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Euro or Greenback…..Both Hurt….But Which Hurts the Least?

By Joel Kruger, Technical Strategist
24 November 2010 12:43 GMT

FUNDYS

After breaking to fresh multi-day lows below 1.3300, the Euro has bounced, with the market managing to establish back above 1.3300. The initial selling in the major had been brought on by a continued wave of risk aversion and fear over the possible contagion in the Eurozone. Comments from Germany’s Merkel outlining the severity of the situation and potential threats had not done anything to help the Euro’s cause, and the market traded down to 1.3285 before bouncing. Also seen weighing on the Euro were comments from Iceland’s President who questioned the adoption of the Euro given the current crisis, and IFO’s Abberger who warned that EMU peripheral contagion was a major risk.

Relative Performance Versus USD Wednesday (As of 12:30GMT)

  1. CAD+0.56%
  2. AUSSIE +0.53%
  3. KIWI+0.32%
  4. STERLING+0.17%
  5. SWISSIE+0.13%
  6. EURO-0.10%
  7. YEN-0.18%

However, there have been a number of officials out in recent trade attempting to downplay the severity of the Eurozone debt situation, and their reassurances seem to have been helping to inspire this latest minor bounce in the currency. While economic data has failed to materially influence price action over the past several sessions, the German IFO, which was the strongest on record and better than expectation, could also not be ignored, and this too was seen helping to keep the single currency propped for the time being.

Technically, there is some very solid support in Eur/Usd in the 1.3300’s, and while 1.3300 figure has been breached on Wednesday, we will only become convinced of a fresh downside extension in the major should we manage to close below the 1.3300 figure. The levels of support in the 1.3300-1.3400 area include; the 38.2% fib retrace off of the 2010 low-high move, some previous resistance turned support from early August, and the 100-Day SMA. As such, we would not at all be surprised to see some form of a bounce from current levels, with bulls looking to reassert.

Additionally, talk of USD diversification has once again resurfaced and this could also serve to attract fresh USD shorts. The release of Tuesday’s Fed Minutes should also not be overlooked in these hectic markets, with the Fed downgrading their outlook for the economy and continuing to sound quite dovish. Elsewhere, UK GDP data came in as expected despite earlier rumors of a weaker number, and in the end, the release failed to materially factor into price action.

A few weeks ago, there seemed to be no good reason to be owning US Dollars given the ultra accommodative Fed policy, and now it seems like there is also no good reason to be holding Euros in light of the escalation in the Eurozone debt crisis. The currency that stands to benefit going forward will therefore be the currency which is will hurt the least, rather than benefit the most. While our core bias is for longer-term USD appreciation, at current levels, we would also not rule out the potential for a bounce in the Euro.

Looking ahead, Wednesday’s economic calendar in the US is super stacked ahead of the Thanksgiving holiday, with US durable goods (0.1% expected), personal income (0.4% expected), personal spending (0.5% expected), and personal consumption all due at 13:30GMT, along with initial jobless claims (435k expected) and continuing claims (4275k expected). University of Michigan confidence (69.5 expected) is then out at 14:55GMT, followed by the house price index (0.0% expected) and new home sales (1.6% expected) at 15:00GMT. Oil and gas inventory data then caps things off at 15:30GMT. US equity futures and oil prices are marginally bid, while gold trades flat. It is worth noting that Wednesday will be the last real trading day of the week in terms of liquidity given the US holiday.

GRAPHIC REWIND

Euro_or_Greenback_Both_Hurt_But_Which_Hurts_the_Least_body_dxy11.png, Euro or Greenback…..Both Hurt….But Which Hurts the Least?

TECHS

EUR/USD: The latest drop below 1.3445 has confirmed a lower top by 1.3785 and opened a fresh downside extension, with the market accelerating below 1.3335 and the 100-Day SMA by 1.3300 before finally stalling out. Next key support now comes in by the 200-Day SMA at 1.3135 and while we would not rule out a test of this longer-term SMA over the coming days, at this point, the risks from here are for some form of a bounce before considering the possibility of bearish resumption, possibly back towards the 1.3600 area. For now we remain on the sidelines and will look for an opportunity to sell into rallies.

USD/JPY: The market has been in recovery mode over the past several days since confirming a double bottom on the break above neckline resistance at 82.00. However, the risks for additional upside should now be limited to the 100-Day SMA by 84.20, and any rallies into this longer-term SMA should be sold in anticipation of a resumption of the broader underlying downtrend. The focus is still on a retest and break of the record lows by 79.75 from 1995, and only a sustained break back above the 100-Day SMA would negate this outlook.

GBP/USD: Overall, price action has been quite choppy, with the market unwilling to commit in either direction at present. The market has been trending lower since reaching 1.6300 several days back, but at the same time has fallen back into some multi-day rising trend-line support. As such, the preferred strategy is to remain on the sidelines and look for a sustained break back above 1.6300 or below 1.5650 for clearer directional bias.

USD/CHF: We contend that the market is in the process of carving a material base by 0.9460, and any setbacks should be very well supported in favor of a sustained recovery. A fresh higher low has now been confirmed by 0.9550 following the latest break back above 0.9975, and the market should now accelerate beyond parity towards our next key topside objective at 1.0300 over the coming sessions. Any intraday setbacks are expected to be well supported ahead of 0.9700.

FLOWS

Hedge fund and real money sellers in Eur/Sek have helped push the pair out of recent ranges. Dip buying in Cable from corporate and Russian accounts.

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

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24 November 2010 12:43 GMT