US Dollar Continues to be Most Attractive Option; Euro Pressures Intensify
- Euro and risk correlated assets remain under pressure into Tuesday
- S&P downgrades Ital by one notch with a negative outlook
- Greek PM is considering referendum on remaining part of Euro common currency
- Aussie weakness offset somewhat by less dovish RBA Minutes
- Reports out of China showing strong support for the US Dollar and US Treasuries
- Reduction of exposure to French banks remains highly concerning
Market participants still remain highly concerned with the outlook for the global economy which continues to show signs of stress. The European debt crisis has been at the center of all of this and the latest S&P downgrade of Italy’s rating by one notch to A/A-1 with a negative outlook has opened yet another wave of liquidation in the Euro and risk correlated assets. Also seen weighing on the Euro early Tuesday have been reports in a Greek newspaper that the Greek PM is considering a referendum on whether the country should remain a part of the Euro common currency. According to the article, the Greek PM is using the prospective vote as a mandate for the government to be able to carry out the austerity measures dictated by the IMF/EU bailout package.
The higher yielding New Zealand Dollar has been the hardest hit on the day thus far, with the currency underperforming even against the even higher yielding Aussie after the RBA Minutes came out less dovish than many had expected. Nevertheless, all of the major currencies are still lower against the buck on the day, which continues to find favor as the primary currency of choice in the current market environment.
China has been a major supporter of the buck in recent days and the latest article out from the People’s Daily cites government researches who conclude that the US Dollar is the safer option relative to the Euro at present, while a researcher in the finance ministry has said that there are very few alternatives to US Treasuries at the moment. Chinese actions have been offering an additional weight on the Euro on another report that a big state bank has halted trading fx spot, forwards and swaps with several European banks. The banks on the list don’t help to calm fears of liquidity freezes at the French banks, with SocGen, Credit Agricole and BNP Paribas all named in the report. This story follows yet another report that Siemens has also been distancing itself from exposures after withdrawing Euro500M from French banks about two weeks back.
On the strategy front, nothing has changed and we continue to recommend looking for opportunities to buy the USD and sell risk correlated assets. However, trading conditions remain quite choppy as the markets consolidate their latest moves and entry points for these fresh positions need to be more carefully timed. The key level to watch in the Euro comes in by 1.3500, and a break back below this level will likely accelerate declines and open a fresh drop exposing the 1.3000 handle further down.
EUR/USD: The sharp pullback below the July lows and establishment below the 200-Day SMA solidifies the prospects for the carving of a major lower top on the monthly chart which now ultimately projects additional declines down towards the 1.2000 area over the coming weeks and months. The latest inter-day rally off of the 1.3500 area lows has stalled out within our projected lower top region between 1.3835 and 1.4055 and a break back below 1.3500 will confirm the lower top at 1.3940 and accelerate declines down towards 1.3000. Ultimately, only back above 1.3940 delays outlook and gives reason for pause.
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. From here, we look for the establishment back above the 50-Day SMA at 77.40 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.
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 1.5780 opens the door for a pick-up in bearish momentum towards key support by 1.5345 further down. Any interday rallies are expected to be well capped below 1.6000, while ultimately, only back above 1.6500 would give reason for concern.
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
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