UK and US Closed for Holiday; Markets Trading on Very Low Volume
Markets will hardly trade on normal volumes Monday, with both the UK and US closed down for holidays. We often find that when markets are pushing in a particular direction heading into a long holiday weekend, they have a tendency to continue to push in that same direction until normal liquidity returns. This could then very well translate into a weaker US Dollar and more record levels in the Swiss Franc against both the buck and Euro.
While the Swiss Franc has found positive flows both in safe haven and healthy risk appetite markets, the Euro has suffered more of late, with the single currency’s latest rise being mitigated somewhat by the ongoing Eurozone debt crisis. The latest negative attention from the region comes from a number of factors including; comments from an Irish minister suggesting that the country may need an additional bailout program, a report from the IMF, EC and ECB that Greece has missed all of its fiscal targets under the bailout plan, and Bini-Smaghi remarks that an orderly Greek restructuring would be a fairytale.
Elsewhere, the Yen has rallied back with Usd/Jpy retreating into the 80.00’s, while the antipodeans remain well bid, with Kiwi standing out and racing to 26 year highs above 0.8200. The relative strength in the New Zealand Dollar comes from investment talk out of China, more constructive outlook for the local economy, and a recovery in commodities prices. On the data front, the calendar is all but empty in European trade, with the only key release coming into he North American session in the form of Canada GDP.
Data overnight has already produced softer than expected UK hometrack house prices, and an on the whole weaker showing out of Australia, highlighted by disappointing new home sales and company operating profit statistics. Looking ahead, as we outlined at the beginning of this commentary, the razor thin volume in the markets on Monday does not make for ideal trading conditions, and it would probably be best to stay on the sidelines until normal market conditions resume into Tuesday. Equity futures and commodities prices are flat.
EUR/USD: In the process of a corrective bounce following a 10 big figure drop in May with the market rallying from below 1.4000 and in search of a fresh lower top ahead of the next major downside extension below 1.3970. From here, look for any rallies to be well capped in the 1.4300-1.4400 area, with only a break back above 1.4500 negating negative outlook and giving reason for concern. Back below 1.4125 confirms and should accelerate declines.
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 weeks.
GBP/USD: The 100-Day SMA has proven to be formidable support for the pair, with the price rallying substantially out from the 1.6060 lows to trade back above 1.6500. However, we would expect rallies to now be well capped below 1.6550 on a daily close basis, with gains even potentially holding below 1.6480 on a close basis which represents the 61.8% fib retrace off of the 1.6740-1.6060 move. Look for a lower top in the 1.6500 area ahead of the next major downside extension below 1.6000 over the coming days. Ultimately, only a daily close back above 1.6550 would negate outlook.
USD/CHF: The latest minor recovery has proved to be just that, with the market finding a fresh lower top ahead of 0.9000 in favor of this latest sharp drop to yet another record low below 0.8500. Daily studies are however still looking quite stretched to us, and we continue to like the idea of taking shots at buying on dips in anticipation of a major base. Look for current declines to hold around the 0.8500 area and a break back above 0.8740 to encourage basing prospects and open the door for the potential formation of a major interday double bottom (neckline by 0.8950) projecting gains back towards 0.9500. A daily close below 0.8400 would negate.
Written by Joel Kruger, Technical Currency Strategist
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