USD Fails to Establish Additional Momentum Ahead of North American Open

FUNDYS

The USD was very well bid against the Euro, Pound, Swisse and Yen, to put in some key reversal days and warn of a shift in the trend, while the commodity currencies outperformed and still managed extend gains against the buck. It seems as though the major currencies were reacting more to the pickup in US data (highlighted through stronger ADP and ISM non-manufacturing) which up until Wednesday had been very weak, while the stronger data also helped to infuse a solid amount of risk appetite to favor additional buying in the commodity currencies.

Relative Performance Versus USD on Wednesday (As of 9:30GMT)

1. SWISSIE+0.71%
2. CAD+0.51%
3. EURO+0.43%
4. YEN+0.22%
5. STERLING+0.01%
6. AUSSIE-0.12%
7. KIWI-0.91%

Technical studies were also warning of the probability for a strong reversal back in favor of the Dollar and with this in mind, there is good reason to believe that the commodity bloc is also highly exposed at current levels and could be playing a game of catch-up on Thursday as they start to sell-off on the broader USD demand. Cyclically, Aussie above 0.9100, Kiwi above 0.7300 and Usd/Cad below 1.0200 are all well overdone at those levels and this further confirms our overall bearish bias here.

Certainly the much weaker than expected unemployment data out of New Zealand in early Asia trade is supportive of our view, and could be the exact catalyst to get things going to the downside for the commodity bloc. We are seeing this play out a little ahead of the North American open with the antipodeans underperforming. However, the Canadian Dollar has been the most impressive currency on the day and continues to confound, with the single currency rallying to fresh multi-day highs towards 1.0100 even amidst some broader USD buying. Some analysts feel that the recent buying back into the USD on some stronger USdata, translates into an even stronger net positive for the neighboring Canadian economy which seems to be on the whole in better shape. Other sources have attributed the relative strength to reported M&A related demand for Canadian assets.

Price action in European trades was anything but steady ahead of the upcoming central bank event risk, with currencies dropping hard at the European open, only to recover sharply back towards and above daily opening levels into the mid-European session. It seems as though some heavy stop-losses were triggered early on, before USD bears looked to take advantage of the dip and aggressively buy back into it. European data and news also helped to factor into the recovery, with German factoryorders coming in much stronger than expected, while the IMF was out saying that Greece is likely to get a $11.8B payout in emergency loans on the back of some austerity progress.

Looking ahead, attention shifts to the highly anticipated Bank of England and European Central Bank event risk at 11:00GMTand 11:45GMT respectively. While no change is expected on the rates side from either central bank, the accompanying language and ECB press conference will be what investors will be focused on for any hints of a shift in the direction of monetary policy. Canada building permits (1.8% expected), US initial jobless claims (455k expected), and continuing claims (4515k expected) are all then due at 12:30GMT.

GRAPHIC REWIND

TECHS

EUR/USD: Looks to have finally stalled out to end a sequence of 9 consecutive daily higher lows after the market failed to extend to fresh multi-day highs beyond 1.3260 and reversed sharply back below Tuesday’s low. The daily RSI has now crossed down from overbought and deeper setbacks are now favored into initial support by the 10-Day SMA and rising trend-line support by 1.3100 at a minimum with an acceleration seen on a sustained break below towards 1.2700. Only back above 1.3260 negates and gives reason for pause.

USD/JPY: Setbacks have finally stalled out just shy of the critical multi-year lows by 84.80, with the market putting in a solid positive close on Wednesday trade. However, the pressure still remains on the downside, and at this point we would be surprised to not see the 84.80 level taken out. Our medium-term and longer-term view is net bullish so once this level is take out we would recommend looking to be buyers. In the interim, a break back above 87.00 would be required at a minimum to relieve downside pressures.

GBP/USD: The daily RSI is looking to cross down from overbought readings and a bearish reversal day following 9 consecutive positive closes helps to strengthen the likelihood for some additional corrective declines over the coming sessions. There is no real support until the 1.5685-1.5710 area, and we would expect to see this area tested at a minimum before even considering the prospects for bullish continuation. However, it is also possible that a material top is now being carved out ahead of a much more significant decline. Ultimately, only a break back above 1.5970 would delay outlook.

USD/CHF: Continues to chop around after being very well supported on dips into the mid 1.0300’s. Wednesday’s bullish price action strengthens basing prospects and could open additional upside back towards 1.0640-80 over the coming sessions. Ultimately, the overall structure is still net bearish and a break back above 1.0680 would be required to relieve downside pressures.

TRADE OF THE DAY

EUR/USD:Although we have yet to see any sustained downside follow through off of Wednesday’s impressive bearish reversal day that ended a sequence of 9 consecutive daily higher lows, we contend that the formation still signals the start to a medium-term top in the pair ahead of a material corrective pullback at a minimum. With technicals looking to unwind from overbought after a very strong move from 1.1880 up to 1.3260, there is plenty of room for pullback and as such, any rallies back towards the 1.3260 highs in North American trade should be aggressively sold. More often than not, strong technical reversal signals in the Euro do not always play out as pretty as they should due to the currency pair’s high profile, but the signals are reliable and will sometimes generate real doubt before they actually play out. STRATEGY: SELL @1.3250 FOR AN OPEN OBJECTIVE; STOP 1.3350. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON THURSDAY.

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

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