FUNDYS
Price action over the past 24 hours has been a bit unusual in our opinion, with risk sentiment dramatically improving, currencies rallying sharply, and global equities racing higher on the back of a decent round of global data on Wednesday. Indeed, Chinese PMIs were impressive, Australian GDP was very solid, and US ISM manufacturing was a pleasant upside surprise, but for the markets to react in such a strong and aggressive manner is suspicious, and we still remain quite cautious with any of these upside moves in risk.
Relative Performance Versus USD Thursday (As of 10:30GMT)
- KIWI+0.42%
- SWISSIE+0.36%
- YEN +0.23%
- EURO+0.12%
- CAD-0.04%
- STERLING-0.34%
- AUSSIE-0.37%
A closer look at some of the major equity markets shows a strong bullish day on Wednesday, with the markets however still well confined to a more important bear channel and even possibly looking to carve out a fresh lower top ahead of the next downside extension. Technically, the push higher in equities on Wednesday should not deter bears, and if anything, only give them an attractive level to sell back into. Instead, we attribute this latest surge in risk buying to early September flows, and some optimism that is more than likely to fade at any sign of softness within the economic data.
Source: Bloomberg
On the data front, Australian trade balance was the main release in Asian trade and come in much weaker than expected to force the higher yielding currency back below 0.9100. In European trade, Swiss data was by far the most impressive after both GDP and retail sales came in way above forecast. Eurozone data was also not too shabby, with GDP and household consumption bettering analyst estimates. Meanwhile, UK releases were not as encouraging, with Nationwide house prices and construction PMI both coming in below consensus. Elsewhere, there were some concerning remarks out from the IMF relating to both UK and Eurozone debt levels, but the comments failed to influence price action.
We have been seeing some more comments relating to the strong Yen, with PM candidate Ozawa saying that rapid Yen rises must be stopped, while PM Kan has blamed the appreciation in the Yen on broader USD weakness and says that he wants to cooperate with the Bank of Japan to tackle the strong Yen.
Looking ahead, all eyes turn to the European Central Bank rate decision (expected to remain on hold at 1.00%) at 11:45GMT, and the Trichet press conference shortly thereafter.US continuing claims (4400k expected) and initial jobless claims (478k expected) are due at 12:30GMT, along with non-farm productivity (-2.0% expected) and unit labor costs (1.4% expected). Factory orders (0.5% expected) and pending home sales (-1.5% expected) then follow at 14:00GMT, with chain store sales capping things off at 14:30GMT. US equity futures and oil prices have dipped into the red, while gold is still tracking marginally higher.
GRAPHIC REWIND
TECHS
EUR/USD: Despite the latest bounce back above 1.2800, the structure sill remains bearish with the market below the 18Aug 1.2925 high. A lower top is sought out below this key short-term resistance, to be confirmed on a break back below 1.2585 over the coming days. While a break back above 1.2925 would delay our bearish outlook, it will not force a shift, with additional rallies then seen well capped ahead of 1.3100. Nevertheless, overall price action remains quite choppy and we do not recommend any positions in either direction at current levels.
USD/JPY: (See Below)
GBP/USD: The market looks poised for a fresh drop following the latest bout of consolidation, with a lower top now confirmed by 1.5600, following the break back below 1.5370. Below 1.5370 now exposes a more meaningful drop to test next key medium-term support by the 100-Day SMA in the 1.5100 area. Ultimately, only back above 1.5700 would negate bearish bias and give reason for pause.
USD/CHF: Has finally managed to take out the yearly lows from January by 1.0130, with the market easily dropping below this level to 1.0065 thus far. However, any additional declines below 1.0065 are seen limited, with medium-term studies looking stretched. As such, we would be more inclined to be looking for opportunities to buy at current levels. For now, a break and close back above 1.0265 will be required to relieve immediate downside pressures. Aggressive players may want to consider buying following Wednesday’s close with the formation of a bullish daily hammer.
FLOWS
Large stops reported below 83.50 in Usd/Jpy. UK clearer bids in Eur/Gbp; decent offers between 0.8350-0.8400. Asian sovereign bids in Eur/Usd. Model funds buying Aussie and Kiwi.
TRADE OF THE DAY
Usd/Jpy: Despite the intense downtrend, we continue to look for opportunities to buy with the market trading by multi-year lows. Our recommendation today incorporates basic ATR analysis which projects a daily low just over the current multi-year low from the previous week by 83.60. At that point, we believe the pressure will be too intense to prevent the market from overshooting and taking out the current lows to test key psychological barriers by the mid-figure. Any additional declines beyond 83.50 should be limited ahead of a major upside reversal. Fundamentally, the Yen has benefited from safe haven flows and broader USD weakness, and we believe that the Yen should not be treated as a safe haven investment given the economic woes in Japan, and deep concern from officials over the rapid appreciation in the currency. Additionally, the USD remains an attractive currency in current market conditions, and despite the latest selling in the buck, a major reversal back in favor of the Greenback is a very real possibility. This should in turn start to put pressure on the Yen. (It is worth noting that we are also keeping a close eye on Usd/Chf and may look to buy there as well into another dip. Stay tuned). STRATEGY: BUY @83.50 FOR AN OPEN OBJECTIVE; STOP 82.50. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON THURSDAY.
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Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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