the time being.

While the US Dollar did benefit from these developments, it was the Swiss Franc that really emerged as the uncontested outperformer. The strength of this currency has been unparalleled, with the Franc managing to wear two hats and find bids in both safe haven and risk inclined markets. While many are familiar with Switzerland’s safe haven appeal, the strength of the local economy and expectation for a tightening of policy in the near future have also infused a good deal of bids into the Franc. The currency has broken to fresh record highs against both the Euro and US Dollar as a result and while technical readings are showing overbought for the Franc, there is no clear fundamental catalyst that has emerged which would suggest that this trend will abate.

Looking ahead, the economic calendar is extremely light, with the EMU closed for Ascension Day. Key releases in the European session come in the form of UK construction PMI, while in the US, initial jobless claims, factory orders and inventories will be the main focus. US equity futures and oil prices are mildly offered and consolidate yesterday’s losses, while gold trades flat for the time being.

ECONOMIC CALENDAR

Opening_Comment_body_Picture_5.png, Risk Correlated FX Under Pressure While Franc Surges on Flight to Safety

TECHNICAL OUTLOOK

Opening_Comment_body_eur.png, Risk Correlated FX Under Pressure While Franc Surges on Flight to Safety

EUR/USD: Corrective rallies off of the sub-1.4000 lows appear to have stalled out, with the market now potentially in the process of carving a fresh lower top by 1.4460 ahead of the next major downside extension below 1.3970. Look for a break back below 1.4250 to reaffirm bearish bias and accelerate declines, while only back above 1.4500 negates and gives reason for pause.

Opening_Comment_body_jpy2.png, Risk Correlated FX Under Pressure While Franc Surges on Flight to Safety

USD/JPY: After undergoing a fairly intense drop off from the 85.50 area several days back, the market looks to have finally found some support by the bottom of the daily Ichimoku cloud and could be in the process of carving out some form of a base. Look for setbacks to continue to be well supported in the 80.00’s with only a close back below 79.50 to give reason for concern. From here we see the risks for a fresh upside extension back towards the recent range highs at 85.50 over the coming weeks.

Opening_Comment_body_gbp2.png, Risk Correlated FX Under Pressure While Franc Surges on Flight to Safety

GBP/USD: Rallies have been very well capped in the 1.6500’s with the market looking like it wants to carve out a fresh lower top by 1.6550 ahead of the next downside extension below 1.6060. Wednesday’s bearish price action helps to confirm negative outlook and we look for a close below 1.6250 to provide added confirmation. Ultimately, only back above 1.6550 negates.

Opening_Comment_body_swiss1.png, Risk Correlated FX Under Pressure While Franc Surges on Flight to Safety

USD/CHF: The latest minor recovery has proved to be just that, with the market finding a fresh lower top ahead of 0.9000 in favor of a drop to yet another record low below 0.8400. Daily studies are however still looking quite stretched to us, and we continue to like the idea of taking shots at buying in anticipation of a major base. Nevertheless, we will look for some kind of bullish confirmation before considering the long, and at a minimum, would like to see a break back above 0.8550 to encourage basing prospects. Until then we recommend standing aside.

Written by Joel Kruger, Technical Currency Strategist

If you wish to receive Joel’s reports in a more timely fashion, email jskruger@dailyfx.com and you will be added to the distribution list.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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02 June 2011 05:03 GMT