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Currencies Contemplating Formation of Fresh Lower Tops

Currencies Contemplating Formation of Fresh Lower Tops

Joel Kruger, Technical Strategist
  • Month end flows out of the way
  • Euro looking to carve lower top
  • Greek PSI talks still lingering
  • China PMIs better but HSBC PMIs offset
  • Keeping an eye on EUR/CHF and USD/JPY

Month end flows are now behind us and, February kicks off with the currency market trying to decide whether it wants to continue to extend corrective gains against the buck, or of they are finally willing to relent to broader bullish US Dollar momentum. The key to our analysis remains the multi-week EUR/USD chart, which shows the market locked in a very well defined downtrend off the 2008 highs. As such, the current bounce is still only classified as corrective and a fresh medium-term lower top is sought out ahead of the next major downside extension towards our 2012 target by 1.2000.

Fundamentally, Greek PSI talks linger on and the Eurozone economy remains on shaky ground. The latest talk in the region revolves around whether Portugal will now need to seek a second bailout. Elsewhere, China PMIs have come out better than expected, with the print coming in back above the key 50 boom/bust line. However, the data is somewhat offsetting given the HSBC private sector version of the data series which still shows contraction below 50. Also seen dampening sentiment have been comments from China’s FinMin that the economy faces downward risks.

As far as the outlook for the day is concerned, we recommend keeping a close eye on price action in EUR/USD. Look for a close below 1.3040 on Wednesday to open the door for accelerated declines and a bearish resumption in the currency markets in favor of broad based US Dollar buying. However, inability to establish below 1.3040 will keep the pressure on the upside and open the door for additional currency gains. Other markets worth watching also include EUR/CHF which trades dangerously close to its 1.2000 SNB floor, and USD/JPY which threatens a retest and break of the record lows from October.


Currencies_Contemplating_Formation_of_Fresh_Lower_Tops_body_Picture_5.png, Currencies Contemplating Formation of Fresh Lower Tops


Currencies_Contemplating_Formation_of_Fresh_Lower_Tops_body_eur.png, Currencies Contemplating Formation of Fresh Lower Tops

EUR/USD: Although gains in this market have been quite impressive in recent days, the price action is still classified as corrective with the market locked in a broader underlying downtrend. From here we would still leave the door open for additional upside to test the 100-Day SMA by 1.3370, but any additional gains should be well capped below 1.3500 on a daily close basis in favor of the formation of the next major lower top ahead of bearish resumption. Ultimately we see risks for a move back below the 2012 lows at 1.2620 and towards the 1.2000 area over the coming months. Should the market close below 1.3040 on Wednesday, look for a more immediate bearish resumption and lower top by 1.3235.

Currencies_Contemplating_Formation_of_Fresh_Lower_Tops_body_jpy2.png, Currencies Contemplating Formation of Fresh Lower Tops

USD/JPY:The higher platform that we had been looking for by 76.55 has now been broken with the market eyeing a direct retest of the record lows from October at 75.55. Overall, we will still be looking for opportunities to be buyers on dips, with longer-term studies warning of a cycle low at some point over the coming months. Our strategy will be to wait for some oversold daily studies and then look to take another shot at the long side. A break back above 76.80 will be required at a minimum to relieve downside pressures.

Currencies_Contemplating_Formation_of_Fresh_Lower_Tops_body_gbp2.png, Currencies Contemplating Formation of Fresh Lower Tops

GBP/USD: The market has mostly been locked in some sideways chop over the past few weeks with any rallies very well capped by 1.5800 and setbacks supported on dips below 1.5300. Until either side is convincingly broken, we would expect to see additional range trade. Therefore the preferred strategy is to look to sell by the range highs and buy dips to range lows. Only a weekly close above 1.5800 or below 1.5250 would give reason for outlook shift.

Currencies_Contemplating_Formation_of_Fresh_Lower_Tops_body_swiss1.png, Currencies Contemplating Formation of Fresh Lower Tops

USD/CHF: Although our overall outlook remains intensely bullish, the market is in the process of some interday consolidation before the next major upside extension beyond 0.9600 and towards parity. However, with the latest consolidative declines now finally testing the 100-Day SMA, any additional downside should be limited in favor of a fresh upside extension. Ultimately, only a daily close back below 0.9000 would give reason for concern. Alternatively, a close back above 0.9230 would alleviate immediate downside pressures and reaffirm outlook.

--- Written by Joel Kruger, Technical Currency Strategist

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