Euro Buy Recommendation Issued; Time For Correction

MORNING SLICES

FUNDYS

While all currencies are lower against the buck on Thursday, none stand out like Kiwi, which has suffered a severe blow on the back of the shocking surge in the unemployment rate. Analysts had been expecting a 6.8% showing, and when the number came in at 7.3%, the single currency was sold violently and aggressively, before finally finding some room for consolidation in European trade. The 7.3% print is the highest the rate has been in a decade, and could seriously hamper any hopes for additional rate hikes from the RBNZ going forward. Meanwhile, in Australia, we saw a mixed batch of data, with approvals coming in better, while retail sales were considerably weaker. Investor sentiment has once again been hit on Thursday, and the snap of a string of positive equity closes in the US markets has not helped. Elsewhere, BOJ Nakamura has come out saying that the central bank will retain a very accommodative stance and that it will not rule out any policy options.

Relative Performance Versus USD on Thursday (As of 10:40GMT) –

1)    YEN                +0.32%
2)    CAD               -0.16%
3)    SWISSIE       -0.17%
4)    STERLING     -0.30%       
5)    EURO             -0.34%
6)    AUSSIE         -0.35%   
7)    KIWI              -0.98%

In European trade, the aggressive USD buying continued, with market participants not concerned with squaring up positions ahead of the central bank event risk, in favor of continuing to build on USD long positions. Fresh 2010 lows in many of the major currencies were set in Europe (including the Euro), and it will now be interesting to see how things play out into the North American session. On the data front, UK Halifax house prices was the most watched release, and helped to generate some relative Sterling weakness after the series produced a weaker than expected result, with a downward revision to the previous print.

Looking ahead, much of the attention and price action will undoubtedly be focused on the highly anticipated central bank decisions from the BOE (unchanged at 0.50% expected) and ECB (unchanged at 1.00% expected) at 12:00GMT and 12:45GMT respectively. While no change is expected to rates, the key focus will be whether the BOE makes any changes to its QE policy, and whether Trichet gives any added insights into future direction of monetary policy at his 13:30GMT press conference.

Canada building permits (2.5% expected), US non-farm productivity (6.5% expected), unit labor costs (-3.4% expected), initial jobless claims (455k expected) and continuing claims (4581k expected) are all due at 13:30GMT.  Canada Ivey PMI (53.0 expected) and US factory orders (0.50% expected) then cap things off at 15:00GMT. US equity futures point to a slightly higher open, while commodities are mildly offered.

GRAPHIC REWIND
 

TECHS
 

EUR/USD (See below)

USD/JPY The latest break back above 91.00 is viewed as a significant short-term development and could now be setting the stage for a medium-term higher low by 89.10. Our outlook for the pair is now bullish and we see significant upside potential from here with the market rallying back towards critical resistance at 93.80 over the coming days. Any dips towards 90.00 should be bought, while only a break back below 89.00 would negate outlook and give reason for pause. The longer-term trend has been grossly bearish, and we would also contend that the short-term price action could be setting up for the initial stages of a major trend shift.  

GBP/USD The latest bout of consolidation has been broken, with the market easily taking out 1.6085, to accelerate declines and expose a direct retest of key medium-term support by 1.5700 over the coming sessions. Key short –term support comes in by 1.5830, below which exposes a direct and immediate retest of 1.5700. Any rallies are expected to be very well capped ahead of 1.6070, with only a break back above this level to now delay.

USD/CHF The latest break back above 1.0500 suggests that the market has now carved out a major base that exposes some fresh medium-term upside towards 1.1000 over the coming weeks. However, given the intensity of the run-up over the past few days from 1.0200 to 1.0600, a short-term corrective pullback can not be ruled out. Nevertheless, we would look to use any dips into the 1.0350-1.0400 region as a formidable opportunity to build on existing longs in anticipation of a higher low.

FLOWS

UK clearer and Asian sovereign demand for Eur/Usd on dips. One very big and reputable player has been in buying up Eur/Sek. Model funds buying Usd/Jpy. Leveraged names building cross-yen long positions.

TRADE OF THE DAY

Eur/Usd: The objective from the 1.4200-1.4600 consolidation break is now being tested, with the market dropping into the 1.3800’s thus far. However, while our core view continues to favor additional downside, short-term technical studies are now oversold and warrant a much needed and healthy corrective bounce. Any additional declines on Thursday should be very well supported on a dip below the 1.3800 figure, and as such, we will look to establish a very playable counter-trend long in anticipation of some major corrective relief. STRATEGY: BUY @1.3790 FOR AN OPEN OBJECTIVE; STOP 1.3690. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON THURSDAY. POSITION SIZE SHOULD BE 3X TOTAL EQUITY.

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