Currency Gains Capped Overnight; Market Direction Still Unclear

MORNING SLICES

FUNDYS

Currencies have been largely confined to tight ranges in early trade this week, with the markets still digesting the extreme Yen moves seen on Friday. Initially, the Yen had been well offered on the news that the BOJ would be considering a fresh easing policy, and talk of intervention from the MOF, but US NFPs opened an acceleration of Yen selling, which drove many of the Yen crosses sharply higher.

Relative Performance Versus USD on Monday (As of 11:45GMT) –

1)    KIWI               +0.47%
2)    AUSSIE          +0.35%
3)    SWISSIE       +0.20%
4)    EURO             +0.15%       
5)    CAD               +0.09%
6)    STERLING    -0.13%   
7)    YEN               -0.18%

Although equities had been trading higher in Asia on some more positive and reassuring news out from Greece, European trade has been less optimistic, with much of the gains being given back heading into the North American open.  Comments from Greek central bank governor Provopoulos that there has been solid demand for Greek bond issues, and French PM Sarkozy that the Eurozone will do whatever is needed to make sure that Greece is not isolated, had helped to keep currencies bid in Asian trade, but some renewed concerns over Dubai debt, and warnings from ex-central banker Wu that China’s economy is not yet ready for an international Yuan, were enough to get some traders nervous, forcing some currency, equity and commodity selling.

On the data front, things were fairly light, with Swiss retail sales coming in much stronger than expected, while Eurozone Sentix was not as bad. Meanwhile German industrial production numbers were misleading, after a downward revision to the previous print produced a weaker result. Another development just ahead of the US open came from the chairman of the House Financial Services committee, with Republican Barney Frank questioning the safety of investing in Fannie Mae and Freddie Mac.

On the whole, currency traders have been trading cautiously, with the markets still reflecting a high degree of uncertainty. Despite some USD selling today, there is still a great deal of interest to be buying USDs into any dips. Many have now begun to price in the beginning of a shift in Fed monetary policy, which ultimately should narrow yield differentials back in favor of the Greenback over the medium-term.

Looking ahead, the economic calendar in North America is anemic, with the only key release coming out of Canada in the form of housing starts (190k expected) due at 14:00GMT. On the official circuit, Fed Sack is scheduled to speak in Arlington, Virginia at 22:00GMT. US equity futures now point to a slightly lower open, while commodities are relatively flat.

GRAPHIC REWIND
 

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 1.3440 will expose a test by next psychological barriers at 1.3000, while a close back above 1.3700 delays and opens the door for some additional short-term corrective upside.

USD/JPY Has been very well supported on dips towards 88.00, and we look for the most recent sharp rebound to open additional upside over the coming weeks back above critical medium-term resistance at 93.75. Last Thursday and Friday’s impressive rally reaffirms our outlook and only a close back under 88.00 would ultimately negate and give reason for pause. 

GBP/USD Although the market remains locked in an intense downtrend, daily studies are in the process of unwinding from oversold levels. The risks from here are for some additional corrective relief, but ultimately, any gains should now be well capped ahead of 1.5500, where a lower top is sought out ahead of the next major drop below 1.4780.

USD/CHF The rally has finally stalled out for now ahead of 1.0900, with the market in the process of correcting from overbought levels. The risks from here are for some additional weakness back towards the 1.0500 area, from where a fresh higher low will be sought out ahead of the next major upside extension beyond 1.0900.

FLOWS

Asian central bank and semi-official offers in Gbp/Usd; retail accounts on the bid. US investment house and CTA offers in Eur/Usd. Various buy-side shops are starting to build short positions in Aussie and Kiwi. 
 

TRADE OF THE DAY

No Trade: No new recommendations at the moment and currently running open positions in Eur/Aud, Eur/Cad, and Gbp/Aud. We booked profit on our Gbp/Jpy long trade earlier today for 330 points.  
 

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