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Euro Plunges to Fresh 2010 Lows As Fears Over Stability in the Region Escalate; Norges Bank Set to Decide on Rates

Euro Plunges to Fresh 2010 Lows As Fears Over Stability in the Region Escalate; Norges Bank Set to Decide on Rates

2010-03-24 10:45:00
Joel Kruger, Technical Strategist





Although we have now seen France jump on board with Germany in calls for IMF involvement in a Greek rescue plan, traders have interpreted this as more of a negative, with the development reflecting the Eurozone’s inability to independently handle its own matters. As such, it has been no surprise to see the Euro easily break to fresh 2010 lows below 1.3400, with setbacks accelerating ahead of the North American open as rumors are confirmed that Fitch has downgraded Portugal to AA- with an outlook that remains negative. Interestingly enough, it is not the Euro that is the weakest major currency on the day and instead it is the Swissie that has relatively underperformed, even in the absence of any official central bank intervention. After breaking to fresh record lows by 1.4230 earlier today, the Eur/Chf cross has since bounced and now trades back towards 1.4300, potentially looking to put in the first positive close in 9 days.

Relative Performance Versus USD on Wednesday (As of 10:25GMT) –

1)    STERLING    -0.54%
2)    CAD               -0.55%
3)    AUSSIE         -0.81%
4)    KIWI               -0.87%       
5)    YEN                -0.88%
6)    EURO             -1.04%   
7)    SWISSIE       -1.05%

Next to Swissie and Euro, the Yen has also been very well offered on Wednesday, with the market surging to clear some key short-term stops above 91.10. A better than expected overnight unadjusted trade surplus out from Japan has failed to materially influence price action. The New Zealand Dollar is the weakest commodity currency on the day to this point, with the antipodean getting hit hard on broad based USD demand, some very disappointing current account numbers and news that rating agency Fitch would not be looking to upgrade the country’s negative outlook. Although though the Australian Dollar has been tracking lower on the day in response to broader price action, the higher yielding currency has managed to retain some mild bids on the back of better secondary data in the form of job vacancies.

Data in the European session has all been Eurozone centric with a combination of German and EMU data coming in on the whole better than expected. However, market participants have clearly been focused on more pressing and overriding concerns in the region. Elsewhere, Fed Yellen was out in Asia with some dovish talk after saying that a lower USD could actually be beneficial to the economy, with the weaker currency helping to bolster exports. However, Yellen also conceded that accommodation would easily be removed as soon as the time was right.

US equities have managed to provide some relief in an otherwise gloomy environment, with the not as bad US housing data from Tuesday helping to support equity bids. But it remains to be seen whether the stock market can hold onto gains with the markets seemingly retreating back into a flight to safety trading environment. Finally, ongoing tensions between the US and China relating to the Yuan exchange rate remain in focus and could be on the verge of escalating over the coming days as pressures for China to implement change continue to mount.

Looking ahead, there is still some non-North American event risk in the form of the Norges Bank rate decision at 13:00GMT. A slower than expected economic recovery, signs of weakness in the manufacturing sector, concerns over the appreciation in the NOK, and deterioration in the economic fundamentals of trading partners, are all factors that will heavily influence the Norges Bank when it decides on rates. All of the above should produce a result in which the central bank leaves rates on hold at 1.75%. The Norges Bank had been the first major central bank to reverse monetary policy on solid prospects for recovery within a local economy that had held up quite well throughout the global downturn. However, things have slowed down of late and this could ultimately put some pressure back on the Krone which looks to be due for some medium-term corrective declines.  Some key data released out of the region earlier today includes an unchanged and better than expected unemployment rate in Norway at 3.3%, and some consumer confidence data in Sweden that has also exceeded expectations.

On the North American docket, US mortgage applications kick things off at 12:00GMT, with the more highly anticipated durable goods (0.7% expected) due at 12:30GMT. New home sales (315k expected) then round things out at 14:00GMT. US equity futures point to a lower open, while commodities are also well offered led by weakness in crude oil.




EUR/USD Has finally broken down below the multi-day consolidation lows (fresh 2010 low) to likely confirm a bearish continuation and open the next major downside extension towards next key psychological barriers by 1.3000 over the coming days. Daily studies have had time to unwind from oversold levels following the major drop in January and February, and there is plenty of room for studies to track lower which is supportive of the prospects for renewed weakness. In the interim, key short-term resistance comes in by 1.3570, with only a break back above this level to take the immediate pressure off of the downside.

USD/JPY Has been very well supported on dips towards 88.00, and we look for the most recent sharp rebound to open additional upside over the coming weeks back above critical medium-term resistance at 93.75. The latest impressive rally from 88.00 reaffirms our outlook and only a close back under 88.00 would ultimately negate and give reason for pause.  Consolidation over the past several days leaves us eying shorter-term range support by 89.60, and any intraday setbacks are expected to be well supported ahead of this level. Back above 91.10 should NOW accelerate towards 92.15 which guards against 93.75.

GBP/USD The market looks to be in the process of a bearish consolidation, with an eventual break below 1.4780 to confirm and open the next major downside extension. The 10-Day SMA has been below the 20-Day SMA for a good portion of 2010, and with the shorter-term SMA now kissing the 20-Day, we could once again be on the verge of another major decline. Key short-term resistance comes in by 1.5200, with a break back above this level required to take the immediate pressure off of the downside.

USD/CHF The overall structure is constructive with a medium-term higher low now sought out by 1.0500 in favor of the next major upside extension beyond 1.0900 and towards 1.1500 further up. Ultimately, it is the 200-Day SMA that we use as our gauge for direction, with the longer-term SMA, which comes in just under 1.0500, expected to continue to prop setbacks. So long as the market holds above this SMA, we recommend looking for opportunities to be long. Wednesday’s  break back above 1.0670 should now accelerate gains. 



European name and leveraged account sales of Gbp/Usd; corporate accounts on the bid. Eur/Usd sees heavy selling through 1.3400 after DNT triggers; French name looking to buy lows. M&A related Yen flows on Dai-Ichi Life's IPO. Japanese investment buyers of Eur/Jpy. Corporate hedgers leading the rally in Usd/Cad. Central bank demand for Eur/Gbp; investment house offers.


Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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