Sterling/Yen Poised for Short-Term Corrective Bounce; Look to Buy

MORNING SLICES

FUNDYS
 

Not a lot to talk about thus far on the day, with currencies mostly consolidating from their Tuesday rebound against the buck. The commodity currencies continue to stand out, although we are finally starting to see some desire for profit taking in Aussie and Cad given how overextended they are against the non-USD and Yen major currencies. Sterling has made the most impressive rally today, with the single currency playing some catch-up after relatively underperforming in recent sessions. A stronger than expected consumer confidence, which rose to its highest levels in 2 years, along with some very solid services PMI data, also helped to provide an added boost for the UK currency. European data was also a non-factor, with German and Eurozone PMI prints coming in as expected, while Eurozone retail sales were slightly better. Earlier in the day, Australia, Q4 GDP came in more or less as expected, while the Y/Y number was better.

Relative Performance Versus USD on Wednesday (As of 11:30GMT) –

1)    STERLING    +0.35%
2)    SWISSIE      +0.27%
3)    EURO            +0.24%
4)    CAD               +0.19%       
5)    YEN                +0.09%
6)    AUSSIE         -0.07%   
7)    KIWI              -0.70%

Overall, the improved sentiment within the markets has also been aided by the latest news out of Greece, with the country expected to announce details of their deficit reduction plan. S&P has added to positive sentiment after saying that it is less pessimistic on Greece than it is on the financial markets. Finally, Fed Fisher has been on the wires saying that while liquidity measures are being removed, now is not the time to begin tightening monetary policy.

Looking ahead, US MBA mortgage applications are due at 12:00GMT, followed by Challenger job cuts at 12:30GMT. ISM non-manufacturing (51 expected) comes out at 15:00GMT, with the Fed Beige Book economic report capping things off later in the day at 19:00GMT. On the official circuit, Fed Rosengren speaks at 15:15GMT in Philadelphia, while Fed Lockhart speaks in New York at 17:00GMT. US equity futures and commodities are marginally bid heading into the North American open.

TECHS
 

EUR/USD Setbacks have stalled for now ahead of  1.3400 (61.8% fib retrace of the 2008-2009 low-highs), and although the overall structure remains bearish, the market looks as though it may be attempting to carve out a short-term base.  However, it is still too difficult to call and the market could just as easily be in the process of a bearish consolidation ahead of the next major downside extension below 1.3440. A break back below 1.3450 will expose a test by next psychological barriers at 1.3000, while back above 1.3700 delays and opens the door for some short-term corrective upside.

USD/JPY Currently in the process of chopping around, with the market most recently rolling over after stalling out above 92.00. Nevertheless, our core outlook in the pair is bullish, and we recommend looking to buy into current dips back towards the recent range lows in the 88.00’s. Ultimately, only a close back under 88.55 would negate and give reason for pause, while above 89.50 should confirm bias and accelerate gains.

GBP/USD The most recent bout of bearish consolidation has been broken, with declines below critical psychological barriers by 1.5000 now exposing next psychological support by 1.4500 further down. Daily studies are however oversold, and we would prefer selling into rallies. The 10-Day SMA has more or less capped rallies over the past several days, so we would recommend looking to sell on a rally back towards the shorter-term SMA which currently comes in by 1.5275.    

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 1.0600 in favor of a bullish continuation through 1.1000 and towards 1.1500 further up.  Only back under 1.0600 would delay and give reason for pause.
 

FLOWS
 

Talk of large bids in Nzd/Usd at 0.6880. Short squeeze talk in Gbp/Usd, with option traders eyeing 1.5100 into NY cut. Middle Eastern accounts on the bid in Usd/Cad. Option market players talking of large buying in 1 week Eur/Usd 1.3750’s.
 

TRADE OF THE DAY

Gbp/Jpy: Very tough to ignore a currency that has been so beaten down and that pays a nice positive carry. The cross has dropped sharply by more than 10 big figures over the past 2 weeks and with daily studies so overextended, we like the idea of establishing a long position on a break back above Tuesday’s high. A break back above Tuesday’s high will mark an end to a series of 9 consecutive daily lower highs, and should also mark an end to a series of 9 consecutive negative closes, pending a positive close on Wednesday. The drop of 9 days also coincides with a fibonacci time sequence that would also suggest that the market pullback has stalled for now. STRATEGY: BUY @133.80 FOR AN OPEN OBJECTIVE; STOP 131.80. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON WEDNESDAY. POSITION SIZE SHOULD BE 3X TOTAL EQUITY.

 

PORTFOLIO OVERVIEW
 

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