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Euro Gains and Risk Sentiment Rallies Still Classed as Corrective

Euro Gains and Risk Sentiment Rallies Still Classed as Corrective

2011-09-15 05:32:00
Joel Kruger, Technical Strategist
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  • Euro finds some bids on assurances from Germany and France
  • EU Barosso comments also help to prop Euro
  • Fear of Greek default, Italian downgrade and European banking crisis offset
  • RBNZ rate decision opens the door for relative underperformance in Kiwi
  • FT piece offers reasonable explanation for more offered gold market of late
  • Yen strong for now but we project major weakness ahead

The Euro has managed to consolidate out from its recent lows in recent trade although we do not expect any additional upside to be sustainable with far too many fundamental constraints to weigh on the market. The minor reprieve for the currency and sentiment in general has come from hopes that European leaders will be able to figure out a way to contain the Eurozone debt crisis. Assurances from Germany and France that Greece will remain part of the Eurozone and comments from EU President Barosso that “the commission will soon present options for the introduction of euro bonds," have been seen as the primary drivers for the currency prop, while on the other side of the coin, conflicting rumors of an imminent Greek default, potential Italian downgrade and blowup in the European banking sector have kept the Euro and risk correlated markets very well offered on any form of a rally.

Market participants will clearly be looking for some more direction over the coming hours and Treasury Secretary Geithner’s attendance at the EU EconFin meting on Thursday and Friday could provide some needed insight. With all of the craziness surrounding the current state of the Eurozone economy, it will be interesting to see what is on the agenda of Mr. Geithner and what initiative the US official takes in attempting to help remedy the situation. Geithner will likely emphasize just how important it will be to keep Greece on life support rather than allowing the country to default, as the consequences of default will far outweigh any additional strain of propping the country from collapse. Market participants will also likely be looking for some form of reassurance from the US government that US swap lines will remain in place to the extent needed in order to avoid a funding crisis.

The New Zealand Dollar has easily been the hardest hit major currency on the day, with the relative underperformance stemming from a central bank rate decision where rates were left on hold at ultra low levels and the monetary policy outlook carried with it a less hawkish than expected tilt. This in conjunction with a very shaky global macro environment fueled the heavy selling in Kiwi which also extended to the entire commodity bloc. Even gold has been coming under pressure in recent trade and while on the surface the price action in the safe haven yellow metal seems counterintuitive, an FT article which says that European banks are rushing to exchange gold assets in an effort to access much needed dollar funds, could very well be the reason why the physical commodity has remained somewhat offered.

On the strategy front, with the Swissie short trade now well on its way, we look to the next potential major mover, and this leaves us staring squarely at the Yen. We are now waiting for the currency to undergo a similar bout of selling ahead and have a hard time seeing how things won’t play out this way. A few months back very few would have been able to anticipate that the more active central bank would have been the SNB. Given the super aggressive measures taken by the Swiss central bank to depreciate their local currency, we can only expect to see similar measures taken by a Bank of Japan whose economy might arguably be even more at risk to currency appreciation than Switzerland.

The Bank of Japan name is synonymous with currency intervention and the central bank has plenty of ammunition to throw at the problem when they feel it is necessary. Given that the Yen is also trading just off record highs against the buck and some other major currencies, we do not suspect that the central bank will welcome the additional spillover flows into the Yen resulting from the Swiss depreciation. While it is true that the current deteriorative state of the global economy should funnel more money into the Yen on the liquidation of risk correlated assets, the Japanese Yen is by no means a safe haven currency given the equally uncertain Japanese economic outlook and natural benefit to the economy in having a weaker currency.

As such, we predict that any additional appreciation in the Yen will open the door for a major central bank reaction that equals or exceeds the one we have just seen from the SNB. The Euro/Yen cross is trading by multi-year lows and has dropped back below levels even seen at the onset of the crisis in 2008. We think that any additional upside pressures on the Yen will soon escalate pressures for the newly appointed Japanese officials to speak out on the unwanted currency strength and set the stage for a strong central bank campaign of aggressive currency intervention. We may not see this play out over the coming sessions, but keep a close watch for our outlook to materialize over the coming days and weeks.

ECONOMIC CALENDAR

Euro_Gains_and_Risk_Sentiment_Rallies_Still_Classed_as_Corrective_body_Picture_5.png, Euro Gains and Risk Sentiment Rallies Still Classed as Corrective

TECHNICAL OUTLOOK

Euro_Gains_and_Risk_Sentiment_Rallies_Still_Classed_as_Corrective_body_eur.png, Euro Gains and Risk Sentiment Rallies Still Classed as Corrective

EUR/USD: The latest downside pressures have intensified with the market easily accelerating below critical support at 1.3835 to mark a significant shift in the structure. A closer look at the monthly chart dating back to the record highs from 2008 shows a progressive decline with the market in the process of carving a series of lower tops and lower lows. The clear break below 1.3835 does a good job of reinforcing the potential for the carving of the next major lower top below 1.5000 and opens the door for a more meaningful decline towards 1.2000 over the coming weeks. In the interim, look for any rallies to be well capped below the previous support now turned resistance in the 1.3835-1.4000 area, while back under 1.3500 accelerates.

Euro_Gains_and_Risk_Sentiment_Rallies_Still_Classed_as_Corrective_body_jpy2.png, Euro Gains and Risk Sentiment Rallies Still Classed as Corrective

USD/JPY:This is a market that looks like it trying very hard to establish some form of a base after recently setting fresh record lows just under 76.00. Although the downtrend remains intact and has been fairly intense, longer-term studies welcome the prospects of the formation of a material base and shift in the overall structure. Price action over the past several days has been confirming, with the market very well supported in the 76.00’s and unable to extend the downtrend to fresh record lows. Instead, the ability to hold above 76.50 is looking more and more constructive, with the weekly chart also showing bullish tendencies after quietly putting in three consecutive positive closes. From here, we look for the establishment back above the 50-Day SMA at 77.65 to reaffirm our recovery outlook and accelerate gains towards next key resistance by 80.25 further up. Ultimately, only a daily close back below 76.50 would give reason for concern.

Euro_Gains_and_Risk_Sentiment_Rallies_Still_Classed_as_Corrective_body_gbp2.png, Euro Gains and Risk Sentiment Rallies Still Classed as Corrective

GBP/USD: Overall price action seems to suggest that this market could once again be looking to roll over in favor of some fresh medium-term declines. Any gains in recent months have proven to be very well capped above 1.6500, and this latest break back below 1.6000 opens the door for a pick-up in bearish momentum. Next key support by 1.5780 has just been broken and Wednesday’s daily close below the level confirms bias and should accelerate declines for a retest of 1.5345 further down. Any interday rallies are expected to be well capped below 1.6100, while ultimately, only back above 1.6500 would give reason for concern.

Euro_Gains_and_Risk_Sentiment_Rallies_Still_Classed_as_Corrective_body_swiss1.png, Euro Gains and Risk Sentiment Rallies Still Classed as Corrective

USD/CHF: A recent acceleration of gains beyond critical resistance and a previous lower top at 0.8550 confirms bullish bias and from here, we see room for fresh upside above 0.9000 and towards 0.9500 over the coming days. Look for any setbacks to be well supported above previous resistance now tuned support at 0.8550 on a daily close basis, while ultimately, only back under 0.8200 would delay. A break and close back above the 200-Day SMA for the first time in several months will provide more ammunition for our highly constructive outlook.

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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