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Daily Observations: May 7, 2012

Daily Observations: May 7, 2012

2012-05-07 21:54:00
Christopher Vecchio, CFA, Senior Strategist

The two key fundamental events over the weekend came in just as expected – Francois Hollande winning the French presidential election and the Greek ruling coalition losing power – but while that’s good for my bias, that’s bad for broader risk-appetite. Although we saw a bit of a bounce back late in the US session – really after European trading closed for the day, as per the recent tend – I still like the US Dollar higher here, as well as the British Pound and the Canadian Dollar. The Australian Dollar and the Euro should pace losses this week.

- AUDJPY: The combination of the US nonfarm payroll report on Friday and the election results this weekend were enough to stoke a significant risk-off environment that past two trading days. Given the AUDJPY’s correlation to US equity markets (+0.91 to DJIA), the move lower comes as little surprise. The break of the 100-DMA, a seemingly impenetrable level during April, has caved almost immediately in May, drawing our attention to the 200-DMA. With respect to the “former resistance turned support, and vice-versa” rule, I looks like the AUDJPY is set to range between the 100-DMA (83.31) and the 200-DMA (81.06) for the next few days without a significant fundamental catalyst. A close below 81.00 should yield a move to 80.50/55 (former swing high), with support lying underneath at 79.70.

- AUDUSD: Now that the USDJPY is relatively steady, if not sliding slightly lower, the AUDUSD is back to trading tightly to the AUDJPY (I caution this near-lockstep correlation may be easily broken if the USDJPY experiences significant volatility). With that said, the AUDUSD has put in fresh yearly lows at 1.0109, suggesting that further downside price action is likely barring some unforeseen tail risk to the US Dollar (more QE posturing by Federal Reserve Chairman Ben Bernanke, for example). Australian trade balance tonight should help push this lower (a worsening Chinese economy likely to hurt exports). I’m interested in selling rallies into 1.02330/55 looking for a move towards parity. It is worth noting that we’ve moved lower very quickly, so a bounce may be possible; any rallies should be capped by the moving average confluence at 1.0325/40 (20-/200-DMA) then 1.0400 (descending TL resistance on February 29 and April 29 highs).

- EURUSD: The bearish wedge is starting to breakout to the downside, as expected. I advocated getting short on a bounce to 1.3065 earlier today, as that represents the wedge’s former support (now turned resistance). On a break below 1.3000 I’m looking towards 1.2970/75 (former swing low), 1.2950/55 (May low), 1.2870/85 (former high/low swings), and 1.2625/30 (yearly low). A move to the topside is the ‘harder’ path, with resistance at 1.3065 (wedge former support), 1.3115/20 (100-DMA), 1.3175/80 (Thursday/Friday highs, 50-DMA), and 1.3260/80 (wedge descending TL resistance). I favor further downside price action and look to sell rallies into 1.3065.

- USDJPY: The pair remains supported by its 100-DMA (now 79.63), a level that it hasn’t closed below since February 8. The tug-and-pull between the Federal Reserve’s QE program and the Bank of Japan’s recent ¥10 trillion stimulus package has kept the pair relatively stable the past several sessions, but a further move lower is expected. Currently, the USDJPY appears to be in a Wave 5 impulse lower, with a 5wave extension completing around 79.10/15, also the 61.8 Fibonacci retracement on the February low/March high move. I prefer staying on the sidelines until a move there, at which point I will get long. A break above 80.60 negates this view and suggests a test of 81.80.

Any other trade ideas and general macroeconomic musings can be found in the Real Time Newsfeed, or by following me on twitter @CVecchioFX.

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