USD Smashed in European Trade as Structural Divergences Intensify

FUNDYS

There has been a notable divergence in data and outlook out of the US and Eurozone over the past several days, with a round of softer data in the US and downbeat Federal Reserve being starkly contrasted with some improving Eurozone data and a positive result from the European bank stress tests. Currencies in general have been prime beneficiaries of this divergence, with market participants also translating this theme into a net risk positive event as reflected by the recent rebound in global equities prices.

Relative Performance Versus USD on Thursday (As of 10:00GMT) –

1) AUSSIE +1.07%

2) SWISSIE +0.91%

3) CAD +0.73%

4) EURO +0.63%

5) YEN +0.42%

6) STERLING +0.27%

7) KIWI +0.05%

Any setbacks in Asian trade from a much more dovish than expected RBNZ, have been wiped clear, and commodity currencies have recovered quite impressively with Aussie leading the charge. Sterling also remains well bid on similar core bearish USD themes, but we do see the risk for at least some relative weakness in the Pound following an across the board weak round of data in Thursday trade. Nationwide house prices, consumer credit and mortgage approvals were all weaker than analyst forecasts.

We have already talked about it this week, but the negative sentiment towards the USD has come back with a fury as investors grow increasingly confident with global recovery prospects and less concerned about having to have their investments in safe haven assets. The talk of major structural problems in the US economy has been intensified, and this in conjunction with a concerned Federal Reserve that looks like it will continue maintain its ultra accommodative monetary policy certainly does not bode well for the Greenback.

Flow related price action is also being attributed to the latest broad based USD sell-off, with talk circulating of heavy end of month related offers in the USD, and large Eur/Usd call options by 1.3250. Data out of the Eurozone on Thursday has come out much better than expected, with Eurozone sentiment indicators pleasantly surprising to the upside. At this point in the day, even the Yen and Swissie have put up some solid gains against the USD and other than some stretched intraday technical studies, there seems to be no catalyst on the horizon to break the current trend, although we would also not rule this out. The North American session has yet to trade, and we could see some profit taking into the US morning, but at this point that remains to be seen.

Looking ahead, Canada industrial product prices (0.5% expected) and raw materials prices (1.0% expected) are due at 12:30GMT, along with US initially jobless claims (460k expected) and continuing claims (4525k expected). US equity futures and commodities are are tracking higher ahead of North American trade.

TECHS

EUR/USD: (See Below)

USD/JPY: The latest round of setbacks below 87.00 have been very well supported and daily studies have now turned up from oversold levels with the market looking like it wants to carve out a base. Look for additional gains over the coming sessions back towards 89.15, with a break of this level to likely accelerate gains and force a more material shift in the structure. However, a close back below 86.25 would negate and shift focus back towards the multi-year lows by 84.80.

GBP/USD: Gains have been quite impressive over the past few sessions with the market taking out key resistance by the 200-Day SMA and closing above the longer-term SMA on Tuesday. This is the first time the market is above the 200-Day since January and could potentially warn of a major shift in the structure. However, we would like to see a two day close above the SMA to adopt a bullish outlook and until then, selling into this strength is the preferred strategy. Look for a break back below 1.5440 to confirm and accelerate.

USD/CHF: The market could be in the process of carving out a material base with setbacks being very well supported for now in the 1.0400 area. However, it is still premature to call for a bullish reversal at this point, with a break back above 1.0645 required at a minimum to take the immediate pressure off of the downside.

FLOWS

Large end of month related offers in the USD. Talk of 1 week 1.3250 call options being bought in Eur/Usd. Model fund demand for commodity bloc currencies.

TRADE OF THE DAY

EUR/USD: We are really recommending against a very strong trend here but we simply can not ignore the highly stretched daily and hourly technical studies which should produce a short-term corrective pullback at a minimum in the near-term. The daily average true range of 140 points projects a daily high today just over 1.3100 and we will look to establish a playable counter-trend short position on a break above 1.3100 in anticipation of said correction. STRATEGY: SELL @1.3115 FOR AN OPEN OBJECTIVE; STOP 1.3215. RECOMMENDATION TO BE REMOVED IFNOT TRIGGERED BY NY CLOSE (5PM ET) ON THURSDAY.

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

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