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Risk Appetite Picks Up in Overnight Trade But Rallies Should Be Sold

By Joel Kruger, Technical Strategist
23 August 2011 11:14 GMT

  • Market participants buying back into risk in overnight trade
  • China and euro zone PMI data on the better side of expectation
  • German ZEW much weaker than expected; surprisingly fails to weigh
  • Gold trades to yet another record high; inches nearer to major barriers
  • China starting to express concern over euro zone debt crisis
  • Moody’s issues warning against seeking collateral for aid to Greece
  • Euro reaches apex of major multi-week triangle formation

Price action is starting to pick up a bit on Tuesday with market participants retesting the waters and looking to dip back into risk. Equity futures have mounted a decent recovery, with some on the whole better than expected PMI data out of China and the euro zone helping to drive some of these bids. However, we are of the opinion that this rally should not be taken for a dismissal of underlying fear and uncertainty over the outlook for the global economy, and markets still remain quite vulnerable to severe bouts of risk liquidation. If there is one market which is sending this message loud and clear, it is certainly the gold market, with the yellow metal surging to yet another record high and inching even closer to major psychological barriers at $2000.

Relative Performance Versus the USD on Tuesday (as of 10:50GMT)

  1. NZD +1.04%
  2. AUD +0.92%
  3. EUR +0.87%
  4. GBP +0.47%
  5. CAD +0.37%
  6. JPY +0.29%
  7. CHF +0.15%

We are actually quite surprised to see markets so bid on Tuesday, with the bids in the Euro of particular interest. On top of what should easily be a counterpoint to the more solid PMI data with a much weaker than expected German ZEW, two other Euro negative stories have hit the wires this week and neither story has been able to gain any real traction just yet. The first story comes out of China where Reuters has quoted China’s Peoples Daily as saying that “the black death-like spread of the euro zone’s sovereign debt crisis endangered China’s exports to the euro zone.” Although China’s holdings of Euro reserves are significantly less than those of their US Dollar reserves, the article goes on to explain that the “Euro debt crisis would lead to a decline in real demand that would have a far-reaching impact on the country's real economy."This is significant as it is the first time we are hearing Euro negative banter out of China.

The second story which has failed to gain traction and could also be equally Euro bearish has come out of the euro zone itself with Moody’s issuing a warning that euro zone states should think twice about seeking collateral for aid to Greece, if they have any desire for the bailout to stay on track. Greece is simply not in a position to b able to offer collateral for its loans and any requests for such collateral would significantly delay and even undermine the broader euro zone recovery process.

As we have already outlined, both of these stories have failed to have any real market moving influence and we will continue to keep a close watch to see if investors eventually do respond to the developments. Technically, the Euro has reached the apex of a multi-week and multi-month triangle and a major breakout is to be expected at any moment. Should these stories actually gain traction, the breakout could very well be to the downside. Key short-term technical support comes in by 1.4255 and a break below could act as the catalyst. Of course, a daily close back above 1.4500 would seriously compromise the bearish outlook scenario.

ECONOMIC CALENDAR

Risk_Appetite_Picks_Up_in_Overnight_Trade_But_Rallies_Should_Be_Sold_body_Picture_5.png, Risk Appetite Picks Up in Overnight Trade But Rallies Should Be Sold

TECHNICAL OUTLOOK

Risk_Appetite_Picks_Up_in_Overnight_Trade_But_Rallies_Should_Be_Sold_body_eur.png, Risk Appetite Picks Up in Overnight Trade But Rallies Should Be Sold

EUR/USD: The market continues to adhere to a bearish sequence of lower tops since May, with a fresh lower top now in place by 1.4535 ahead of the next downside extension back towards and eventually below 1.4000. In the interim, look for any intraday rallies to be well capped by 1.4500, while only a daily close back above 1.4535 ultimately negates. Short-term support now comes in by 1.4255 and a break back below should accelerate declines.

Risk_Appetite_Picks_Up_in_Overnight_Trade_But_Rallies_Should_Be_Sold_body_jpy2.png, Risk Appetite Picks Up in Overnight Trade But Rallies Should Be Sold

USD/JPY:Although the market finally managed to break to fresh record lows below 76.00, failure to establish any downside momentum on the break suggests that the market could be looking to establish a more meaningful base. At this point, buying at current levels seems to be a compelling trade, with the market by record lows and likely due for a major reversal. However, we would look for a break and close back above 77.30 at a minimum to strengthen bullish reversal prospects and alleviate immediate downside pressures. Back under 76.00 negates and exposes next key psychological barriers by 75.00 further down.

Risk_Appetite_Picks_Up_in_Overnight_Trade_But_Rallies_Should_Be_Sold_body_gbp2.png, Risk Appetite Picks Up in Overnight Trade But Rallies Should Be Sold

GBP/USD: The market remains locked in a broader consolidation off of the April highs, and a fresh top is now sought out somewhere around 1.6550 in favor of the next downside extension back towards the recent range lows at 1.5780. Ultimately, only a daily close above 1.6550 would delay outlook and give reason for pause, while a daily close back under 1.6350 should accelerate declines.The recent topside failure just over 1.6600 reaffirms bearish outlook.

Risk_Appetite_Picks_Up_in_Overnight_Trade_But_Rallies_Should_Be_Sold_body_swiss1.png, Risk Appetite Picks Up in Overnight Trade But Rallies Should Be Sold

USD/CHF: The latest sharp reversal off of record lows just shy of 0.7000 is encouraging and could finally be starting to signal the formation for a major base. Weekly studies are also confirming with the formation of a very bullish bottom close. From here, look for an acceleration of gains back towards the 0.8500 area over the coming days with setbacks expected to be well supported above 0.7500 on a daily close basis.

Written by Joel Kruger, Technical Currency Strategist

If you wish to receive Joel’s reports in a more timely fashion, email jskruger@dailyfx.com and you will be added to the distribution list.

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23 August 2011 11:14 GMT