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Euro Drops to Fresh 2012 Lows; Fear and Panic Dominate Trade

By Joel Kruger, Technical Strategist
23 May 2012 11:09 GMT

  • Fear and uncertainty take hold of markets
  • Price action reminiscent of Bear and Lehman
  • Investors continue to price in probability for Greek exit
  • Euro breaks to fresh 2012 lows; no signs of bounce
  • Bank of Japan leaves policy on hold as widely expected
  • BOE Minutes reveal 8-1 vote to keep rates steady; retail sales very weak

Fear and uncertainty are the ultimate market poison, and of course, the ongoing European turmoil has fueled both. Market participants don’t seem to be thinking clearly, in a way reminiscent of the US environment in the early crisis days when Bear Stearns and Lehman collapsed.

We don’t blame them. European leaders are dragging their feet on Greece, and the longer markets wait for a solution, the more investors will price-in a Greek default and Euro exit. The next step is only logical - instead of speculating if Greece will egress, market players are now wondering how messy the fallout will be.

And naturally, currencies have been feeling the brunt of all this. Price action has seen resurgence in broad based buying of the US Dollar and Yen on a flight to safety, while risk correlated assets have been aggressively sold. Any rebound in the early week following some already aggressive risk selling in recent sessions has already been well offered, and the risks from here continue to be tilted to the downside. In fact, it is actually rather surprising that the Euro has only just now broken down through the yearly lows from January at 1.2625. The EU Summit today could inspire some fresh volatility, and we will be watching closely for any positive developments. Still, we recommend that market participants take to the sidelines and patiently wait for the panic and fear to subside.

Relative performance versus the USD Wednesday (as of 10:50GMT)

JPY +0.72%

GBP -0.22%

CAD -0.23%

CHF -0.26%

EUR -0.27%

AUD -0.62%

NZD -0.63%

Elsewhere, the Bank of Japan has come out and left policy on hold as was widely expected. While the central bank did cite ongoing risks to the global economy, perhaps some upbeat comments towards the local economy were poorly mistimed given the escalation in global fear over the past 24 hours and recent Fitch downgrade of Japan. Unfortunately for the administration, this will only add to additional upside pressure on the Yen, which still trades rather close to its record highs against many currencies. Meanwhile, comments from the former Greek PM that both a Greek exit or austerity would both be quite painful, have not helped matters, while an abysmal UK retail sales print was also digested in the European session.

Technically, risk correlated assets are already well oversold on the daily charts, and it will be interesting to see just how stretched these markets can get before any sign of rebound. Aussie and Kiwi have both dropped to fresh multi-day lows against the buck, and yet both of these currencies are already well oversold on the short-term charts. The Euro is also oversold and yet, given the fundamental outlook above, things could still get much uglier. Normally, we might recommend looking to fade the risk off trade, but given just how scary markets are right now, the best place is probably on the sidelines. It is true that there is no money to be made on the sidelines, but sometimes, the best trade is no trade at all.

ECONOMIC CALENDAR

Euro_Drops_to_Fresh_2012_Lows_Fear_and_Panic_Dominate_Trade_body_Picture_5.png, Euro Drops to Fresh 2012 Lows; Fear and Panic Dominate Trade

TECHNICAL OUTLOOK

Euro_Drops_to_Fresh_2012_Lows_Fear_and_Panic_Dominate_Trade_body_eur.png, Euro Drops to Fresh 2012 Lows; Fear and Panic Dominate Trade

EUR/USD:The market remains under intense pressure with the market finally taking out the 2012 lows from January at 1.2625. While we would not rule out a possibility of a sustained break below this level over the coming sessions, short-term technical studies are correcting from oversold and are showing a need for some form of a bounce from where a fresh lower top is sought out. Ultimately however, any rallies should now be very well capped by previous support turned resistance at 1.3000 in favor of additional weakness over the medium-term that projects deeper setbacks into the lower 1.2000's.

Euro_Drops_to_Fresh_2012_Lows_Fear_and_Panic_Dominate_Trade_body_usd.png, Euro Drops to Fresh 2012 Lows; Fear and Panic Dominate Trade

USD/JPY:The market continues to consolidate around 80.00 and is in the process of looking for a medium-term higher low ahead of the next major upside extension back above the yearly highs at 84.20 and towards 90.00 further up. However, for the time being it remains in question whether the market will still head lower towards the 200-Day SMA by 78.50 before ultimately reversing higher. The key level to watch above comes in by 80.60, and a break and close above this level will officially alleviate downside pressures and suggest that a higher low has now been carved in the 79.00's.

Euro_Drops_to_Fresh_2012_Lows_Fear_and_Panic_Dominate_Trade_body_gbp.png, Euro Drops to Fresh 2012 Lows; Fear and Panic Dominate Trade

GBP/USD:The market remains under intense pressure since breaking back below 1.6000 and setbacks could now extend towards next key support in he 1.5600 area over the coming sessions. Still, daily studies are now stretched and we would prefer looking to sell into rallies towards 1.6000 where a fresh lower top is sought out.

Euro_Drops_to_Fresh_2012_Lows_Fear_and_Panic_Dominate_Trade_body_usd_1.png, Euro Drops to Fresh 2012 Lows; Fear and Panic Dominate Trade

USD/CHF:Overall the structure remains highly constructive and we continue to project additional upside over the coming months back above parity. For now, the latest break and close above 0.9335 is expected to accelerate gains for a retest of the yearly highs by 0.9600, while any intraday pullbacks should be very well supported ahead of 0.9200. Ultimately, only back under 0.9000 would negate outlook and give reason for pause.

--- Written by Joel Kruger, Technical Currency Strategist

To contact Joel Kruger, email jskruger@dailyfx.com. Follow me on Twitter @JoelKruger

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23 May 2012 11:09 GMT