Rating Agency Casts Dark Cloud Over Risk Sentiment

MORNING SLICES

FUNDYS

The broad based consolidation in the major currencies continues with the Euro once again failing to establish any topside momentum and falling back into the middle of a multi-day bearish consolidation against the buck. Some renewed concerns over Greek contagion into Portugal and Spain have not helped matters, while comments from Fitch that it would be possible to have a sovereign default in the Eurozone, exacerbate the situation for the Euro. The same holds true for Sterling and Swissie, while Dollar/Yen is in the process of rolling back over after mounting an impressive three day rally. The Pound has come back under pressure and is the weakest currency on the day, with many attributing the relative underperformance to a very disappointing RICS house price reading, a wider trade deficit, concerns from Fitch, and some cautious remarks from BOE Barker. The single currency has already been at risk given the high degree of uncertainty about the upcoming elections and ongoing concerns over the strength of the economy. UK BRC sales also were out in Asia and came in on the stronger side, but failed to materially influence price action.

Relative Performance Versus USD on Tuesday (As of 11:15GMT) –

1)    YEN              +0.61%
2)    AUSSIE        -0.23%
3)    CAD              -0.30%
4)    SWISSIE      -0.41%       
5)    EURO            -0.45%
6)    KIWI              -0.53%   
7)    STERLING    -0.76%

Talk of a near term revaluation of the Yuan has been generating a lot of attention in the currency markets over the past 24 hours, with Dr. 'Doom' Roubini saying that China could end its dollar-yuan peg as soon as next month.  However, many have taken the reval talk with a grain of salt, especially in light of recent comments from PBOC governor Zhou who has said that the global recovery is not solid and that China must be very cautious in the timing of normalizing its policies, which includes a yuan revaluation. Nevertheless, traders are still paying close attention, especially with the IMF now pressuring China to reval.

Elsewhere, the Yen crosses have come back under pressure on talk of Japanese repatriation, while lower equity prices and a higher USD could also be factoring into the flight to safety price action. Looking ahead, US NFIB small business optimism is due at 12:30GMT, followed by IBD/TIPP economic optimism at 15:00GMT. US equity futures and commodities are both tracking lower on the day. 
 

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

Sell stops reported in Usd/Jpy below 89.30. Asian investors and Russian accounts looking to buy Gbp/Usd dips. Model funds selling Yen crosses. Local accounts staring to bid Usd/Cad. Shorter-term specs on the offer 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 on Monday for 330 points.  
 

PORTFOLIO OVERVIEW

P&L Update and Overview: Many of you have been asking for a way to better track trading results and open positions. In response to these requests and in an effort to be fully transparent, a simulated portfolio has been created to track our results on a daily basis. We are pleased to announce that our model generated returns of 50% in 2009. The return on equity curve seen below has now been reset for 2010.
 

Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
If you wish to receive Joel's reports in a more timely fashion, e-mail jskruger@fxcm.com and you will be added to the "distribution" list.

If you wish to discus this topic or any other feel free to visit our Forum page