Markets have been rather temperamental of late with sentiment seesawing and investors unsure as to the direction of the next major moves. From a currency market perspective, the critical question is whether the latest US Dollar rally can extend or whether currencies will once again find renewed bids. The combination of a potential removal of QE2 by the Fed and some escalating fears over the threat of contagion in the Eurozone certainly support a market environment which can see additional US Dollar gains, and ongoing global growth concerns also bode quite favorably for the US Dollar.
Relative Performance Versus the USD Wednesday (as of 10:50GMT)
- NZD +0.54%
- JPY +0.47%
- EUR +0.15%
- CHF -0.09%
- CAD -0.09%
- AUD -0.22%
- GBP -0.46%
Most recently, the European finance ministers acknowledged that Greece would need to undergo some kind of “soft restructuring” of its debt, and this has resulted in a more risk averse market environment. While we have seen the Euro bounce back in recent sessions, the moves are more classified as corrective following a 10 big figure drop off rather than anything fundamentally supporting the bounce. Global equities would confirm these suspicions, as stocks were softer on Tuesday and show room for a deeper drop ahead.
We continue to see risks for relative underperformance in the higher yielding currencies going forward, and like the idea of fading the Australian and New Zealand Dollars against most of the major currencies. Data out of Australia in particular has been increasingly weaker, and we have already seen poor employment in recent days along with the latest disappointing consumer confidence and softer wage cost index data. Other currencies worth keeping a close eye on are the Yen and Swiss Franc. While these two currencies are on the opposite end of the spectrum relative to the antipodeans in terms of their risk profiles, both the Yen and Franc have been showing signs of relative weakness from record high levels.
On the data front, the European session was all about UK releases, with both the Bank of England Minutes and Uk employment data out. Early rumors weighed heavily on the Pound, with talk of a much softer jobs number and a defection of BOE Weale to the dovish camp. However, only one rumor proved reliable, with employment data coming in softer than expected. Ultimately, this was enough to keep Sterling well offered across the board and under pressure into the North American open. Elsewhere, there was a good deal of official chatter from various ECB officials, with Mr. Nowotny retaining a hawkish line. The Portuguese auction results wee initially well received, but EMU bond spreads continued to show signs of widening.
Looking ahead, Canada leading indicators and the release of the FOMC Minutes will be the main attention getters in North American trade. Fed policy remains a central theme in the global macro environment and any sense of a shift in the monetary policy outlook will surely influence market direction. US equity futures and commodities prices are tracking higher, with oil leading the way.
EUR/USD: The break and weekly close below key medium-term support at 1.4155 in the previous week now suggests that deeper setbacks are ahead with the market contemplating a potential drop below 1.4000. Next key support comes in by 1.4020 (28Mar low), while rallies towards 1.4400-1.4500 should be aggressively sold into. Only a daily close back above 1.4500 would negate. In the interim, we remain on the sidelined and await a clearer entry signal.
USD/JPY: After undergoing a fairly intense drop off from the 85.50 area several days back, the market looks to have finally found some support by the bottom of the daily Ichimoku cloud and could be in the process of carving out some form of a base. Look for setbacks to continue to be well supported in the 80.00’s with only a close back below 79.50 to give reason for concern. From here we see the risks for a fresh upside extension back towards the recent range highs at 85.50 over the coming days.
GBP/USD: The market is starting to give way, with the price now dropping back below the 50-Day SMA to warn of additional declines over the coming sessions. Look for deeper setbacks below 1.6000, with any rallies now expected to be well capped ahead of 1.6400. Ultimately, only back above 1.6520 gives reason for concern.
USD/CHF: Starting to show signs of basing off of the recently established record lows by 0.8550, with the market putting in a solid bullish close for two consecutive weeks and breaking back above the previous weekly high. Next key resistance comes in by 0.9000 and a break above will further confirm recovery structure and open the door for a move back towards a medium-term lower top at 0.9340. Look for any intraday setbacks to be well supported above 0.8700 on a daily close basis. Ultimately, only a daily close back below 0.8700 delays and gives reason for concern.
A Middle Eastern account has been a repeat buyer in Eur/Usd with semi-official and Russian accounts selling. M&A related bids seen in Eur/Chf with momentum and spec types jumping in. CTAs have been good size sellers in Eur/Jpy. An Asian account was an aggressive buyer in Cable with a US prime name on the offer.
Written by Joel Kruger, Technical Currency Strategist
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