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Daily Observations: May 14, 2012

Daily Observations: May 14, 2012

Christopher Vecchio, CFA, Senior Strategist

What interesting price action today after this weekend’s developments. As I noted in this morning’s FX headlines column, I think there’s a lot to say about a market that couldn’t rally on the back of a 50-bps rate cut by the People’s Bank of China. I suggest reading my full thoughts on the matter.

Generally speaking, the big key to my US Dollar bullish outlook (same for the Yen) is that there’s a lot of uncertainty in the market: uncertain over the Greek political situation; uncertain over the Chinese growth picture; uncertain over the Fed’s intentions to ease or not. There is nothing worse for an investor than an uncertain investment horizon, and during these times, we typically observe strong US Dollar demand (cash is king).

Having now broken through key technical levels and the US Dollar facing its first overbought readings against the Australian Dollar and the Euro in months (first time since early-October against the Aussie; since mid-January against the Euro), higher yielding currencies and risk-correlated assets are looking very vulnerable. If this bear trend is to stay intact, from a technical perspective, I believe that some consolidation is necessary or at least a slower rate of decline; any panic moves lower (think end of September, beginning of October) should be look to be bought because it won’t be for much longer before the Federal Reserve steps into the market to boost investor confidence (last time panic started to set in, at the end of November, the Fed opened up currency swap lines, sinking the US Dollar).

- AUDJPY: The pair has found support today at channel support at 79.40 (descending TL on parallel from March 27 and April 27 highs, to April 11 low). A small rebound has been in place but this is something that should be sold, in my opinion, given the deteriorating sentiment around the Chinese growth picture and the need for firms to shed higher yielding assets (like the Australian Dollar) in favor of more liquid assets (like the Japanese Yen). Furthermore, with the Reserve Bank of Australia’s board minutes from their May meeting due tomorrow – the minutes from the meeting at which 50-bps were cut from the key interest rate – I expect some further downside in all AUD-based pairs. Rallies back into 80.10 should be sold, in my opinion.

- AUDUSD: Similar story for AUDUSD as AUDJPY, give the RBA minutes tonight. The Chinese rate cut has had little impact, though it has insulated too much downside in AUD-based pairs. A very weak close into the end of the day has the pair at fresh yearly lows, and for now, with former swing highs holding steady (as well as the May high at 1.0429) I continue to favor downside price action into 0.9860/80. Below, support is thin, with next significant levels on the chart coming in at 0.9660/80, then the 2011 low of 0.9385/90. I favor further downside and favor holding shorts through the European trading sessions.

- EURUSD: The bearish wedge continues to play out, with the EURUSD falling flat on its face today after no new developments out of Greece over the weekend. The pair really took it on the chin today, falling through the 1.2870/75 level (former high/low swings) late in the US session with relative ease. I’m looking at 1.2805/10 (parallel TL from February and April highs to March lows), 1.2685/90 (parallel TL from February and April highs to February lows) and 1.2625/30 (yearly low) as the next levels of interest lower. A move to the topside is the ‘harder’ path, with resistance at 1.2950/55 and 1.2970/75, 1.3065/70 (wedge former support), and 1.3115/20 (100-DMA). I favor further downside price action and look to sell rallies into 1.3065/70.

- USDJPY: My outlook is unchanged and will remain as such unless the USDJPY breaks above 80.60. The pair remains supported by its 100-DMA (now 79.68), 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.

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