Currencies Locked in Tight Jittery Trade Ahead of Spanish Auction
- Investors squarely focused on Spanish auction results
- Risk for letdown seem to be low; expect results to be well received
- Aussie data continues to show signs of weakness
- Keeping an eye on Swiss Franc
- Bank of Japan committed to monetary easing
Markets seem to be a little jittery heading into Thursday trade, and although most currencies are locked in a tight consolidation, there is a sense that we could soon see a major breakout. The European economic calendar is all but empty, but that will be just fine, with investors squarely focused on the highly anticipated Spanish bond auction results. The build-up ahead of the event risk and reaction post, will likely dictate the flow of trade for the remainder of the day, and could very well inspire the aforementioned breakout. Spanish yields have been tracking at uncomfortably elevated levels around 6% and any sign of a poorly received auction could open a move towards the 7%, a level which saw other PIG (Portugal, Ireland, Greece) nations needing bailouts.
While an unsuccessful auction result would jive with our core outlook, which tends to favor further liquidation of the Euro and risk correlated assets, we have a hard time accepting that the source for the next bout of risk liquidation will be driven off of today’s auction result. Simply put, we feel that there is quite a lot of pressure on the Eurozone right now, and with so much attention on today’s auction, it would likely be disastrous should the auction fail. Instead, we see a situation where the auction is well received as local officials attempt to ensure success in light of the downside risks to failure, and the Euro temporarily finds renewed bids that keep the single currency supported. At that point, we will then look to take advantage of any unexpected Euro rallies and look to build into our core Euro short position, with underlying fundamentals still unfavorable in the region. If we are wrong and the auction is in fact unsuccessful, then we will stand aside and wait to sell the Euro into the first post auction rally.
Elsewhere, it is worth keeping an eye on the EUR/CHF cross rate after SNB Jordan was finally announced as central bank chief on Wednesday. The central bank is committed to capping any additional Franc gains, and should we see any pickup in risk off trade, it could once again force the SNB into action, with the cross rallying towards 1.2100. The key level to watch, in our opinion, comes in at 1.2050, with a break required to accelerate gains. Other recent developments include more weakness in Australian data as highlighted by the latest NAB business confidence reading, and comments from the Bank of Japan Governor who said the central bank is committed to monetary easing.
EUR/USD: The latest round of setbacks have stalled ahead of some key multi-week support by 1.3000 and from here we still can not rule out risks for additional consolidation above 1.3000, before considering bearish resumption. Ultimately, any rallies towards 1.3300 should be well capped, while a break and daily close back under 1.3000 would accelerate declines to the early 2012 lows at 1.2660.
USD/JPY: The latest pullback from the 2012, 84.20 highs was viewed as corrective and it looks as though the market has finally found some solid support ahead of 80.00. The setbacks have stalled by the top of the daily and weekly Ichimoku clouds and we look for the formation of a fresh medium-term higher low somewhere around 80.00 ahead of the next major upside extension back towards and eventually through 84.20. Overall, this is a market that has undergone a major structural shift in recent months and we now see the pair in the early stages of a longer-term up-trend. Ultimately, only a weekly close back under 78.00 would negate.
GBP/USD: The recent break back above 1.6000 now opens the door for fresh upside towards the October 2011 peak at 1.6150. However, any additional gains beyond 1.6150 should prove hard to come by, and we once again see risks for a bearish reversal in favor of renewed weakness back down towards key support by 1.5800. A break and close below 1.5800 will then accelerate declines. Ultimately, only a weekly close above 1.6150 would negate underlying bearish bias.
USD/CHF: Our core constructive outlook remains well intact, with the latest setbacks very well supported by psychological barriers at 0.9000. It now seems as though the market could be looking to carve a fresh higher low, and we will be watching for additional upside back towards the recent range highs at 0.9335 over the coming sessions. Above 0.9335 should accelerate gains towards the 2012 highs by 0.9600 further up. Ultimately, only back under 0.9000 delays and gives reason for pause.
--- Written by Joel Kruger, Technical Currency Strategist
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