Euro Poised for Short-Term Bounce Before Fresh Selling

MORNING SLICES

FUNDYS
 

Asia Session - Treasury Secretary Geithner has attempted to calm the markets somewhat after saying that he wants to only limit risk taking from the big banks and not break them up. The Yen is the strongest currency on the day, with the news that Japan may become the most heavily indebted nation seen weighing on risk appetite. Meanwhile, Aussie has recovered mildly on Friday, despite hints of some unsettling tax changes in the country. ECB Noyer has been on the wires saying that the recovery in France is fragile and will be slow due to the removal of stimulus. The Greece debt crisis remains at the forefront of investor minds and central bank governor Provopoulos has attempted to play down any fears of a potential separation from the Euro. The recent slide in equities has summoned new doom and gloom comments from Nouriel Roubini who warns that the global rally in equities may come to a halt in the second half of 2010, on the back of slower growth and deflationary pressures.

Relative Performance Versus USD on Friday (As of 10:20GMT) –

1)    AUSSIE        +0.79%
2)    CAD              +0.54%
3)    KIWI             +0.54%
4)    EURO            +0.50%       
5)    SWISSIE      +0.45%
6)    STERLING    +0.14%   
7)    YEN               +0.04%

Europe Session – UK retail sales has been the big story in European trade, with the data coming in well below market expectations, and weighing on the single currency which had relatively outperformed over the past several days. Eurozone data has produced a more impressive result, with French business confidence and Eurozone industrial new orders both bettering analysts estimates. As such, it is indeed no surprise to see the Eur/Gbp cross finally finding some relief from the beating it has taken over the past several days. Meanwhile, it seems as though some constructive solutions are emerging from Greece after the head of the local debt agency announced that a 5-10 year bond will be sold in the near future. Finally, Fitch has revised its outlook for Russia to stable from negative, while also approving the country’s BBB credit rating.

Outlook - While we continue to see the overall risks for continued broad based USD appreciation, the latest slide in currencies could once again warrant some short-term corrective action on Friday. Ideally, traders should look to take advantage of any currency rallies and look to build on long USD positions. In Eur/Usd, we see the potential for a bounce back to 1.4250, but would recommend aggressively selling into this level if it is hit over the coming sessions.

Looking ahead, the North American calendar is unusually light for a Friday, with the only key release coming in the form of Canada retail sales (-0.3% expected) due at 13:30GMT.  US equity futures are mildly bid, while commodities are mixed with oil higher and gold lower.

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. However, given the extend of the latest drop, we would not rule out the possibility for a short-term corrective bounce towards 1.4250 before considering bear trend resumption. 

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 session. Only back above 92.00 would give reason for concern and delay.

GBP/USD Gains have stalled out by 1.6455, with the market looking like it is now ready for bear trend resumption after the formation of a bearish gravestone doji-like candle a few days back. Key short-term support comes in by 1.6125 and we will look for a break below this level to reaffirm our bearish outlook and accelerate declines back towards critical medium-term support by 1.5700 over the coming days. For now, any intraday rallies should be well capped ahead of 1.6370.

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 1.0500 over the coming sessions. 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. Bulls should look for opportunities to buy on dips into the 1.0250-1.0300 area.

FLOWS
 

Spec accounts selling cross-yen. US prime name selling Eur/Aud. Model funds on the bid in Aussie. Leveraged names buying Eur/Gbp. Local accounts looking to buy Usd/Cad. US investment house recommends looking to buy Usd/Jpy.

TRADE OF THE DAY
 

Eur/Aud: Although we were stopped for a loss earlier in the week, we still remain highly bullish at current levels, with the market trading at what appears to be a discount given longer-term technical studies. Weekly studies are oversold and we expect to see a major bounce over the near-term, which ultimately will set up a major base and open some significant upside over the coming weeks and months. While a sell-off in the USD on Friday does not favor a higher cross rate, we do not expect the USD selling to persist and would use any cross weakness resulting from broad based USD selling as an excellent opportunity to re-establish a long position.  STRATEGY: BUY @1.5510 FOR AN OPEN OBJECTIVE, STOP @1.5360. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE ON FRIDAY. 3X LEVERAGED.  

PORTFOLIO OVERVIEW
 

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