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Technical Signs Warning of Currency and Commodity Top; Net USD Bullish

Technical Signs Warning of Currency and Commodity Top; Net USD Bullish

2011-03-28 05:14:00
Joel Kruger, Technical Strategist
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Despite all of the gains in the Euro last week, the market still managed to fail ahead of the key November highs by 1.4280 and closer lower on the week to result in an early break below the previous weekly low already this week. This ends a sequence of 5 consecutive weekly higher lows and could warn of deeper setbacks ahead.

The loss of German Chancellor Merkel’s power in Baden-Wuerttemberg weakens her authority on some key issues, including the amount of support Germany will provide to the indebted Eurozone nations, and with Portugal facing intense pressure for an EU/IMF bailout, Irish banks expected to unveil massive losses, and the Spanish cajas in need of raising Eur15B, this should not help the Euro’s cause. Additionally, there is still a good deal of uncertainty surrounding the Japanese nuclear contagion threat, and this is not seen helping matters for the somewhat risk correlated Euro.

Elsewhere, the Pound remains under pressure and is contemplating establishing itself back below 1.6000, with more sellers seen into the new week after the Bank of England’s Posen said that he expected inflation to fall back into next year. This follows some bearish GBP developments in the previous week which included a more dovish Bank of England Minutes and much weaker than expected UK retail sales.

Technical_Signs_Warning_of_Currency_body_Picture_5.png, Technical Signs Warning of Currency and Commodity Top; Net USD Bullish

Meanwhile, Fed Bullard has been giving USD bulls something to hold on to after coming out quite hawkish over the weekend. The Fed official said that if the US recovery was as strong as he thought, it would be reasonable to send a signal to markets that the Fed would start withdrawing its stimulus and begin the process of reversing monetary policy. Bullard added that higher oil prices were not derailing the recovery and that the sequence of the Fed exit strategy would be to sell off all its assets, change the pledge to keep interest rates near zero, and then finally start to raise interest rates.

Technical_Signs_Warning_of_Currency_body_Picture_6.png, Technical Signs Warning of Currency and Commodity Top; Net USD Bullish

Moving on, we continue to be quite taken aback with the outperformance in the commodity bloc despite all of the above, and remain quite bearish going forward. Part of the relative strength in these currencies has undoubtedly come from surging oil and gold prices, but we feel that both oil and gold are at risk for some major short-term corrective selling. Both commodities are showing signs of topping and the risks from here are for a gold pullback towards $1382 and oil reversal towards $97. Should we see these market reversals play out, we would expect this to filter into the FX market and weigh on Aussie, Kiwi and Cad over the coming days.

Looking ahead, broader macro themes will certainly dominate flows in European trade, with no economic releases on the calendar for the session in Monday trade. In North America, things heat up a bit with personal spending, pending home sales and various Fed officials slated to speak. US equity futures and commodities are tracking slightly lower into the European session.

ECONOMIC CALENDAR

Technical_Signs_Warning_of_Currency_body_Picture_7.png, Technical Signs Warning of Currency and Commodity Top; Net USD Bullish

TECHNICAL OUTLOOK

Technical_Signs_Warning_of_Currency_body_eur.png, Technical Signs Warning of Currency and Commodity Top; Net USD Bullish

EUR/USD: A closer look at the weekly chart shows the market failing ahead of some key resistance from November 2010 at 1.4280 and reversing to confirm a bearish weekly close and break of a sequence of 5 consecutive weekly higher lows. This certainly warns of the potential for deeper setbacks ahead, and we initially will look for a daily close back below 1.4050 to provide further confirmation for reversal prospects. The 1.4050 level loosely coincides with some rising trend-line support off the 2011 lows and a daily close below this level could accelerate declines towards next key support by 1.3750 further down. Back above 1.4250 delays.

Technical_Signs_Warning_of_Currency_body_jpy2.png, Technical Signs Warning of Currency and Commodity Top; Net USD Bullish

USD/JPY: The latest violent drop-ff to fresh record lows by 76.35 has been intense, with the market threatening a fresh longer-term downside extension below 80.00. However, given the nature of the move, we would not at this point categorize the downside break as anything significant that alters the medium-term outlook. For now, the sidelines are the best place to be and we will look to see where the market closes this week to gain a clearer perspective. A weekly close below 79.75 might open a retest of the 76.35 spike lows, but any additional declines below 76.00 are seen limited. A weekly close back above 81.20 on the other hand, would take the immediate pressure off of the downside.

Technical_Signs_Warning_of_Currency_body_gbp2.png, Technical Signs Warning of Currency and Commodity Top; Net USD Bullish

GBP/USD: The 1.6300 handle continues to be a difficult obstacle for bulls, with the market unable to hold above the figure for any meaningful period of time. As we had warned in the previous daily analysis, the market has once again rejected trading above the figure to set up a bearish reversal exposing deeper setbacks into the 1.5700 area over the coming sessions. Ultimately, only back above 1.6300 delays.

Technical_Signs_Warning_of_Currency_body_swiss1.png, Technical Signs Warning of Currency and Commodity Top; Net USD Bullish

USD/CHF: The latest break to fresh record lows below 0.9000 (0.8910) is certainly concerning and threatens our longer-term recovery outlook. Still, we do not see setbacks extending much further and continue to favor the formation of some form of a material base over the coming weeks for an eventual break back above parity. Look for the market to hold above 0.9150 on a daily close basis, while back above 0.9370 will officially confirm reversal prospects and accelerate gains. Only a break and weekly close below the recent record spike lows at 0.8910 ultimately delays outlook.

Written by Joel Kruger, Technical Currency Strategist

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