Currencies Confined to Tight Range in Lackluster Holiday Trade

MORNING SLICES

ABRIDGED

We would just like to take the opportunity to wish everyone a happy holidays and healthy new year. Price action in the final week of trade is always quite volatile and dangerous due to the illiquid trade and we recommend that all of you who decide to establish positions to trade responsibly and with limited leverage. The USD has come back under some pressure, with many market participants looking to lighten up on their long USD exposure. However, trends have a way of accelerating in the final days of the year and we could very well see some aggressive USD buying into Tuesday, Wednesday and Thursday. 

Relative Performance Versus USD on Monday (As of 9:40GMT) –

1)    AUSSIE        +0.40%
2)    KIWI              +0.37%
3)    CAD              +0.10%
4)    STERLING    +0.04%       
5)    SWISSIE       -0.10%
6)    EURO            -0.18%   
7)    YEN                -0.43%

Here are some developments from overnight:

1)    Japan industrial production comes in slight better than expected at 2.6% versus 2.5% consensus
2)    Japan retail sales declines by slightly less than expected but 15th consecutive month of declines
3)    Japan total cash earnings  by wage earners drops 2.8% to put in 18 straight monthly declines
4)    UK Hometrack puts in smallest annual decline in more than 18 months but up less than November
5)    UK BRC survey shows that retailers expect 2010 to be challenging but better than 2009

Looking ahead, Canada is closed for holiday, while US desks are very understaffed. The only economic release comes in the form of Dallas Fed manufacturing (2.0% expected) due at 15:30GMT.  US equity futures point to a higher open, while commodities are also bid.

TECHS

EUR/USD: While longer-term and medium-term technicals now warn of a major shift in the structure, which favors additional USD gains, shorter-term technicals are stretched, with the daily RSI dropping recently dropping below 30. Remarkably, the daily RSI in the major had not been below 30 since October of 2008. While this development reaffirms the trend shift into the USDs favor, the shorter-term horizon now warns that we could see more of a bounce over the coming days to allow for some inter-day oversold technical readings to unwind. There is a lot of support from previous daily lows earlier in the year at current levels, but the next key level to watch below comes in by the 200-Day SMA at 1.4200. Nevertheless, the risks from here are for a bounce back towards the 1.4500-4600 area before considering a fresh downside extension.

USD/JPY: Despite the latest bounce, the pair still remains confined to a very strong downtrend and any rallies are seen limited, in favor of a bearish resumption. Look for any additional rallies to stall out ahead of 92.00, with only a break and close back above 92.35 to delay outlook and give reason for re-think. Key support now comes in by 90.15, and we look for a break below this level to trigger resumption of downtrend. It is however worth noting that the market has broken back above the daily Ichimoku to potentially warn of a shift in the structure. But moves above the Ichimoku in recent attempts have proved fleeting.   

GBP/USD: The market has now easily cleared support by the 200-Day SMA and psychological barriers by 1.6000 to open the next downside extension towards key medium-term support at 1.5700. Daily studies are however looking a little stretched and we would recommend looking to sell into rallies rather than selling on breaks. Look for any rallies to now be well capped ahead of 1.6300, where a lower top is sought out ahead of the retest on 1.5700.

USD/CHF: The break back above 1.0340 has been a critical development which now greatly increases the likelihood of a material shift in the structure in favor of additional USD gains over the coming weeks and months. The market has also now broken back above the 100-Day SMA for the first time since May 2009, while the daily RSI has reached its highest levels in over a year, which further strengthens our core bullish outlook. From here, look for any setbacks to now be very well supported ahead of 1.0200, with the market now seen eyeing a test of next resistance by 1.0700 over the coming days.

GRAPHIC REWIND

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