Markets have been quite choppy in the overnight although ahead of the North American trading session, risk-appetite appears to be improving, led by the Euro which is the best performing currency on the day. The catalyst: improving sentiment around Europe, especially with respect to the impending Spanish bailout, something I noted in this week’s Euro Weekly Trading Forecast.
The Wall St. Journal is reporting that Spain is considering requesting a new line of credit from the European Stability Mechanism (ESM), the region’s bailout fund. Of course, this means that the European Central Bank will likely be in the market, utilizing the new OMTs, the central bank’s unlimited sterilized bond-buying program designed to cap participating sovereigns’ yields.
The report also draws light on another clue that Spain is moving towards a bailout request, on top rhetoric from German Chancellor Angela Merkel and French President Francois Hollande. Last month, it is noted, Spanish Prime Minister Mariano Rajoy said that he would only seek a bailout for his country if he received “unanimous” support from other Euro-zone leaders. When would be a better time to request a bailout than this week at the Euro-zone Summit.
To me, all signs are pointing to a bailout. Will the results appease markets for long? Perhaps. But, in my opinion, I think this would remove a significant near-term hurdle from the investment horizon and allow the EURUSD to move to fresh highs in the second half of 2012.
Taking a look at credit, peripheral European bond yields are mixed despite the Euro’s strength. The Italian 2-year note yield has increased to 2.094% (+1.1-bps) while the Spanish 2-year note yield has increased to 3.127% (+0.2-bps). Likewise, the Italian 10-year note yield has decreased to 4.942% (-1.8-bps) while the Spanish 10-year note yield has increased to 5.786% (+1.2-bps); higher yields imply lower prices.
RELATIVE PERFORMANCE (versus USD): 10:11 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.07% (-0.33% past 5-days)
There are several intriguing pieces of data due out today, all of which come out of the United States before the US cash equity open. At 08:30 EDT / 12:30 GMT, the USD Consumer Price Index (SEP) will be released and is expected to show a slight jump in both the headline and core readings, though both will remain at or just under the Federal Reserve’s +2% yearly inflation target. At 09:00 EDT / 13:00 GMT, the USD Net Long-term TIC Flows (AUG) report is due, which is as a measure of Treasury flows and is a good indicator for global sentiment. At 09:15 EDT / 13:15 GMT, the USD Industrial Production (SEP) report should show a slight rebound, though not enough to overcome to the contraction in August.
EURUSD: Although price has ranged for the past several weeks, our bias is becoming more bullish now as short-term moving averages have begun to accelerate higher. Resistance comes in at 1.3070/75 (October high), 1.3145, and 1.3165/75 (September high). Support comes in at 1.3000, 1.2930/35 (61.8% Fibo on February 2012 high to July 2012 low), 1.2910/20 (20-EMA), 1.2820/30 (200-DMA, late-April swing high), and 1.2785/1.2800 (ascending trendline off of July 24 and August 2 lows (50-EMA).
USDJPY: My bias on the USDJPY is close to switching to bullish today as the pair threatens a breakout from the descending trendline off of the April 20, June 25, and August 20 highs. A close above 78.65 will accomplish this, though ideally a move above 78.85 (former swing highs) will confirm. Resistance comes in at 78.70/80, 79.20/30, and 79.60/70. Support is78.40/60, 78.10/20, 77.90, and 77.65/70 (June 1 low).
GBPUSD: Price is back in our decision zone with the pair trading between the 20-EMA (1.6080/85) and the descending trendline off of April 2011 and August 2011 highs (1.6100/20). If the GBPUSD gets back above this trendline, we will be bullish again. Support comes in at 1.6080, 1.5975/95 and 1.5770/85 (late-August swing lows). Resistance comes in at 1.6100, 1.6135, and 1.6260 (the former April swing highs by close).
AUDUSD: The AUDUSD is testing the 100-DMA again, a level the pair hasn’t had two consecutive daily closes above since the first two-days of August. As such, we are neutral at this point, though will switch on a close above. Resistance is at 1.0265/75 (100-DMA), 1.0330, and 1.0405/25 (mid-August swing lows). Support comes in at 1.0230/35, 1.0200/15, 1.0160/75 (mid-July and early-September swing levels), 1.0145/50 (October low), 1.0100/10, and 1.0000.
SPX500: No change from yesterday: “Crucial support at 1420/25 (the 61.8% Fibo retracement on June 2012 low to September 2012 high, ascending trendline off of the June 4 and July 24 lows, 50-EMA) held, and upon further examination, it appears a Bull Flag off of the September 14 and October 5 highs may be forming; a break above 1470 could signal a move to 1500. A close above the 20-EMA today at 1440 would be very bullish (a sign bulls remain adamant). Support comes in at 1420/25 and 1400. Resistance comes in at 1443/45, 1460, 1470, and 1498/1504.”
GOLD: Gold held our first big test level of 1735 and with burgeoning US Dollar weakness, precious metals could rebound. It is worth noting that there is massive developing RSI divergence (the last time RSI was this low price was below 1600), which portends to a bullish outcome. Resistance is 1758 an 1785/1805. If the US Dollar strengthens, we look lower towards 1735 and 1715/20 (former swing levels, 50-EMA).
--- Written by Christopher Vecchio, Currency Analyst
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