morning slices

Euro Still Well Propped Despite Shift in Sentiment

It is really too early to tell at this point, but it appears as though a number of negative sentiment developments over the past 24 hours has begun to weigh on the currency markets. Certainly there is some sense to this correlation, with the higher yielding Aussie and Kiwi getting hit the hardest on the day thus far. The Euro has also started to show signs of exhaustion, while all major currencies are down against the buck heading into the US open.

MORNING SLICES

Fundys – It is really too early to tell at this point, but it appears as though a number of negative sentiment developments over the past 24 hours has begun to weigh on the currency markets. Certainly there is some sense to this correlation, with the higher yielding Aussie and Kiwi getting hit the hardest on the day thus far. The Euro has also started to show signs of exhaustion, while all major currencies are down against the buck heading into the US open. The initial catalyst for the shift in sentiment and elevated risk aversion was sparked late in the day on Wednesday, with US equities collapsing into the close after holding in the black for much of the day. Overnight, more concerns over a troubled hedge fund and rumors that there was a massive unwinding of positions underway, did not help. China added fuel to the fire after coming out with some lower than expected growth data, while an Australian trade minister threw cold water on the strong Aussie. Asian equities faltered as a result, with setbacks accelerating into Europe as all major equity indices were markedly lower. The much weaker than expected UK retail sales data and BoE Tucker comments that it would be possible to increase QE measures did not help matters, while a somewhat dovish Riksbank held rates steady at 0.25% and downgraded its inflation forecasts.

Nevertheless, price action is still net USD bearish and each and every rally in the USD has been met with some intense selling. It remains to be seen whether these currency dips will once again be met with strong buying and concurrent USD selling. Despite the heavy sell-off in global equities, the Euro is only marginally lower on the day, which should be concerning for USD bulls. Trend traders are firmly in control and have not had any reason to doubt their convictions. The USD will clearly need to mount a multi-day recovery in order to garner the necessary momentum. This would certainly be a welcome and refreshing event. The key level to watch is 1.4830 in Eur/Usd, with only a break of this level forcing a material shift in the overall construct of the FX markets.

Looking ahead, Canada retail sales (0.4% expected) are due at 12:30GMT, along with US initial jobless (515k expected) and continuing claims (5970k expected). The US RPX composite is out at 13:00GMT, followed by leading indicators (0.8% expected) and the house price index (0.3% expected) at 14:00GMT. Attention will also be given to the bank of Canada monetary policy report at 14:30GMT. On the official circuit, Fed Rosengren speaks at 14:30GMT, while the Treasury’s Barr testifies on Banking in front of the House Committee at 15:00GMT. Fed Dudley steps up at 17:30GMT, with Fed Evans capping things off at 20:00GMT.  US equity futures have nudged a little lower on the back of some weaker than expected Suntrust Q3 earnings. Commodities have also come under pressure on similar themes.
 
Graphic Rewind -
  

 Techs - EUR/USD The 1.5000 barriers have finally been cleared with the market rallying to fresh 2009 highs just shy of 1.5050 ahead of the latest minor pullback. Next key resistance now comes in by the 78.6% fib retracement off of the major 2008 high-lows at 1.5240. While we not at all be surprised to see a more significant corrective pullback off of current levels, the bullish structure still remains firmly intact while above 1.4830. Nevertheless, as a contrarian, a short position was established by 1.5010 on Wednesday, with stops currently in place at 1.5110. Our objective has been left open. USD/JPY Our shift to a bullish outlook on Wednesday (based on 10/20-Day SMA positive cross) has paid off, with the market breaking above the recent consolidation and testing the 50-Day SMA in the mid 91.00’s. A clear break above the 50-Day will open an acceleration towards next key resistance at 92.55 (21Sep high) which also coincides with the Ichimoku cloud bottom. Any pullbacks are now expected to be well supported ahead of 90.00.  GBP/USD While the rally of the past few days has been impressive, the overall structure still looks quite toppish and we would expect to see the recent surge above 1.6500 to stall out at any moment. A closer look at the daily chart is quite revealing, with the market showing some strong internal resistance between 1.6665 and 1.6745 (former shoulder resistance of major h&s top). Ultimately, Wednesday’s low by 1.6345 needs to be broken to officially signal a bearish continuation. USD/CHF Fresh 2009 lows on Wednesday stalled just shy of parity with the market since locked in a mild corrective recovery rally. However, this is not expected to last, with the market still firmly locked in an intense downtrend, with a test of the major psychological barrier expected over the coming sessions. A daily lower top is now sought out below 1.0155, with only a break back above this level to take the short-term pressure off of the downside.  
 
Flows – Talk of semi-official bids in Usd/Chf and Eur/Chf. Option expiry by 0.9050 in Eur/Gbp set to roll off at NY cut. b stops below 1.4940. Aussie stops below 0.9185. Kiwi stops below 0.7500.  US account buying Usd/Jpy.

Trade of the Day – Gbp/Jpy: The rally continues into Thursday with gains extending to 152.00 thus far. Daily studies still show room to run, but additional gains are now seen stalling out by next key resistance in the 153.10-30 area (100-Day SMA/7Sep high). We are not sure that the market will get there today, but if it does by chance continue to rally up through 153.00 to test the 100-Day SMA, we will be waiting and will happily establish a short position in anticipation of a sharp pullback. STRATEGY: SELL @153.05 FOR AN OPEN OBJECTIVE; STOP 154.55. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NEW YORK CLOSE (5PM ET) ON THURSDAY. SUGGESTED POSITION SIZE = 3X EQUITY.

P&L Update and Overview: Many of you have been asking for a way to better track trading results and open positions. In response to these requests and in an effort to be fully transparent, a simulated portfolio was created in June to track and mirror all recommendations and trades. Below is a return on equity curve since inception on June 1, 2009, along with an open and closed position tracker. I am hopeful that this will make things easier for you all.

 

Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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