Sentiment Shows Pickup into North America But Lacking in Substance

• Euro bid overnight but rally still lacking substance
• Fresh short position in NZD/USD by 0.8512
• German ZEW comes in mixed; markets focus on current situation
• Greek and Spanish auctions well received
• Swiss Franc continues to decline from record highs
• US Q2 earnings more in focus with batch due on Tuesday
• RBA Minutes confirm less hawkish stance
• Bank of Canada rate decision on tap

Although there is nothing tremendous in terms of substance in Tuesday trade thus far, it seems as though market participants have been inclined to buy back into the Euro and other risk correlated currencies on expectations that a positive result will come out of this week’s emergency EU meeting. A second aid package for Greece looks to be pricing in to markets, while sentiment has also been supported by some solid auction results out from both Greece and Spain. Meanwhile, although the German ZEW data was mixed, the better than expected current situation component has also helped to restore some confidence for the time being.

Relative Performance Versus the USD on Tuesday (as of 11:20GMT)

1. NZD +0.71%
2. AUD +0.62%
3. CAD +0.47%
4. EUR +0.43%
5. GBP +0.40%
6. JPY +0.04%
7. CHF -0.23%

However, the rally in the markets on Tuesday thus far seems to be lacking and there are still plenty of unanswered questions which will need to find resolution before becoming more convinced of a resumption in risk buying, namely with regard to the Eurozone and US structural problems. Additionally, data on Tuesday has not been all positive, with the ZEW economic sentiment reading coming in softer along with an equally unimpressive Eurozone construction output.

Th Swiss Franc is by far the weakest major currency on the day, with this market reacting to a wave of risk buying early Tuesday and also exposed to some expected profit taking from record levels against the Euro, Pound and US Dollar. While technically there is plenty of room for additional depreciation in the Franc off of current levels, it is too early at this point to call for any meaningful reversal. We did however manage to benefit from the Franc selling after catching a very early entry on a long Eur/Chf position early Monday by 1.1445.

US Q2 earnings should get more attention on Tuesday, with 23 names reporting, including some of the major US banks. Up until now, earnings have been quite positive thus far and it will be interesting to see if this trend can continue. While most of the attention in the markets is on the other global macro themes mentioned above, any positive signs from the earnings front could definitely help to bolster sentiment.

Earlier today, in Australia, the July minutes were released and confirmed the recently bearish outlook adopted by many traders towards the Australian economy and local currency. The minutes dropped the long standing language which referenced the need to tighten monetary policy at some point, and instead scaled back citing the adverse impact from the European markets crisis, and a cooling off in China. As far as the domestic part of the economy was concerned, the RBA noted that growth in aggregate demand was not showing further signs of improvement, while the housing and labor markets were also not supportive of more aggressive policy. Nevertheless, the impact from the more dovish minutes was negligible with much of the event risk already priced in to markets.

Looking ahead, Canada leading indicators, US building permits and housing starts are all due at 12:30GMT, ahead of the more highly anticipated event risk for the session in the form of the Bank of Canada rate decision. While no change to policy is expected with rates to be left on hold at 1.00%, market participants will be focused on the accompanying central bank language to see if there is any indication of rate hikes on the horizon given the latest uptick in inflation data. US equity futures and oil prices are tracking well bid ahead of the North American open, while gold trades flat and consolidates just off record highs. It is worth noting that gold is technically overbought on the daily chart with the RSI above 70.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: Overall, price action remains quite bearish and we continue to like the idea of selling into rallies in anticipation of a more sizeable pullback below the 200-Day SMA. The longer-term moving average resides by the 1.3900 figure and a clear break below will open the door for a test of next key support in the 1.3750. In the interim, look for the formation of a fresh lower top by 1.4285, with only a break back above this level to delay outlook.

USD/JPY: The latest daily close below 79.50 certainly compromises our constructive outlook with the market breaking down below some solid multi-day range support in the 80.00 area and dropping into the 78.00’s thus far. This now puts the pressure back on the downside and opens the door for a retest and potential break below the record lows from March by 76.30. At this point, a daily close back above 80.00 would be required at minimum to relieve downside pressures.

GBP/USD: We classify the latest price action as some consolidation ahead of the next major downside extension with the market now looking to establish back below the 200-Day SMA and extend declines through next key support at 1.5750 further down. In the interim, look for any rallies to be well capped ahead below 1.6250 on a daily close basis. Back under 1.6000 helps to confirm and should accelerate.

USD/CHF: Despite the intense downtrend resulting in recently established fresh record lows below 0.8100, short/medium/longer-term technical studies are looking quite stretched to us, and we continue to like the idea of taking shots at buying in anticipation of a major base. The latest declines have stalled by 0.8080, and a bullish outside day formation on Monday could very well encourage short-term basing prospects. A daily close back above 0.8200 will confirm.

TRADE OF THE DAY

NZD/USD: We continue to view this market as well overextended both on a longer-term and short-term basis, with the price trading by 30-year post float record highs above critical psychological barriers at 0.8500. Any additional gains from here are seen limited and taking shots at fading rallies over the past several days has often yielded profitable intraday results before the trend once again reasserts. As such, selling above 0.8500 is expected to once again yield good initial returns (daily ATR met and hourly RSI overbought), while we are also anticipating a more significant inter-day top to form over the coming days. Fundamentally, although recent data out of New Zealand has certainly been supportive of a higher exchange rate, we see these positive developments as already priced into a market which is still very much exposed to any broader global macro threats. Relative weakness in other risk correlated assets has been seen in recent days and with broader sentiment expected to continue to be weighed down, we see Kiwi playing catch-up (or rather “catch-down”). POSITION: SHORT @0.8512 FOR AN OPEN OBJECTIVE; STOP 0.8612.

Written by Joel Kruger, Technical Currency Strategist

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