The majors have been seemingly stuck in the mud the past few days, and the trend hasn’t changed thus far on Thursday. At the time this report was written, all of the majors were trading within a +/-0.23% range against the US Dollar, and trading volumes across global equity markets remain significantly lower than their four-week moving averages: almost halfway through the session, shares traded on the German DAX has barely traded to one-fifth of its four-week average, at 39.840 million shares (versus 178.344, or only 22.3%). Accordingly, given the fact that this is not a technically strong market in any regard (low rates of market participation in up and down moves), we’re not taking too much stock in what we’ve seen thus far today.
Data out of the Euro-zone wasn’t positive today, with the German labor market showing further cracks while broad measures of Euro-zone confidence declining. Although the German Unemployment Rate held at 6.8% in August, the labor market lost 9K jobs; Europe’s largest economy has now lost 45K jobs since April, wiping out all but 5K added since December 2011. The three-month average for the German Unemployment Change has been positive for five consecutive months for the first time since April 2009 through August 2009. We believe that labor market readings out of Europe have been and will continue to be one of the prescient indicators for the crisis and should be monitored closely.
Also out of Germany this morning has been some interest commentary from an advisor to German Chancellor Angela Merkel, who said that (paraphrasing) any bond-buying program set forth by the European Central Bank that is not unlimited in nature would have a marginal impact at best. The spokesperson also noted that it remains in Germany’s best interest to keep the Euro together, as a Euro-zone breakup scenario would result in an approximate -10% decline in German output.
The Italian 2-year note yield has increased to 2.942% (+8.0-bps) while the Spanish 2-year note yield has increased to 3.538% (+9.8-bps). Likewise, the Italian 10-year note yield has increased to 5.768% (+2.5-bps) while the Spanish 10-year note yield increased to 6.515% (+10.8-bps); higher yields imply lower prices.
RELATIVE PERFORMANCE (versus USD): 12:35 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.17% (+0.49% past 5-days)
The docket is moderate for today, with a few important data due out this morning at 08:30 EDT / 12:30 GMT ahead of the US cash equity open. The CAD Current Account (Balance of Payments) (2Q) will be released and is expected to show a wider deficit at –C$15.0B from –C$10.3B in the first quarter. USD Personal Income and Spending (JUL) are also due, and both are expected to show modest month-over-month increases with the former forecasted to have increased by +0.3% from +0.5% and the latter up by +0.5% from 0.0%. Also due are USD Initial Jobless Claims (AUG 25), forecasted to print 370K from 372K. But the most important data due is the USD Personal Expenditure Core (JUL) – a measure the Federal Reserve uses to gauge inflation – and is expected to show a slowdown to +1.7% from +1.8% year-over-year.
BB represents Bollinger Bands ®
EURUSD: Little has changed over the past several days although the EURUSD maybe working on a Bull Flag within its ascending channel/wedge off of the July 24 low, as well as within an Inverse Head & Shoulders pattern in the works since late-June. Given the Head at 1.2040/45, this would draw into focus 1.2760 (would come amid a major breakout) as long as price holds above 1.2405. Interim resistance comes in at 1.2560, 1.2615/20 (channel resistance, 100-DMA), and 1.2660/70 (long-term descending channel resistance). Near-term support comes in at 1.2500, 1.2440/45 (former swing highs), 1.2405 (Neckline), 1.2310/30, 1.2250/65, and 1.2155/70.
USDJPY: The USDJPY has inched higher today on the back of some better than expected US economic data, and a close above the key 78.60 level looks likely. This level coincides with former June swing lows and a level of resistance for most of July (note the daily wicks above said level but no closes). For now, this is the most important level: potential exists for a rally back into 79.10/20 as long as 78.60 holds, whereas a daily close below suggests a move towards 78.10/20 at the minimum. Penetration of the August low at 77.90 will likely result in a washout to new lows with the potential for 77.65/70 and 77.30.
GBPUSD: The pair has trended higher, with the GBPUSD riding its 50-SMA on the 4-hour chart as support before finding support in the 1.5770/1.5790 area yesterday. As noted earlier in the week “Whereas RSI dropped to 36.58 yesterday on the 4-hour chart, the last time RSI was this low, the GBPUSD traded in the 1.5500s. Likewise, last time price was at this level (1.5793), the RSI was at 71.59. Through and through, this is a bullish development.” Thus, the rebound could be representing a final push higher before the next leg lower. Key levels for the near-term are 1.5880/1.5900 to the upside and 1.5770/90 to the downside; we are continuing to become overextended on shorter-term charts, suggesting that another failure at 1.5900 could lead to profit taking before further bullish price action. A daily close below 1.5770/90 over the coming days should lead to a drop into 1.5700/20. Beyond that, support comes in at 1.5635/40 (last week’s low), and 1.5625 (ascending trendline support off of August 6 and August 10 lows). A daily close above 1.5900 points towards 1.5985.
AUDUSD: Whatever bounce the AUDUSD had appears to be complete, with an ensuing test of 1.0400 and failure. Accordingly, with the pair hovering near the daily lows, our baseline assumption is that the pair will trade lower before higher; and unfortunately for bears, this doesn’t given an opportunity to reload near descending channel resistance near 1.0450/60. Elsewhere, near-term resistance comes in at 1.0480, 1.0530/45 (former swing highs, and would also represent a break of the downtrend off of the August 9 high), and 1.0600/15 (August high). Should we see a rally up towards 1.0600 again, another failure would market a Double Top and signal a push for a test of 1.0200/05 (100-DMA). Near-term support comes in at 1.0330, 1.0305/10 (descending trendline support, 200-DMA), and 1.0200/20 (100-DMA, 1.618% extension on August 9 high to August 17 low, measured against the August 23 high).
--- Written by Christopher Vecchio, Currency Analyst
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