morning slices

Bargain Hunters Look to Take Advantage of Latest Panic Selling

The markets have been riddled by a fresh round of panic, with the reaction even more aggressive than what we have recently seen, as a combination of the lightened post-US holiday trade and news that Dubai is seeking a six month standstill on its debt, weigh on sentiment.

MORNING SLICES

FUNDYS

The markets have been riddled by a fresh round of panic, with the reaction even more aggressive than what we have recently seen, as a combination of the lightened post-US holiday trade and news that Dubai is seeking a six month standstill on its debt, weigh on sentiment. Also acting as a catalyst for some earlier jitters was an unfounded rumor that the ECB would be announcing an emergency rate cut, and the news that UK Darling would be looking to downgrade the growth outlook for the local economy. The fact that the source for the elevation in risk aversion is coming from outside of the US has also exacerbated the situation, with many decoupling theorists now caught second guessing the prospects of global recovery. Nevertheless, we have seen bargain buying into Europe as some traders look to take advantage of what they deem to be a market overreaction. The news that Abu Dhabi may be willing to extend Dubai another loan has also helped to prop investor sentiment from its lows.
   
Relative Performance Versus USD on Friday (As of 10:15GMT) –

1)    YEN               +0.02%
2)    EURO             -0.81%
3)    STERLING     -0.84%
4)    SWISSIE       -0.91%       
5)    KIWI               -0.94%
6)    CAD                -1.04%   
7)    AUSSIE          -1.34%

With the exception of the Yen, all currencies are still well offered on the day against the buck, with the Australian Dollar getting hit the hardest, as the higher yielding currency is exposed to a liquidation from carry trades. Price action in the Yen has certainly been the most exciting overnight, with Usd/Jpy dropping to fresh multi-year lows below 85.00, before sharply bouncing on the back of some warnings from government officials that FX moves are now being watched very closely. Vice cabinet office minister Furukawa even goes as far as hinting that the government is examining a potential response to the current moves in the local currency. This has no doubt helped to bid Usd/Jpy nearly back to opening levels above 86.00. The next key level below in Usd/Jpy really doesn’t come in until 79.75 which represents the 1995 historic lows.

On the data front, Eurozone confidence came in slightly better than expected, while the Swiss KOF improved but fell short of consensus estimates. In Japan, overnight data came out surprisingly better than expected, with unemployment dropping and inflation contracting at a narrower pace. Meanwhile retail sales came in as expected. Commodity markets are finally feeling the stress of the latest shift in sentiment, with gold backing off of its record highs shy of $1200, and oil also retreating. US equity futures are pointing to a lower open, with all major indices looking to open up down some 2.0%. Looking ahead, the North American calendar is very light, with only Canada current account (-13.4B expected) due at 13:30GMT.

GRAPHIC REWIND

 

TECHS
 

EUR/USD The break above 1.5065 to fresh 2009 highs by 1.5145 a few days back, appears to have been a false break, with the market sharply reversing course and trading back below the 50-Day SMA. The 50-Day SMA, which comes in by 1.4835 is the critical level to watch, with the medium-term moving average supporting a majority of the up-trend in 2009 on a close basis. As such, a close below this level would be viewed as a significant development and would suggest a material shift in the construct of the market. Given the latest volatility and whipsaw price action, we would recommend deferring to the weekly chart, which still shows the formation of a potential double top. The neckline comes in by 1.4625 and a break below would open a measured move decline towards the 1.4100's. Only back above 1.5000 would give reason for concern.

USD/JPY The market continues to extend declines to fresh multi-year lows since breaking below the recent 2008/2009 matched trend lows at 87.15. There is no real support now until 79.75 which represents the 1995 historic lows and a retest of this level can not be ruled out at this point with the overriding trend so intensely bearish. However, daily studies which are severely oversold can also not be ignored and the shorter-term risks seems to favor some corrective upside back towards the 88.30-89.25 area (10/20-Day SMAs) before considering the possibility for another round of weakness below Friday's 84.80 lows.

GBP/USD Our outlook for the pair remains well intact with the market adhering to the multi-month consolidation after failing ahead of 1.7000 and rolling back over into the well defined range. Look for a sustained break below 1.6250 to now open the door for some deeper setbacks over the coming weeks towards next key support by 1.5705. In the interim, below 1.6250 will expose initial previous resistance turned support by 1.6130. Rallies should now be well capped ahead of 1.6500, with only a break back above the psychological barrier to delay outlook.

USD/CHF Our core bullish bias is still intact, with the market unable to establish itself below parity and subsequently sharply reversing back above 1.0100. This puts our major double bottom scenario back in play, with a closer look at the weekly chart more clearly defining the reversal formation. The neckline for the pattern doesn't come in until 1.0340, and a break above this level will be required to confirm and accelerate gains back into the 1.0700's. Ultimately, only back under 0.9915 would negate outlook and give reason for pause.

 

FLOWS

Broad flows into US session show US prime name, model accounts and buy-side shops selling the USD across the board into the latest rally. Same names buying cross Yen.
 

TRADE OF THE DAY

No Trade: No clear opportunities presenting at this point but we will send out if we see anything develop into the close.

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.

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