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Daily Observations: May 29, 2012

Daily Observations: May 29, 2012

Christopher Vecchio, CFA, Senior Strategist

Trading on Tuesday has been quite volatile, with the US Dollar trading in ranges >= 0.5% against most of the majors. The Egan Jones downgrade helped knock risk-appetite off a bit at the end of the European session but as expected, the US afternoon bloc has yielded the typical rally by risk-correlated assets. Much of the hope this morning was predicated on the European Central Bank announcing a recapitalization of Europe’s banks, but so far that rumor has been dismissed by officials.

Technically speaking, it’s a welcomed development to see the US Dollar pullback a bit; trading is a function of time as well as price, and a move sideways/slightly higher by the Australian and New Zealand Dollars and the Euro would relieve some of this technical stress. Overall, with significant levels of former support now resistance overhead in the key majors that I follow – AUDUSD and EURUSD – we’re going to need to see a significant positive fundamental catalyst to find continuation to the upside. With little hope for this on the horizon (in my opinion), I remain cautiously bearish (cautiously bullish USD) and will look to sell rallies.

- AUDJPY: As I said yesterday, “[N]ow 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.” While the AUDJPY pierced 78.40 today (trading up to 78.65), the pair does not appear to be poised close above the ST resistance at the time of writing. A daily close above 78.40 suggests a test of 79.00/20, at which point shorts look more appealing. Bias: sideways/bearish.

- AUDUSD: The AUDUSD saw little follow through today after yesterday’s gap open higher, as European trading has been the thorn in this pair’s side. The pair had a fairly large range today – nearly 1% - as the AUDUSD bounced between 0.9800 and 0.9900. The lack of follow through while highly correlated equity markets have rallied is concerning. Given current price (0.9852), I favor selling rallies into 0.9920/30, with Stops above 0.9940 (last week’s swing high). A break of 0.9940 should open room for a move back towards parity. Near-term support lies at 0.9790/0.9800, the lows set in the overnight and the US session today. Going forward, as I said yesterday, “[T]o 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: Yesterday I said “[B]ack-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.” After two consecutive runs at the 1.2600 level, the pair finally cracked 1.2500 putting in a new 2012 low at 1.2460. The EURUSD two consecutive unsuccessful runs at the 1.2600 level on Friday and Monday weren’t surprising, given the fact that 1.2625/30 was the former yearly low set in January (that’s to say there is strong resistance above). 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 lower. 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.

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