Sterling Underperforms on Fitch Warnings

MORNING SLICES

Fundys – Although data released in the Eurozone overnight could not be construed as currency supportive, the markets continued to brush aside any fallout from economic releases, in favor of a more prominent widespread USD negative sentiment. The buck remains under pressure on Tuesday and consolidates just over its weekly lows against many of the major currencies, despite a very poor UK trade balance, weaker than expected German ZEW and softer Norwegian CPI. The Pound has however been the hardest hit overnight with much of the earlier negative price action centered around the Fitch comments that the UK was the country at greatest risk for a potential downgrade of its AAA ratings.  Nevertheless, the market still trades off its daily lows and has been well bid on dips as traders continue to look to slam the forever beaten down USD. Also seen propping Sterling somewhat has been the earlier better than expected RICS, BRC and UK Populus poll.
   
Relative Performance Versus USD on Tuesday (As of 11:20GMT) –

1)    SWISSE      +0.09%
2)    EURO           +0.06%
3)    CAD              -0.07%
4)    AUSSIE        -0.11%       
5)    KIWI             -0.13%
6)    YEN               -0.23%   
7)    STERLING    -0.27%

Another source for USD weakness has been an article in the UK Guardian which has generated some attention after reporting that a whistleblower from the IEA has claimed that the world’s oil reserves are much lower than official estimates suggest. Finally, China has come out saying that it will keep improving the exchange rate mechanism and gradually make its local currency more flexible.

Elsewhere, the Australian Dollar remains well supported on the back of an impressive NAB business conditions index, while Swedish industrial production was slightly better than expected. ECB Stark was on the wires saying that an exit strategy is in place and could be implemented at any time, and ECB Almunia commented that exit strategies will be discussed at today’s Ecofin meeting. SNB Jordan has also been out saying that he sees no reason to change monetary policy for now.

We contend that the currency market is once again getting ahead of itself, with exchange rates deviating from their inherent fundamentals. Market participants have chosen to buy currencies and continue to beat up the USD, even in the face of some arguably overextended risk appetite and concerning data as reflected by last Friday’s disturbing rise in the US unemployment rate and the latest overnight releases in the Eurozone and UK. However, price action will need to once again confirm our bias, with the USD needing to put in a strong recovery day on Tuesday.

Looking ahead, the North American calendar is very light with the only notable release coming in the form of US economic optimism (49.5 expected) at 15:00GMT. US equity futures point to a lower open, while commodities are also offered thus far, with gold trading back under $1100. However, with many of the currencies just under their respective 2009 highs, we would not rule out the potential for some stop hunting.

Graphic Rewind -

 
Techs - EUR/USD The story here continues to be about the 50-Day SMA and its ability to prop any setbacks for a majority of the up-trend in 2009. The market has simply been unable to establish a close below the medium-term moving average to keep the bullish structure firmly intact. However, some stretched medium-term technical studies do warn of a major corrective pullback over the near-term and potential shift in the structure. While it is premature to get too aggressive at current levels, we have established a short on Monday by the 78.6% fib retrace off of the 1.5060-1.4625 move, in anticipation of a topside failure ahead of 1.5060 this week. For now, the key level to watch below comes in by 1.4845, with a break below to potentially bring the 50-Day back into play. Back above 1.5060 will delay outlook and open bullish continuation.  POSITION: SHORT @1.4970 FOR AN OPEN OBJECTIVE; STOP 1.5130. USD/JPY Difficult to determine whether we are undergoing some bearish consolidation within the broader underlying downtrend, or are in the process of carving out some form of a short-term base. We will stick to the latter for now with the market looking like it could be carving out an inverse head & shoulders base above 88.00. A break back above 91.25 will help to reaffirm the prospects for the right shoulder, with a push back above the neckline by 92.50 ultimately required to confirm formation. A break above 92.50 should then open a measured move upside extension towards 96.50 once broken. Back under 89.20 however will likely negate and shift focus back on downside. GBP/USD Despite the latest surge, the market has been well confined to a prominent range that has defined price action for the past several months. Monday’s rally has stalled out shy of the 1.7040, 2009 highs, with the market being well capped by formidable internal range resistance in the 1.6800’s. Look for Tuesday’s reversal and break back below Monday’s 1.6610 lows to now potentially set up a bearish reversal day and open a resumption of setbacks towards a very well supported 1.6250 area. Only a close back above 1.6755 negates. USD/CHF We continue to retain a constructive outlook for the pair despite the underlying bearish trend with medium-term studies overextended and warning of a more meaningful corrective rally. While the 78.6% fib retrace off of the 1.0030-1.0335 move has now been overcome, this does not rule out the potential for a double bottom formation in the lower 1.0000’s to be confirmed on an eventual break back above 1.0335. For now, the market needs to initially hold above parity on a close basis and then break back above 1.0175 to get things going.      
 
Flows – Real money sellers of Usd/Cad; corporates on the bid. Custodial accounts buying Eur/Jpy.  US prime name buying Eur/Usd. Model funds continue to bid Aussie and Kiwi. UK Clearer and French bank bidding Eur/Gbp.

Trade of the Day – No Trade: We currently have an open position in Eur/Usd and will wait to see if any new opportunities present on Tuesday. 

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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