Volatilty Expected on Batch of Data, LTRO, Bernanke and End of Month Flows
- End of month flows could influence trade
- Euro risks still tilted to upside with focus on establishment above 1.3500
- Yen stabilized after bout of intense selling
- Global equities remain very well supported but still see risks for pullback
- ECB LTRO on Wednesday remains in focus
Wednesday should be a volatile day in the markets, with investors having to digest a large batch of economic data, absorb the two major event risks for the day in the form of the ECB LTRO and Fed Bernanke speech, and also contend with end of month flow related price action. At this point, the Euro remains very well supported and continues to press higher in an attempt to establish above 1.3500 and push towards the 200-Day SMA just over 1.3700. However, overall, any additional strength in EUR/USD or risk correlated assets once the 1.3600-1.3700 area is tested should prove limited in favor of a bearish resumption resulting in broad based USD buying, risk liquidation and a pullback in global equities.
Retail positioning shows traders long the US Dollar against all of the major currencies, and we fear these traders could still feel a little more pain before things turn around. At this point, we recommend staying on the sidelines and waiting for a clearer opportunity to present. On the data front, Australian releases were overall unimpressive overnight, with construction work done and new home sales coming in a good deal weaker than previous. However, the Australian Dollar has disregarded the local data for the time being, with broad currency positive flows dominating at the moment. Nevertheless, we anticipate a tide shift on the horizon and will be looking for Aussie relative underperformance going forward.
EUR/USD: The latest break and daily close above 1.3325 ends a recent bout of multi-session consolidation and now opens the door for the next upside extension towards the 1.3600-1.3700 area over the coming days. While our broader outlook remains aggressively bearish with a downside target by 1.2000 in 2012, the 2012 correction within the broader downtrend off of the 2008 record highs is still in play, and shows potential for additional gains. Still, we prefer to remain sidelined as our bearish bias has us looking for opportunities to sell rather than attempting to buy into a corrective rally within a broader downtrend. We would also not rule out the possibility for a topside failure ahead of 1.3600-1.3700, but given the latest break, the risk for additional gains seems like a very real possibility that needs to be considered and anticipated. Back under 1.3350 will be required at a minimum to alleviate immediate topside pressures.
USD/JPY:The market is doing a good job of showing the potential for the formation of a major cyclical bottom after taking out the 200-Day SMA and now clearing psychological barriers by 80.00 for the first time in 6 months. This further solidifies basing prospects and we could be in the process of seeing a major bullish structural shift that exposes a move towards 85.00-90.00 over the coming months. At this point, only back under 77.00 would delay outlook and give reason for concern. However, in the interim, it is worth noting that gains beyond 80.00 over the coming sessions could prove short-lived with technical studies rolling from their most overbought levels in over 10 years and warning of some additional corrective declines towards previous resistance now turned support by 78.00 before bullish continuation.
GBP/USD: The market has now broken above the 200-Day SMA for the first time in several months and this now warns of the potential for additional upside above 1.6000 over the coming sessions. Still, we see any additional rallies as being very well capped ahead of 1.6200 and our strategy is to look to fade overdone intraday rallies above 1.6000 in favor of an underlying bearish resumption. Conservative traders will want to wait for confirmation on a break and close below 1.5800.
USD/CHF: The market remains under some intense pressure since topping out by 0.9600 back in late December/early January, and risks from here are for deeper setbacks over the coming sessions, potentially towards the 200-Day SMA by 0.8800 before eventually stalling out. However, our broader outlook remains bullish and we will be on the lookout for the formation of the next medium-term higher low ahead of a fresh upside extension back through 0.9600 and above parity. Ultimately, only a break back below 0.8550 would compromise outlook and give reason for pause.
--- Written by Joel Kruger, Technical Currency Strategist
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