Euro Continues to Underperform While Other Currencies Consolidate

FUNDYS

A combination of elevated concern in the Eurozone and improving prospects for a US recovery have been the primary contributors to the latest rally in the US Dollar. Friday’s downgrade of Ireland by Moody’s and subsequent IMF comments of serious contagion risks, weighed heavily on the Euro, which managed to erase earlier gains and reverse sharply below critical shorter-term support at 1.3165. This now exposes a key platform base by 1.2970 over the coming sessions. Also seen influencing price action has been the passage of the US cut extensions and accompanying stimulus measures which have eliminated some political uncertainty to benefit the USD, while failure at the EU Summit to address short-term debt concerns has not helped the Euro’s cause. The Euro is a gross underperformer on Monday across the board.

Relative Performance Versus USD Monday (As of 11:45GMT)

1. KIWI+0.75%
2. AUSSIE +0.33%
3. SWISSIE+0.27%
4. YEN+0.25%
5. CAD+0.20%
6. STERLING+0.19%
7. EURO-0.21%

The other major currencies have mostly been consolidating Friday’s moves in the early week with not too much in the way to focus on. Some of the stories today include the BOJ 2-Day meeting which kicks off, and the reemergence of geopolitical risks, with South Korea saying that it will go ahead and conduct live-fire drills in disputed territory with North Korea.

In European trade, the UK CBI came out with a warning that interest rates in the UK would need to push higher to offset rising inflation, while the ONS was apparently getting ready to release a report that would call for a downward revision to GDP. However these developments failed to influence price action with Sterling actually performing quite well on the day following an improved UK mortgage approvals by major UK lenders.

Elsewhere, with all of the talk of potential contagion and risks of Spain being the next big problem country, FinMin Campa has come out in defense of his country saying that the financial industry remains solvent and that there is no need to worry about borrowing costs. On the data front, German producer prices were slightly softer, while the Eurozone current account was on the whole narrower than the previous showing.

While we are not particularly looking to take any positions in this lightened end of year trade, our watch list of overextended currency crosses due for some decent corrective reversals include; Eur/Chf, Aud/Nzd, Gbp/Chf, Eur/Aud, and Gbp/Aud. All of these cross rates have seen considerable one sided moves and technical studies are certainly suggesting that we could soon see some form of a trend change.

Looking ahead, the economic calendar is fairly light on Monday, with the US Chicago Fed National Activity index and Canada wholesale sales (0.7% expected) out at 13:30GMT, followed by Eurozone consumer confidence (-9.0 expected) at 15:00GMT. US equity futures and commodities prices are tracking moderately higher into North American trade.

GRAPHIC REWIND

TECHS

EUR/USD:Friday’s break back below the recent platform base at 1.3165 is significant and helps to increase the probability for a bearish resumption back towards and eventually below next key support by 1.2970. A bearish outside day on Friday and confirmed bearish outside week also help to strengthen our core downside bias, but we would like to still see a close below 1.3165 on Monday to officially confirm outlook. In the interim, any intraday rallies should be well capped ahead of 1.3360.

USD/JPY:Although the market continues to recover with prospects for a material base looking more and more encouraging following the recent break back above the daily Ichimoku cloud, inability to establish any meaningful upside momentum beyond 84.00 suggests that the recovery could be on hold for a bit, with the market now in the process of consolidating. Ultimately however, while the pair holds above 82.00 on a close basis, we retain a constructive outlook. Only a daily close back below 82.00 will negate and open the door for a resumption of the broader underlying downtrend, while a break and close back above 84.50 will mark and end to the consolidation and open a fresh upside extension towards 86.00.

GBP/USD:The sharp pullback in the previous week signals an end to the latest corrective channel, with the market breaking back below the recent 1.5595 base and exposing the next drop towards 1.5295 over the coming sessions. A lower top now looks to be firmly in place by 1.5910, and any intraday rallies are expected to be well capped in the 1.5700 area going forward. Ultimately, only back above 1.5780 gives reason for concern.

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. The market should now look to rally beyond parity towards our next key topside objective in the 1.0280-1.0500 area over the coming weeks. The 1.0280 resistance represents the highs from September, while the 1.0500 area is the 200-Day SMA. Any intraday setbacks are expected to be well supported ahead of 0.9500. While recent bearish price action certainly threatens recovery outlook, ability to hold above 0.9460 keeps the structure intact.

FLOWS

A US investment house selling in Eur/Usd on behalf of a real money account for year-end purposes. Some modest fund selling of Eur/Cad with other big names trading on other euro crosses including a German bank bidding in Eur/Gbp, Swiss names in Eur/Jpy and a Russian account in Eur/Aud.

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

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