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Markets Hit by European Banking Woes and Softer US Economic Data

Markets Hit by European Banking Woes and Softer US Economic Data

2011-08-19 04:16:00
Joel Kruger, Technical Strategist
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  • Bears regain control of markets as panic and fear escalates
  • European banking sector concerns are primary driver of sentiment shift
  • US economic data also does a good job of shaking confidence
  • Swiss Franc becoming less attractive despite safe haven bids
  • Dollar/Yen could be enticing trade on a break to fresh record lows

The bears are back in control into the final day of trade for the week, with all risk correlated assets getting hit hard in favor of a flight back into more comfortable safe-haven options like the Yen, US Dollar, and Gold. Even the Swiss Franc has come under pressure with the latest measures taken by the Swiss central bank dissuading additional investment in the local currency. We foresee a scenario where the Yen will also soon become much less attractive in risk liquidation environments, with the Bank of Japan expected to step in quite aggressively in the event of another acceleration of Yen gains.

The primary driver for the latest price action comes on the back of fears over the stability of the European banking sector and talk that US banks are in the process of reducing their exposure to these banks. However, US economic data has done nothing to help matters, with initial jobless claims higher, house sales lower and the Philly Fed seriously disappointing. As a result, gold has broken to fresh record highs, while US equities have once again been decimated to threaten a break to fresh multi-day lows. On the currency front, the higher yielding antipodeans are feeling the most pain, and from a technical standpoint, there is plenty of room for additional declines in both the Australian and New Zealand Dollars.

From a strategy standpoint, we continue to favor buying the US Dollar across the board in the current unstable market environment, with the Greenback benefitting by default as investors will be more and pressured to find some security in the largest and most liquid financial market in the world. While we have already seen a nice US Dollar recovery off its recent lows against most major currencies, the Yen still sits by record highs against the buck and could soon also be exposed to material weakness going forward in light of the intense discomfort of the Japanese with their currency at such elevated levels. We therefore like the idea of looking to buy Usd/Jpy on a break to fresh record lows towards psychological barriers at 75.00.

Looking ahead, the European economic calendar is exceptionally light, with the only noteworthy releases coming in the form of German producer prices and UK public finances. Canadian data then takes center stage into North America, with inflation readings due out. On the official circuit, Fed Pianalto will speak on the topic of the economy just ahead of the weekend.

ECONOMIC CALENDAR

Markets_Hit_by_European_Banking_Woes_and_Softer_US_Economic_Data_body_cal.png, Markets Hit by European Banking Woes and Softer US Economic Data

TECHNICAL OUTLOOK

Markets_Hit_by_European_Banking_Woes_and_Softer_US_Economic_Data_body_eur.png, Markets Hit by European Banking Woes and Softer US Economic Data

EUR/USD: The market continues to adhere to a bearish sequence of lower tops since May, with a fresh lower top now in place by 1.4535 ahead of the next downside extension back towards and eventually below 1.4000. In the interim, look for any intraday rallies to be well capped by 1.4500, while only a daily close back above 1.4535 negates. Short-term support now comes in by 1.4240 and a break back below should accelerate declines.

Markets_Hit_by_European_Banking_Woes_and_Softer_US_Economic_Data_body_jpy2.png, Markets Hit by European Banking Woes and Softer US Economic Data

USD/JPY:Setbacks have stalled out just ahead of the 76.25 record lows from March, with the market dropping to 76.30 ahead of the latest consolidation. Given that we are seeing the rate by record lows, we would not at all be surprised to soon see the formation of a material base in favor of significant upside back above 80.00. However, the overall structure remains bearish and the risks are still tilted to the downside favoring a dip to fresh record lows into the 75.00’s before considering a fresh base. Back above 77.30 required at a minimum to relieve immediate downside pressures.

Markets_Hit_by_European_Banking_Woes_and_Softer_US_Economic_Data_body_gbp2.png, Markets Hit by European Banking Woes and Softer US Economic Data

GBP/USD: The market remains locked in a broader consolidation off of the April highs, and a fresh top is now sought out somewhere around 1.6550 in favor of the next downside extension back towards the recent range lows at 1.5780. Ultimately, only a daily close above 1.6550 would delay outlook and give reason for pause, while back under 1.6350 should accelerate declines.

Markets_Hit_by_European_Banking_Woes_and_Softer_US_Economic_Data_body_swiss1.png, Markets Hit by European Banking Woes and Softer US Economic Data

USD/CHF: The latest sharp reversal off of record lows just shy of 0.7000 is encouraging and could finally be starting to signal the formation for a major base. Weekly studies are also confirming with the formation of a very bullish bottom close. From here, look for an acceleration of gains back towards the 0.8500 area over the coming days with setbacks expected to be well supported above 0.7500 on a daily close basis.

Written by Joel Kruger, Technical Currency Strategist

If you wish to receive Joel’s reports in a more timely fashion, email jskruger@dailyfx.com and you will be added to the distribution list.

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