Currencies Digesting Latest Fed Move

MORNING SLICES

FUNDYS

While many had heard the warnings from Fed Chair Bernanke in the previous week of a near-term raise in the discount rate, most did not believe it would come so soon, and in such unpredictable and untimely manner. Yesterday, late in US trade, the Fed went ahead and raised the discount rate by a quarter of a point to 0.75%. This caught the markets well off guard and triggered a major USD rally to fresh yearly highs against all of the major currencies, with the exception of the Yen. The moves came despite the Feds reassurance that the raise in the discount rate was not reflective of a shift in the economy or the current monetary policy outlook. However, given the recently more hawkish FOMC Minutes and favorable momentum for the Greenback, the buck was well positioned to benefit from the development, merely on the expectation that the wheels are now in motion for a reversal of monetary policy.

Global equities have not responded well to the move, with ongoing global macro concerns (Eurozone debt crisis) now escalating at the prospect of a tighter global policy shift in the face of a recovering economy that arguably requires as much accommodation as needed. Commodities have also come off on similar themes and correlations, with gold giving back its post IMF recovery rally (the IMF forced a selloff in gold earlier in the week after announcing that it would be selling reserves in the open market) on the Fed announcement.

The higher yielding antipodeans are amongst the weaker currencies on the day, but it is the Pound that has been hit the hardest as an article from the UK Telegraph has inspired a heavy bout of Sterling liquidation after reporting that the UK government deficit is at crisis levels and may even be worse than that of Greece. Attempts from Fed Bullard to minimize and downplay the impact of the discount rate decision have fallen on deaf ears thus far, and it will be interesting to see how the markets respond in European and North American trade.

In European trade, German PPI was firmer than expected, while German and Eurozone PMIs also exceeded expectations. Meanwhile in the UK, retail sales were released and came in significantly weaker adding to the already mounting pressure on the Pound.

Looking ahead, Canada retail sales (0.5% expected) and leading indicators (1.1% expected) are due at 13:30GMT, along with US CPI (0.3% expected). US mortgage delinquencies cap things off at 15:00GMT.  On the official circuit, Fed Dudley is slated to speak at an economic conference in Puerto Rico at 13:00GMT. US equity futures trade with a heavy tone but have managed to recover off of their earlier lows, while commodities are also looking more constructive in Europe.

GRAPHIC REWIND

TECHS

EUR/USD: The break below 1.3530 on Thursday now marks an end to the latest consolidation and opens a fresh downside extension that ultimately exposes a drop towards 1.3000 over the coming days. Next key short-term support comes in by 1.3420, and we look for a test of this level over the coming sessions. Daily studies are however looking stretched, so we would prefer to recommend looking to sell into rallies, rather than selling downside breaks. Look for a fresh lower top to carve out below 1.3840, ideally by the 10-Day SMA, which currently resides in the mid-1.3600’s.   

USD/JPY: Has finally ended the latest bout of consolidation with the market breaking back above key short-term resistance at 91.25 to now open the door for fresh upside over the coming days. The break back above 91.25 now completely negates the violent single-day pullback from a couple of weeks back and potentially exposes a direct retest of next key resistance by 93.75 further up. Any intraday setbacks should be well propped ahead of 90.00.  

GBP/USD: The break below 1.5535 on Thursday now marks an end to the latest consolidation and opens a fresh downside extension that ultimately exposes a drop towards 1.5000 over the coming days. Next key short-term support comes in by 1.5295, and we look for a test of this level over the coming sessions. Daily studies are however looking stretched, so we would prefer to recommend looking to sell into rallies, rather than selling downside breaks. Look for a fresh lower top to carve out below 1.5815, ideally by the 10-Day SMA, which currently resides in the mid-1.6600’s.   

USD/CHF: Continues to press higher with the market now fast approaching our 1.1000 objective from a few weeks back. A major base looks to be firmly in place and any setbacks are expected to be well supported ahead of 1.0500 in favor of a bullish continuation through 1.1000 and towards 1.1500 further up.  Daily studies are starting to look stretched so we do not rule out the possibility for a short-term pullback. 

FLOWS

Semi-official and momentum types buying Eur/Usd, Asian Central bank demand for Aud/Usd on dips. US Prime name and ACB real money sellers in Gbp/Usd.

TRADE OF THE DAY: EUR/AUD

Charts created by Bloomberg - prepared by Joel Kruger

Technical Catalyst: A string of nine consecutive negative closes (Fibonacci sequence) has now been compromised with a doji close on Thursday, and this could very well be suggestive of the early formation of a long awaited and much needed base.  Daily studies are deeply oversold, while weekly studies also look exhausted. This in conjunction with a market that now trades at over 10 year lows and by a longer-term cyclical bottom, strengthens the prospects for a major upside reversal in the near-term. Thursday’s high comes in by 1.5170 and we will look to take advantage of the anticipated trend reversal by buying a break of this high.

Fundamental Catalyst: The recent announcement from the Fed has put a serious dent in investor sentiment, and in turn has weighed heavily on global risk appetite. As things correlate, this should start to put some pressure on the higher yielding currencies as market participants look to exit their riskier positions in favor of a flight to lower yielding plays. We are fully aware of the risk associated with the Euro at present, but also believe that any fears in the Eurozone related to Greece, Portugal and Spain are overdone, with the Euro to likely benefit on this cross as price action normalizes  and more accurately reflect fundamentals. Traditionally, any pressure on global equities results in a higher cross rate, and we contend that this sets up an opportunity to participate in a very compelling long trade.

STRATEGY: BUY @1.5175 FOR AN OPEN OBJECTIVE, STOP @1.5045. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE ON FRIDAY. 5X LEVERAGED.

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