Curencies, Equities and Commodities Still At Risk for Additional Declines
There have been two stories that have been making headlines in an otherwise quiet session of Asian trade. The first comes from an FT report which says that China speculators were the cause of some wild moves in the silver market in recent days that resulted in a surge to $50 and sharp pullback to the $32 area. The second comes out of New Zealand where RBNZ Bollard has reiterated that rates will stay on hold at record low levels for some time. Mr. Bollard cited risks to the local economy and the aftereffects from the earthquake as his reasons for leaving monetary policy accommodative, and said that rates would not move higher until downside risks passed and the economy started show signs of recovery.
Other than these two stories, there is very little else to talk about, but the ongoing fears of contagion in the Eurozone certainly continues to remain at the forefront of investor minds. Overall, whether currencies manage to mount a little more of a rally against the buck in the coming sessions, we see these rallies as being well offered with more upside for the Greenback. In our opinion, there has been a serious disconnect between rallying currencies, equities and commodities in recent weeks and consistently weak global economic data. Although market participants have been persistently buying back into risk, the justification for the risk buying appears to be less and less substantiated. As such, we continue to forecast more currency, equity and commodity selling ahead, with the US Dollar to be the main beneficiary of these moves.
Looking ahead, German and Eurozone GDP and US CPI and Michigan confidence are the main economic releases for the day. However, we continue to expect to see the markets trade off of broader macro themes and developments. Appetite for risk (or lack there of) will play a major role in the direction of the markets should contribute to volatility in Friday trade. US equity futures and commodities are tracking lower into European trade.
EUR/USD: Setbacks have stalled for now after just taking out some critical support by the 1.4155 lows from 18Apr. At this point, it is difficult to determine whether the market will look to consolidate the latest intense declines and possibly bounce a bit back towards the 1.4500 area, or will continue to decline and accelerate below 1.4155 to officially signal a shift in the medium-term structure in favor of the USD. Either way, the strategy from here should be to look to sell, with any rallies now seen well capped in the 1.4500 area, as the break below 1.4155 is significant, ending a sequence of consecutive higher lows in 2011. In the interim, we remain sidelined and await a clearer signal.
USD/JPY: After undergoing a fairly intense drop off from the 85.50 area several days back, the market looks to have finally found some support by the bottom of the daily Ichimoku cloud and could be in the process of carving out some form of a base. Look for setbacks to continue to be well supported in the 80.00’s with only a close back below 79.50 to give reason for concern. From here we see the risks for a fresh upside extension back towards the recent range highs at 85.50 over the coming days.
GBP/USD: The market is staring to give way with the price now dropping back below the 50-Day SMA to warn of additional declines over the coming sessions. Look for deeper setbacks towards the 1.6000 area, with any rallies now expected to be well capped ahead of 1.6500. Ultimately, only back above 1.6520 gives reason for concern.
USD/CHF: Starting to show signs of basing off of the recently established record lows by 0.8550, with the market putting in a solid bullish close on the weekly and now breaking back above the previous weekly high to end a sequence of consecutive weekly lower tops. Next key resistance comes in by 0.9000 and a break above will further confirm recovery structure and open the door for a move back towards a medium-term lower top at 0.9340. Look for any intraday setbacks to be well supported above 0.8700 on a daily close basis. Ultimately, only a daily close back below 0.8700 delays and gives reason for concern.
Written by Joel Kruger, Technical Currency Strategist
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