Greenback Well Bid Into US Open; More USD Supportive Comments Emerge

MORNING SLICES

FUNDYS
 

It has been more about flows and broader themes rather than any specific economic releases or events that have moved markets thus far on Thursday. The USD has caught a bid tone into European trade, but once again it remains to be seen whether any Dollar rallies can be sustained. While it isn’t strange to see the Aussie or Yen outperform on a given day depending on the market drivers, it is certainly strange to see both of these currencies outperforming on the same day. At present, the Aussie and Yen are the only major currencies up against the USD, while the other commodity currencies lag.

Relative Performance Versus USD on Thursday (As of 11:05GMT) –

1)    AUSSIE        +0.11% (2009 high)
2)    YEN               +0.10%
3)    STERLING    -0.01%
4)    EURO            -0.24%       
5)    KIWI              -0.26%
6)    SWISSIE      -0.26%   
7)    CAD               -0.29%

The Yen strength can be attributed to the latest bout of profit taking and uncertainty within the markets, with the relative Aussie strength has been justified by a better than expected jobs data release in Asia. However, the single currency is now well off of its post-data 2009 highs and has been weighed back down to daily opening levels as market participants consider some carry liquidation. Also putting a damper on the higher yielding currency have been comments from Treasury Secretary Swan who says that stimulus will remain in place for some time and will only be gradually withdrawn. Additionally, although the unemployment rate did come in as expected at 5.8%, this was still a higher print from the previous 5.7% and confirms that unemployment is still on the rise. Kiwi on the other hand is one of the worst performing major currencies on the day and has been showing some relative weakness on the back of New Zealand FinMin comments that Kiwi is “quite high” against the USD.

Eurozone releases have been light with the ECB Monthly Bulletin providing no surprises after saying they see an improvement in the second half of the year but still expect the recovery to be gradual. Also out has been Eurozone industrial production which has come in weaker than expected helping to fuel additional offers in the Euro. In Switzerland, the ZEW showed a drop-off from the previous print, while in Sweden, inflation data came in slightly firmer than expected.

On the official front, IMF Strauss-Kahn says he does not see the role of the USD decreasing, while a Japanese Minister of Finance has come out supporting a strong USD policy. The Japanese MoF adds that there are no plans to adjust the Japanse FX reserve portfolio. The topic of exit strategies and stimulus removal has been very hot of late but the general consensus continues to be that removal at this juncture would be “very dangerous” as one Canadian official has most recently said.
                                                 
Looking ahead, US mortgage applications are due at 12:00GMT, followed by initial jobless (510k expected) and continuing (5700k expected) claims at 13:30GMT. Also out at 13:30GMT is the Canadian new house price index (0.2% expected). The US monthly budget statement release then caps things off later in the day at 19:00GMT. US equity futures point to a lower open, while commodities have also shifted into the red.

MINORITY OPINION: While many favor to continue to buy the Australian Dollar, we hold a minority opinion that the currency is well overvalued at current levels. Market participants have grown to rely too comfortably on a currency that is heavily dependent on anything but domestic fundamentals. The real driver of the currency has been nothing short of favorable yield differentials and a large bet on the prospects for the Chinese economy, both of which could easily change in an instant. While it is true that data within the local economy has been solid, we still contend that Australia has yet to fully realize the impact of the global recession and will indeed be faced with some serious constraints in the event of any form of a hiccup within the global economic recovery over the coming months. Data in the region has also consistently exceeded expectation, which raises some questions as to just how properly expectations are being managed.  In the end, the market is the market and while we can speculate all we want, the market will continue to push the Australian Dollar higher until it and only it decides otherwise.

GRAPHIC REWIND
 

TECHS
 

EUR/USD - The story here continues to be about the 50-Day SMA (1.4755) 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 (or after just clearing) 1.5060 this week. For now, the key level to watch below comes in by 1.4940, with a break to potentially bring the 50-Day back into play. A close back above 1.5060 will delay outlook and threaten short trade. 

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 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. Back under 89.20 however will likely negate and shift focus back on downside and towards 87.15-88.00.

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 the latest topside failure to now potentially set up a resumption of setbacks towards a very well supported 1.6250 area over the coming days. Any rallies should be well capped ahead of 1.6700.

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 latest pullback has matched the recent 2009 lows by 1.0030, this does not rule out the potential for a double bottom formation to be confirmed on an eventual break back above 1.0335. For now, the market needs to regain a bid tone and break back above 1.0110 to get things going. Back under 1.0030 would undermine our double bottom outlook and put pressure back on downside.       

FLOWS
 

Short-term Specs Stopped on Eur/Usd longs; talk of real money selling. Corporate offers in Eur/Gbp. Some Macro funds establishing hedged positions in Gold through options which has been seen weighing. Leveraged accounts buying USDs across the board. US bank on the offer in the Yen crosses.

TRADE OF THE DAY

No Trade: We are currently exposed to the USD through our short Euro and Aussie positions and will stay sidelined until these positions play out.

PORTFOLIO OVERVIEW
 

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
If you wish to receive Joel's reports in a more timely fashion, e-mail jskruger@fxcm.com and you will be added to the "distribution" list.