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Daily Observations: May 28, 2012

Daily Observations: May 28, 2012

Christopher Vecchio, CFA, Senior Strategist

The Euro-zone situation continues to get worse, and European leaders clearly lack the will to remedy the situation. That’s not to say they’re trying; but rather they’re not taking the necessary measures to ring fence the economic crisis in Greece from becoming a crisis of confidence in Italy or Spain. Thus, it is of my firm belief that rallies in the EUR should be sold still. The political developments in Greece over the weekend lend to the belief that we could see the EURUSD rally back towards 1.2800, but I remain grounded in my perspective that another election will just bring about more deadlock, not resolution.

The Chinese growth picture remains an issue for the AUD and NZD, which are been hit quite hard during the month of May. Key data are due later this week (mainly the official PMI Manufacturing report for May) and this should show signs of stress as well. I remain bearish these pairs and will sell rallies.

What concerns me, and what has given me a cautiously bearish view in the near-term (cautiously bullish the USD), is that the last time global financial markets were positioned as they currently are, was back in late-November 2011. This prompted the Federal Reserve to unveil currency swaps with many of the other major central banks on November 30, which sunk the US Dollar for almost a week (one big down day followed by several days of consolidation). Today’s gap open, while occurring amid holidays on both sides of the pond, has the eerie feeling of the gap open on November 28, two days before the Fed swaps.

- AUDJPY: The pair has been obliterated in May, shedding 6.39 percent at the time of writing. Now that 80.00 has been broken definitively, a daily close below 76.98 (swing low in mid-December) will open up space for a continuation towards 75.00 (November swing low at 74.77). For now, it looks like we could be stuck in a tight range between 77.00 and 79.00. Rallies to the topside should be capped by 78.40 and 79.00/20 in the short-term. Only a deeper pullback above 80.95/81.15 (200-DMA, May 10 swing highs) will signal that a bottom has been established. Bias: bearish.

- AUDUSD: The AUDUSD has been among the top performers today, largely benefiting from a massive gap open to start the week. However, once European traders entered the market, the pair fell back from its session highs failing to clear the 0.9900 level. Given current price (0.9840), I favor selling rallies into 0.9900/20, with Stops above 0.9940 (last week’s swing high). A break of 0.9940 should open room for a move back towards parity. To the downside, a break of 0.9690 gives room to run towards 0.9660/65 (November swing low). Support is thick below current price, with significant levels coming in at 0.9660/65, 0.9615/25, 0.9520/40, and finally 0.9385/90 (2012 level from October 4). Bias: bearish.

- EURUSD: Back-to-back Inverted Hammers are forming on the daily chart suggesting that bulls haven’t been able to regain enough momentum to scare away the bears. Indeed, given current price (1.2530), the EURUSD has made two consecutively unsuccessful runs at the 1.2600 level, which isn’t shocking given the fact that 1.2625/30 was the former yearly low set in January. A look back to May/June 2010 shows that significant support in the 1.2370 area should be respected, and only a daily close below said level will open up targets low. The Greek polling results have inspired some confidence but not enough to overcome the bank run fears in Spain. I favor selling rallies into 1.2820 (last week’s swing high). A move back above 1.2820 lines up a test of 1.3000 and 1.3070. Bias: bearish.

- USDJPY: Now that we’ve tested the 79.10/15 area (my ideal entry level), the pair has seen a dip below 79.00 but has also rallied back above 80.00. With that said, until there is a clean break above 80.60, we are range bound between 79.00 and 80.60. A break above 80.60 opens the door for a move towards 81.80. Back above 81.80 will give way for a move back to 84.00/20. I will buy dips towards 79.10/15. Bias: bullish.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.