Merkel-Sarkozy Comprehensive Plan Talk Bolsters Sentiment For Now
- Merkel-Sarkozy proposed plan well received this far by markets
- Solid US employment data also factoring into better start to week
- Italian and Spanish downgrades brushed aside and forgotten
- Belgium and Luxembourg agree on recue plan for Dexia
- UK Cameron out offering his take on the eurozone crisis
- Bank of England Weale leaves door open for additional QE expansion
Risk sentiment has been given a bit of a boost into the early week, with currencies, equities and commodities all tracking decently higher into European trade. Markets had initially been weighed down on Friday following the news of Fitch downgrades to Italy and Spain, but were able to shrug off the downbeat development after taking more time to fully digest solid US employment data. Also seen helping to accelerate rallies in risk correlated assets was the weekend story that Germany’s Merkel and France’s Sarkozy had promised the delivery of a comprehensive plan by the end of the month to rid the eurozone of its debt crisis.
Merkel and Sarkozy said their goal was to come up with a sustainable answer to Greece’s woes, look to find a way to recapitalize European banks, and plan for a deepening economic coordination between the eurozone’s members by the November G20 summit. Elsewhere, Belgium and Luxembourg have agreed on a rescue plan for Dexia, but any potentially positive price action resulting from this headline has been offset by Moody’s, with the rating agency placing Belgium’s ratings on review for a possible downgrade.
Still, we continue to warn against buying into these risk rallies, as the overall state of the markets remains highly fragile and much work needs to be done before any sustainable economic recovery can be achieved. UK’s Cameron was out recently echoing these sentiments after saying that European leaders needed to adopt a “big bazooka” approach to resolving the crisis. Cameron added that time was short and that the eurozone was contributing more to the overall uncertainty in the global economy than any other region. Cameron went on to suggest the need for a substantial increase in the firepower of the EFSF, while at the same time urging an improvement in the banking sector and governance of the eurozone.
Some would however recommend that Cameron spend more time focused on his own economy with UK fundamentals also showing signs of additional stress. The normally more hawkish BOE Weale was out commenting that there is still more room for additional quantitative easing expansion after citing a sharp deterioration in the UK’s prospects.
At this point, technical studies still classify the risk rallies as corrective, and the overall trend remains risk negative. The Euro is in the process of correcting out from the recent lows by 1.3145, and while the markets holds below 1.3690, a fresh lower top is sought ahead of the next downside extension below 1.3145. Market participants should take their cues from this market and only back above 1.3690 would compromise the current structure. Looking ahead, the economic calendar is quite busy in European trade, with eurozone sentix highlighting the docket. However, all is quiet in North America, with the US off for a long holiday weekend.
EUR/USD: Setbacks have stalled out for now by 1.3145 with the market in search of a fresh lower top below 1.3690 ahead of the next major downside extension below 1.3000. Overall, our outlook remains quite bearish and we continue to project deeper setbacks into the lower 1.2000’s over the coming weeks. Ultimately, only back above 1.3690 would delay outlook and give reason for pause.
USD/JPY:Has been locked in an intense consolidation in the 76.00’s over the past several weeks, since breaking to fresh record lows by 75.95, and while we would not rule out the possibility for a continuation of the downtrend, any additional declines are seen as limited. Longer-term technical studies are looking stretched and we anticipate the formation of a major base in favor of an intense upside reversal. Look for a break back above the August highs at 80.25 to confirm outlook and accelerate. In the interim, any dips towards 75.00 are viewed as an excellent and compelling buy opportunity.
GBP/USD: Although the overall structure remains bearish, setbacks have been very well supported around the 1.5300 area and the market is currently in the process of consolidating the recent declines. We would however warn of the potential formation of a double bottom on the daily chart, with a break and daily close back above the neckline at 1.5715 to confirm the formation and expose a more significant rally back above 1.6000. However, inability to establish above 1.5715 will keep the bearish structure intact and open the door for a bearish resumption back towards and below the recent range lows at 1.5270.
USD/CHF: Although daily studies are showing overbought and warn of the potential for a short-term corrective pullback, the recent daily close back above the 200-Day SMA is significant and now opens the door for the next upside extension towards 0.9500 further up. Medium-term and longer-term studies still show plenty of room for upside ahead, while the short-term outlook also remains constructive above 0.8645. Ultimately, only back under 0.8645 delays short-term outlook and would open the door for a more sizeable corrective decline. Still, even at that point, buying into dips would be the preferred strategy.
AUD/USD:The market is finally confirming the formation of a major top by post float record highs set back in the summer at 1.1080, with the latest break back below parity confirming our bearish outlook and opening the door for more significant declines going forward. From here we look for any rallies to be well capped below parity on a weekly close basis, with a break below 0.9000 to accelerate declines and expose 0.8500 further down.
NZD/USD:The market is finally confirming the formation of a major top by post float record highs set back in the summer at 0.8845, with the latest break back below 0.8000 confirming our bearish outlook and opening the door for more significant declines going forward. From here we look for any rallies to be well capped below 0.8000 on a weekly close basis, with a break below 0.7100 to accelerate declines and expose 0.6600 further down.
USD/CAD:Inability to break to fresh record lows below 0.9000 in 2011 has opened the door for a more meaningful bullish reversal, with the market now carving out what we believe to be a significant longer-term base. From here, any setbacks should be well supported by parity, with a fresh higher low sought out by the psychological barrier ahead of the next major upside extension towards 1.1000-1.1500 further up.
--- Written by Joel Kruger, Technical Currency Strategist
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