Currencies Lack Direction Ahead of North American Open Following Boring Overnight Trade

FUNDYS

The fact that the employment data was on the whole quite weak but not disastrous ended up being the worst possible situation for the Greenback, which most probably would have benefited in a situation where the data was either really bad or really good. A really bad report would have rehashed the views that weakness in the US is likely to ripple into the global economy, thereby perpetuating the flight to safety trade, while a really strong report would probably have benefited the buck as well, with investors being encouraged by the data and overall prospects for US recovery (translating into higher fed fund futures). In the end, this is not how things played out, and we could be in store for another round of USD selling.

Relative Performance Versus USD on Monday (As of 10:30GMT)

1. STERLING+0.09%
2. AUSSIE+0.09%
3. YEN-0.07%
4. SWISSIE-0.11%
5. EURO-0.11%
6. CAD-0.15%
7. KIWI-0.42%

Technically, currencies are certainly overextended and warn of the potential for a major corrective pullback in favor of the US Dollar, but at this point, we have received no confirmation of such a reversal. The Euro now looks like it could extend towards the 1.3500 area, while Usd/Jpy still needs to take out critical support by 84.80 below. Cable has finally reached 1.6000 but could now see an overshoot into the 1.6100-1.6300 area before finally stalling out. Meanwhile, Usd/Chf looks poised for a fresh drop towards the 1.0100 figure before considering the possibility of a meaningful base. The antipodeans have also been quite strong with Aussie and Kiwi residing by fresh multi-day highs. The only currency that has shown any weakness over the past few sessions has been the Canadian Dollar, with the single currency getting whacked in sympathy with the USD due to proximity, while also being hit hard on some horrid local data.

On the data front, German trade came in slightly higher than expected, while Eurozone sentix investor confidence was much stronger than forecast. However, the data failed to materially factor into price action. Looking ahead, all is quiet on the economic calendar in North America, and markets will like trade off of broader global macro developments. US equity futures point to a firmer open, while oil looks to be well bid, up nearly 1%. Meanwhile, gold trades flat.

GRAPHIC REWIND

TECHS

EUR/USD: Continues to extend gains to fresh multi-day highs above latest figure resistance at 1.3300, with the market adhering to a rising bull channel since early June. From here, scope exists for additional upside towards the 1.3400-1.3500 area from where we see the market stalling out in favor of a much needed corrective pullback. Daily studies are overbought and this indeed warns of the likelihood for a reversal over the coming days. Rising channel support comes in by the 1.3100 area, so will need to see a break and close below the figure at a minimum to force some kind of a shift in the bullish structure.

USD/JPY: Daily studies are still not quite oversold and there is still room for additional downside from here below next critical support by 84.80. However, any additional declines below 84.80 are not seen as sustainable, with the greater likelihood for a major upside reversal from there. As such, we would be looking for opportunities to buy the market on a dip towards 84.00 over the coming sessions.

GBP/USD: No sign of any exhaustion just yet, and the market looks poised for yet another upside surge beyond critical psychological barriers at 1.6000. Daily studies are however overbought, so we would recommend looking to sell into overshoots beyond 1.6100.

USD/CHF: Continues to chop around after being very well supported on dips in the 1.0300’s. However, it appears as though the fresh multi-day lows on Friday could now open some additional declines towards 1.0100 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.

FLOWS

Offers in Usd/Chf ahead of 1.0400; bids in the lower 1.0300’s. Sovereign interest on both sides of Eur/Usd; reported option barriers @1.3350. Bids ahead of major option barriers in Usd/Jpy at 85.00.

PORTFOLIO OVERVIEW

The model portfolio has been reset as of August 2010 with a starting equity of $10,000. Please note that we still have some positions open that will not be tracked in this portfolio. We are currently Long Eur/Aud, Short Eur/Chf, Short Eur/Gbp, and LongUsd/Cad. However, we will continue to update these positions as they progress.

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

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