Euro Attempting to Turn Corner Following Double Bottom Trigger
- Short covering rally begins in Eur/Usd
- Upbeat Draghi and solid auction results also prop
- Commodity bloc becomes less desirable
- Yen crosses at risk for upside over coming sessions\
A combination of early 2012 short-covering, some better than expected Eurozone auction results and a relatively upbeat ECB President Draghi, have all been attributed to the latest gains in the Euro, which stands out as a relative outperformer over the past few sessions. The break in Eur/Usd back above 1.2820 has also triggered a technical double bottom on the daily chart which should now open a measured move upside objective towards the 1.3000-1.3200 area. While we would not be getting overly bullish the Euro against the US Dollar, we do however feel that there could be some excellent opportunities to play the Euro against some of the other key currencies.
Eur/Jpy has also triggered a double bottom on the daily chart, but in this case, there could be a lot more room to run given how stretched this market has been in recent weeks and the fact that it is below major psychological barriers at 100.00 and by multi-year lows. Eur/Aud and Eur/Nzd are also showing signs of reversal from record lows, but again, we would probably advise waiting for a little more confirmation before getting aggressive with counter-trend positions. Still, we do like the idea of playing the upside in the Euro, particularly against these commodity currencies, given the fact that any stabilization within the Eurozone, will likely start to put a lot more pressure on Aussie and Kiwi going forward.
Should the Euro region begin to stabilize, then all those who had been aggressively positioning away from the Euro will look to build back into the single currency. Conversely, should the markets return to a risk off environment that is less Euro specific and more global macro, we could just as easily see underperformance in the commodity currencies given their traditional positive correlation to risk. In our opinion, the latter scenario is probably the more realistic of the two, where risk off trades works its way back into the markets but draws more unwelcome attention to economies that have not yet been entirely exposed to the global slowdown.
We believe that the global recession will soon enter a third and final phase which will originate in China and spread to the commodity economies and emerging markets. Already over the past couple of days we have been hearing fresh rumors of further accommodation out of China, and more recently, Australia’s Financial Sector Union has warned local baking executives to prepare for the worst following the news from ANZ that it will aggressively reduce its workforce over the next 6 months. US equity futures and gold prices are relatively unchanged, while oil has managed to mount a decent recovery.
EUR/USD: The recent break back above 1.2820 has triggered a double bottom on the daily chart, which opens additional corrective activity from here back into the 1.3000-1.3200 area over the coming sessions. Ultimately however, we retain a bearish bias and would be looking for opportunities to fade rallies in favor of underlying bear trend resumption and the next major downside extension below 1.2500.
USD/JPY:Despite the latest pullbacks, we continue to hold onto our constructive outlook while the market holds above 76.55 on a daily close basis. We believe that any setbacks from here should be limited in favor of a fresh upside extension back towards 79.55 over the coming weeks. Look for a break above 78.30 to confirm and accelerate, while only a daily close below 76.55 negates and gives reason for pause.
GBP/USD: The market has mostly been locked in some sideways chop over the past few weeks with any rallies very well capped ahead of 1.5800 and setbacks supported ahead of 1.5270. Until either side is broken, we would expect to see additional range trade. Therefore the preferred strategy is to look to buy range dips and sell by range highs. Only a weekly close above 1.5800 or below 1.5250 would give reason for outlook shift.
USD/CHF: This market remains very well supported on any form of a dip and looks poised for a fresh upside extension towards 1.0000 over the coming weeks. Look for a daily close back above 0.9600 to confirm and accelerate. Ultimately, any dips should be used as formidable buy opportunities, while only back below 0.9000 would ultimately threaten the recovery outlook.
--- Written by Joel Kruger, Technical Currency Strategist
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