morning slices

FX Market Direction Likely Predicated on JPM Earnings

The Euro has been hit hard across the board following ECB Trichet’s comments in which the central banker made no hints over a potential exit strategy, while also sounding extremely cautious.

MORNING SLICES

FUNDYS

The Euro has been hit hard across the board following ECB Trichet’s comments in which the central banker made no hints over a potential exit strategy, while also sounding extremely cautious. Also seen weighing on the single currency has been the escalating concerns over Greece and the potential default of its loans. Trichet has said that Greece will not get any special treatment. As if that was not enough, rumors of the resignation of German Chancellor Merkel, following the release of a scathing Time magazine article, has added more fuel to the fire of negative Euro sentiment. Meanwhile, in Japan, the latest studies show that economists and consumer both expect the country to remain entrenched in deflation. Elsewhere, the World Bank’s chief economist has been out warning of the potential for a double dip recession, but also expresses optimism over the outlook for the Chinese economy.

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

1)    YEN               +0.45%
2)    STERLING     -0.13%
3)    CAD               -0.32%
4)    KIWI              -0.47%       
5)    AUSSIE         -0.48%
6)    SWISSIE       -0.58%   
7)    EURO             -0.59%

Some secondary data in the European session isn’t seen factoring too much into price action on Friday, with Swiss PPI already coming out bang on as expected. Eurozone CPI is also due out but has not been released at time of print. In the UK, more doubt and concern has arisen over the impact of quantitative easing policies, while a batch of solid data out of China has opened a rebound in the local markets.

Looking ahead, it very well could be the US equity markets and earnings from JP Morgan that set the stage for market direction in currencies on Friday. Nevertheless, there is also some important economic data that should not be ignored. Canada new motor vehicle sales (-7.0% expected), US CPI (0.1% expected), and empire manufacturing (12.00 expected) are all due at 13:30GMT, followed by industrial production (0.7% expected) and capacity utilization (71.9% expected) at 14:15GMT. University of Michigan confidence (74.0 expected) then caps things off at 14:55GMT. On the official circuit, Fed Yellen is slated to speak at 19:30GMT.  US equity futures are pointing to a flat open, while commodities are tracking lower.

GRAPHIC REWIND
 

TECHS
 

EUR/USD The market has been locked in a choppy consolidation since basing out by 1.4215 in late December, and it is unclear at this point which way we will go from here. The 200-Day SMA is yet to be challenged, and dips throughout the consolidation have been very well supported just ahead of the longer-term SMA. A break below this SMA will now be needed to open the door for a fresh downside extension and confirmation of a more significant structural shift. The latest topside failure ahead of 1.4600 looks to be an encouraging development for bears and could now open an immediate retest of the range lows and potential breach of the 200-Day SMA. A close back above 1.4600 will however negate and delay outlook.  

USD/JPY Despite the latest bounce to 93.75, the pair still remains confined to a very strong downtrend off the April 2009 highs and any rallies should be limited. However, while a medium-term lower top is now being sought out below 97.80, the latest upside break warns that the market could still see additional upside before attempting to roll back over. Falling trend-line resistance off of the April 2009 highs comes in by the 93.00 area, and as such it will be interesting to see if the pair can manage a close above this line. A close above 93.75 would open a direct retest of psychological barriers at 95.00, while failure to do so may suggest that the medium-term lower top is ready to start to form. Recent price action seems to be suggesting that we could be headed for underlying bear trend resumption after the market triggered a double top, with the break below neckline support at 91.25. This now projects a measured move downside extension towards 89.00.

GBP/USD While some might interpret the recent break above 1.6240 as the trigger of a double bottom, we do not see a double bottom scenario playing out, with any gains above 1.6240 limited to the 1.6400-1.6500 area. The current rally is classed as corrective and we look for a lower top to carve out ahead of the next downside extension towards key medium-term support at 1.5700, which had been narrowly in the previous attempt.

USD/CHF The break back above 1.0340 in recent weeks has been a critical development which now greatly increases the likelihood of a material shift in the structure in favor of additional medium-term USD gains. From here, look for any setbacks to now be very well supported ahead of 1.0020 (78.6% of latest moves), with the market now seen eyeing a test of next resistance by 1.0700 over the coming weeks. In fact, a higher low could now even be in place at 1.0135, with the latest break back above 1.0220 helping to confirm. Ultimately, only a close back under parity would give reason for concern.

 

FLOWS

Option Strikes at 90.70 for NY cut in Usd/Jpy. German account selling Eur/Usd. Macro funds on the offer in Eur/Gbp. Local accounts still looking to buy Usd/Cad. Leveraged accounts starting to book profits on Eur/Chf shorts.

TRADE OF THE DAY

 

Eur/Cad: We took advantage of buying a very oversold cross rate last Friday, and will once again look to take advantage of a still overdone cross rate following the latest dip back towards the multi-month lows. Longer-term studies show the market very well supported in the 1.4600-1.4700 area and any pullback to retest the recent 1.4730 lows should result in yet another sharp upside reversal. We favor the current pullback potentially exceeding 1.4730 towards the figure before sharply reversing course to set up a short-term double bottom scenario on the daily chart. Neckline resistance would come in by 1.5085, with an eventual break above this level then opening additional upside into the 1.5400’s. STRATEGY: BUY @1.4715 FOR AN OPEN OBJECTIVE; STOP 1.4565. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE ON FRIDAY. 3X LEVERAGED.

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