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EUR/USD Buy Recommendation Issued @1.2890; Technical Studies Warn of Short-Term Exhaustion

EUR/USD Buy Recommendation Issued @1.2890; Technical Studies Warn of Short-Term Exhaustion

2010-05-05 10:04:00
Joel Kruger, Technical Strategist




The threat of the Greek contagion into other economies (Spain the latest), softer Chinese data and a tightening from the PBOC, and a criminal probe into Goldman Sachs, are all negative events spread out across the globe that have weighed heavily on risk appetite. As a result, we have seen a massive flight to safety in the form of the USD, with the Euro, Swissie and even Yen all taking considerable hits and tracking to fresh 2010 lows against the Greenback. Even the commodity bloc currencies have been influenced, with Aussie, Cad and Kiwi all finding heavy offers in recent. The VIX jumped up by close to 20% on Tuesday and market participants are feeling a similar sense of panic as had been felt post-Lehman. 
Relative Performance Versus USD on Wednesday (As of 9:30GMT) – 

1) AUSSIE         +0.13% 
2) STERLING +0.06%
3) CAD         -0.05% 
4) EURO -0.07%
5) SWISSIE         -0.08%
6) YEN          -0.11%
7) KIWI -0.15%
While most of the major currencies are trading flat against the buck on Wednesday thus far, the Aussie has managed to outperform on a relative basis, with the antipodean finding some bids on the back of a solid round of local data, with the performance of services index and building approvals exceeding expectations. Sterling has also managed to hold up quite well, aided by a much stronger than expected UK CIPS construction survey. Eurozone data has failed to materially influence price action, after both German and EMU PMIs came in a tad firmer than expectation, while Eurozone retail sales were somewhat mixed. 
In our opinion, the USD is now very well positioned to extend gains across the board, with the single currency potentially benefitting in both risk averse and risk inclined markets. While a risk averse market should force USD appreciation on a flight to safety, any improvement in risk appetite could now also benefit the buck, which stands to gain on a Fed that is required to adopt a more hawkish monetary policy and thereby look to raise rates, which would in turn narrow yield differentials back in favor of the Dollar. As such, we remain USD bulls and would look to continue to buy the Greenback over the medium-term. 
Looking ahead, US Challenger job cuts are due at 11:30GMT, followed by ADP employment (30k expected) at 12:15GMT. US ISM non-manufacturing (56.0 expected) is due at 14:00GMT, with some oil inventory data capping things off at 14:30GMT.  On the official circuit, Fed Rosengren is slated to speak on the topic of housing in Boston at 12:30GMT. US equity futures and commodities are seen consolidating near yesterday’s closing levels.

EUR/USD (See Below). 
USD/JPY: The market has managed to break to fresh 2010 highs beyond 94.75, to confirm a fresh higher low by 91.60, and expose the next upside extension towards the 98.00 area over the coming sessions. The overall structure remains highly constructive, with the pair looking like it is in the process of carving out a major longer-term base. Look for any intraday setbacks to now be well supported in the 93.00 area, with a close above 95.00 to accelerate. 
GBP/USD: Key support by 1.5130 has been taken out, and the close below this level on Tuesday helps to reaffirm bearish outlook. From here, any rallies should be well capped by 1.5350, with a lower top sought out ahead of the next major downside extension to retest next key support by the 2010 lows at 1.4780 further down. Short-term levels to watch above and below come in by 1.5265 and 1.5045 respectively. 
USD/CHF: The overall structure is constructive with a medium-term higher low now sought out by 1.0435 in favor of the next major upside extension towards 1.1500. Tuesday’s impressive upside beyond 1.0925 confirms bias and we look for any setbacks to now be well supported by the previous resistance at 1.0925. 
Option barriers at 95.00 in Usd/Jpy; stops below 94.25. Real money, sovereign account, Asian central bank, Swiss and Middle Eastern bids in Eur/Usd below 1.3000. Model accounts bidding Aud/Usd. 
Eur/Usd: Although the trend has been intensely USD bullish with the market dropping to fresh 2010 lows below 1.3000 thus far, we are sensing that the near-term risks are for a corrective bounce given stretched daily and weekly studies. Next key support comes in by 1.2885, which represents the April 2009 lows, and while we expect this level to be tested, it also may offer itself as a formidable spot for the base of the next medium-term lower-low. STRATEGY: BUY @1.2890 FOR AN OPEN OBJECTIVE; STOP 1.2790. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE ON WEDNESDAY. POSITION SIZE SHOULD BE 3X TOTAL EQUITY.
P&L Update and Overview: Many of you have been asking for a way to better track trading results and open positions. In response to these requests and in an effort to be fully transparent, a simulated portfolio has been created to track our results on a daily basis. We are pleased to announce that our model generated returns of 50% in 2009. The return on equity curve seen below has now been reset for 2010. 

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

If you wish to receive Joel's reports in a more timely fashion, e-mail instructor@dailyfx.com and you will be added to the "distribution" list.



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