Currencies Remain Under Pressure As Weak Global Economic Data Reinforces Investor Fear

FUNDYS

Both the USD and Yen (Swissie too on similar safe haven flows) remain well bid, and the lack of economic data in European and Asian trade, has allowed the theme of elevated uncertainty and risk aversion to continue.

Relative Performance Versus USD on Thursday (As of 11:10GMT)

1. SWISSIE+0.45%
2. YEN-0.04%
3. CAD-0.04%
4. EURO-0.33%
5. AUSSIE-0.33%
6. STERLING-0.43%
7. KIWI-0.62%

Key developments over the past few hours have mostly originated from Japan, with an early Yen sell off easily absorbed following FinMin Noda’s press conference in which the government official failed to mention intervention or offer anything new on the subject of the strong currency which trades at multi-year highs against the USD. Also out in Asian trade was a weaker than expected Aussie employment report, with the unemployment rate rising by more than expected after analysts had been looking for an unchanged print. However, the negative data was somewhat mitigated by a stronger participation rate, to leave some room for optimism. Elsewhere, in the Eurozone, industrial production came in much weaker than expected to help keep the Euro under pressure and trading by its daily lows.

It is clear at this point that the latest safe haven buying is certainly justified with the fears of risk to the global economy from a downbeat Federal Reserve earlier in the week being substantiated by the latest wave of weaker global economic data. Even the seemingly well perceived and insulated Scandinavian economies have begun to show cooling, most recently reflected through today’s softer Swedish inflation data and very disappointing Norwegian retail sales. While it is unclear and premature at this point to call for a double dip recession, it is also clear that we are in for a bumpy road ahead, and wild swings in the market are to be expected as the global economy tries to fight its way into sustained recovery.

From a trading standpoint, we should try and understand the current market environment, adapt to it as much as possible, and use it to our advantage. It seems as though just when things look like they can’t go wrong, they inevitably do, and similarly, just when it looks like the world is about to fall off a cliff, things turn around quite sharply. For now, it looks as though the bears are backin control and we would expect to see this latest trend play out for a little while longer. But when things do get really ugly, don’t be afraid to buy.

Looking ahead, US initial jobless claims (465k expected) and continuing claims (4535k expected) are due at 12:30GMT along with the import price index (0.3% expected). US equity futures are pointing to marginal declines at the open, while oil is noticeably lower by some 1% and gold tracks higher by 0.65%.

GRAPHIC REWIND

TECHS

EUR/USD: Wednesday’s violent pullback officially confirms short-term topping and opens the door for deeper setbacks over the coming sessions. The latest downside acceleration has also triggered a break of the previous weekly low to set up a bearish reversal week. For now, look for next support by 1.2700 to be tested over the coming sessions, with any intraday rallies expected to be very well capped ahead of 1.3070.

USD/JPY: Critical support by 84.80 has finally been broken to open some fresh multi-year lows. Next key support comes in by 84.45, with a break below this level exposing the monthly lows from June 1995 further down at 83.50. However, as we have already warned, daily studies are starting to look stretched, and with 84.80 finally broken, any additional declines should be very well supported ahead of 83.50 in favor of a much needed upside reversal. A break back above 86.25 will be required at a minimum to relive downside pressures.

GBP/USD: The inter-day double top triggered on Tuesday is now well on its way to reaching its 1.5500 area objective following Wednesday’s sharp downside follow through. There is a confluence of support by 1.5500 in the form of the 200-Day SMA and rising trend-line support from early June and a sustained break below this level will suggest that a more meaningful top is in place by 1.6000. Inability to establish a close below 1.5500 will keep the up-trend intact.

USD/CHF: Continues to chop around after being very well supported on dips in the 1.0300’s. However, the latest recovery is still only classed as corrective within a multi-day range, and a clear break back above 1.0680 will now be required to accelerate gains and mark a shift in the structure. Broader market price action has been net USD supportive of late, so we would not be surprised to see a close above 1.0680 over the coming sessions.

FLOWS

A US investment bank has been selling large amounts in Eur/Usd along with a Swiss bank on the offer. A European central bank has been selling its euro holdings in Eur/Jpy. An ACB and custodial name have been providing supply in Cable all the way down.

TRADE OF THE DAY

EUR/JPY: Although the market has come back under pressure and threatens a retest of the late June multi-year lows by 107.30, market conditions remain quite choppy and we would still not rule out the possibility for a higher low above 107.30 ahead of the next major upside extension. The 78.6% fib retracement off of the June-July move comes in by 108.90 and for the recovery idea to play out, we would need to see any additional weakness to stall out by this level. A bounce out from the 108.90 level would keep basing prospects intact and open the door for the formation of a right shoulder of a major inverse head and shoulders pattern. The daily average true range on the cross currently resides at 150 points and with this range having already been exceeded today, any overshoots should be hard to sustain. As such, we will use our fib level as an ideal entry point for a long entry and will look to get involved if it is hit. STRATEGY: BUY @108.90 FOR AN OPEN OBJECTIVE; STOP 107.90. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON THURSDAY.

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 (1.53), Short Eur/Chf (1.46), Short Eur/Gbp (0.85), and LongUsd/Cad (1.0245). 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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