Broad Based USD Demand Exposes Commodity Bloc

MORNING SLICES

FUNDYS

Price action on Wednesday has been quite volatile, but less a function of any specific fundamental catalyst and more attributed to some key levels being broken in the FX market. The most significant technical development has been the clear break below the 200-Day SMA in Eur/Usd. The pair had been very well supported on dips to the longer-term SMA over the past several weeks, and the break below now warns of a material shift in the structure, in favor of additional USD gains over the coming months.

Relative Performance Versus USD on Wednesday (As of 10:00GMT) –

1)    YEN                +0.24%
2)    STERLING     -0.36%
3)    CAD                -0.57%
4)    SWISSIE       -0.66%       
5)    EURO             -0.69%
6)    AUSSIE         -1.05%   
7)    KIWI              -1.60%


Although Cable has been tracking lower on the day in response to the broad based USD gains, the Pound continues to outperform on the back of some solid economic data and expectations that the BoE may look to soon remove QE. Nevertheless, we contend that the Sterling rallies are somewhat unjustified at current levels, and would particularly look to take advantage of an oversold Eur/Gbp market. The ramped up USD buying has also resulted in some heavy Yen cross related selling, with Usd/Jpy barely moving on the day. However, we would not rule out the potential for a pick-up in Usd/Jpy buying as well, given the latest structural shift in the market place.

Traders should now be aware that there is a major shift underway and our recommendation is therefore to look to take advantage, by fading any other strong trending markets up to this point. In our opinion, this translates into buying the major currencies against the commodity bloc currencies. All of the commodity bloc currencies have had exceptional runs against the majors (Eur, Swissie, Sterling), and we believe that we should start to see some notable weakness in the commodity bloc, which should ultimately result in higher major/commodity cross rates. Unfortunately, we were taken out of our long Eur/Aud position on Tuesday, but will look to re-establish a fresh long position if given the opportunity.

On the data front, German PPI came in on the softer side of expectations, while UK data was impressively solid. The unemployment drop in the UK was the largest since April 2007. Meanwhile, there were no surprises from the BoE Minutes which revealed a unanimous decision to leave rates unchanged at 0.50%, and the APF scheme at 200B.

Looking ahead, Canada CPI (-0.1% expected) is due at 12:00GMT, along with US mortgage applications. US PPI (0.0% expected), housing starts (575k expected) and building permits (580k expected) cap things off at 13:30GMT. US equity futures are weighed down, while commodities have also been offered.

GRAPHIC REWIND
 

TECHS
 

EUR/USD A multi-day bearish consolidation has been broken, and more importantly, the market has finally broken below the 200-Day SMA to highlight what we contend to be a significant shift in the broader structure, which now favors additional USD strength over the medium-term. The consolidation high-lows had been roughly defined between 1.4200-1.4600, and we therefore look for the current down-leg to extend into the 1.3800’s over the coming days. Any rallies are expected to be well capped ahead of 1.4400, with only a break back above 1.4580 negating outlook and giving reason for pause.

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. Falling trend-line resistance off of the April 2009 highs has been adhered to on the latest rally and a medium-term lower top could be in the process of carving below 94.00. 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 over the coming days.

GBP/USD Gains have stalled out by 1.6455 on Tuesday, with the market looking like it is now ready for bear trend resumption after the formation of a bearish gravestone doji-like candle. Key short-term support comes in by 1.6215 and we will look for a break below this level to confirm our bearish outlook and accelerate declines back towards critical medium-term support by 1.57001 over the coming days. While our short entry was missed on Tuesday, aggressive players may want to consider establishing shorts at current levels in anticipation of a 1.5700 retest. Stops should be placed on a close basis above 1.6500. 

USD/CHF The market is in the process of carving out a major base since dipping down below parity in November 2009. Look for a higher low by 1.0130, to be confirmed on a break back above 1.0505 over the coming days. Above 1.0500 will then open a fresh upside extension back towards next key resistance in the 1.0700 area. Only back under 1.0130 would delay outlook and give reason for pause.

FLOWS

Hedge funds buying Usd/Cad. German bank selling Gbp/Usd. Leveraged and model accounts building on Eur/Usd short positions following the break of the 200-Day SMA. Variety of accounts starting to sell Aussie and Kiwi more aggressively.

TRADE OF THE DAY

No Trade: Stopped out of Eur/Aud on Tuesday and currently long Eur/Chf and Eur/Gbp. Not looking to increase exposure at this point.

PORTFOLIO OVERVIEW

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