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Eurozone Crisis Mechanism Provides Boost to Markets; Will it Last?

Eurozone Crisis Mechanism Provides Boost to Markets; Will it Last?

2010-05-10 10:40:00
Joel Kruger, Technical Strategist
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 MORNING SLICES

 

 

FUNDYS
 
The rally, which has now extended beyond 1.3000, has been triggered on the news over the weekend of a Eur440B crisis mechanism and a Eur60B stabilization fund to help keep the Euro propped. However, efforts to intervene on a currency’s behalf do not usually end well, and only really serve as a means to slow depreciation. Despite the latest efforts to offer some form of reassurance to the markets, there is still a high degree of uncertainty and fear surrounding the Eurozone debt crisis. It has not helped that Germany does not want to use their taxes for the bailout, while the people of Greece do not want to see higher taxes and a reduction in wages. As such, we would recommend that traders take the latest Euro bounce with a grain of salt and look for opportunities to sell back into what has been a very intense downtrend. 
 
Relative Performance Versus USD on Monday (As of 10:25GMT) – 

1) EURO +2.02% 
2) CAD          +1.98%
3) AUSSIE +1.80% 
4) KIWI +1.50%
5) STERLING +1.17%
6) SWISSIE          +1.12%
7) YEN          -1.69%
 
Politics have been factoring into price action of late, with Sterling still suffering at the hands of a hung parliament result, while Euro gains (though impressive on Monday) have been slowed somewhat on the back of the news that German Chancellor Merkel recorded her worst ever result in regional elections this weekend. Elsewhere, the Bank of Japan Minutes have been released but have also produced and uneventful result, with the Minutes failing to factor into price action. 
 
While we are not surprised to see the latest developments help to prop currencies overnight, we are somewhat taken aback with the relative strength in the Australian Dollar, despite a weaker round of local data. The single currency has benefited greatly from its economy’s ability to outperform even in the face of a global macro slowdown. But with data starting to show signs of softening, we believe the Australian Dollar could be at risk for some relative weakness over the medium-term. A combination of higher rates and softer data would be an unwelcome scenario that would ultimately put a lot of pressure on the higher antipodean. Overnight data has produced a weaker than expected job ads and business confidence showing. Data in Europe was mixed, with a narrower German trade balance and significantly weaker Eurozone Sentix. 
 
Looking ahead, all eyes turn to the key event risk for the day, in the form of the Bank of England rate decision (unchanged at 0.50% expected) and asset purchase target (unchanged at 200B expected) due at 11:00GMT. Canada housing starts (200k expected) is the only other release for the remainder of the day at 12:15GMT. On the official circuit, Fed Kocherlakota is slated to speak in Minnesota at 17:00GMT. US equity futures have recovered significantly, while oil has also rebounded materially. Gold has seen some profit taking and tracks lower, with market participants getting out of their safe-haven investment on the improved overall sentiment. 
 
GRAPHIC REWIND
dxy5.10

TECHS
  
EUR/USD: The acceleration of declines since breaking below 1.3000 has been intense and the market has now easily broken below what was next support by 1.2885 to trade just shy of 1.2500 thus far ahead of the latest bounce. While our overall bias remains extremely bearish on the pair over the medium-term, daily and weekly studies are in the process of undergoing a very much needed and healthy corrective bounce. Look for the bounce to potentially extend into the 1.3100’s before the next lower top is sought out in favor of bearish continuation. In the interim, we remain sidelined. 
 
USD/JPY: The whipsaw price action from last Thursday’s violent trade has delayed our outlook but certainly does not change our overly constructive bias. The medium-term higher low from early March just over 88.00 remains intact, with the market stalling out ahead of the level, and we now look for a push higher from here back towards and through next key topside barriers by 95.00. Only a break back below 88.00 would negate and give reason for pause. 
 
GBP/USD: The market has finally taken out the key 2010 lows by 1.4780 to confirm a fresh medium-term lower top by 1.5500 and open the next major downside extension towards next critical psychological barriers by 1.4000 over the coming weeks. At this point however, with daily studies looking stretched, we would not rule out the possibility for a consolidation or corrective bounce back towards 1.5000-1.5200 before considering a bearish resumption. 
 
USD/CHF: The overall outlook remains highly constructive and while daily studies do not rule out the possibility for some additional short-term declines to allow for technicals to unwind, any setbacks should be very well supported ahead of 1.0900, in favor of an eventual push into the 1.1500-1.2000 area. Back above 1.1245 opens next upside extension. 
 
 
 
TRADE OF THE DAY
eur2
 
aud2
 
Eur/Usd & Aud/Usd: The overall trend is still grossly in favor of the USD and as such, we will look to take advantage of the extreme rallies on Monday, and use the bounce as an opportunity to trade back into the trend. Both Eur/Usd and Aud/Usd have well exceeded their daily average true ranges and next resistance comes in by some previous support now turned resistance at 1.3115 and 0.9135 respectively. As such, if the market continues to bounce on Monday, we will happily sell just ahead of these levels in anticipation of some bearish continuation. 
 
EUR/USD STRATEGY: SELL @1.3110 FOR AN OPEN OBJECTIVE; STOP 1.3210. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM NY TIME) ON MONDAY. POSITION SIZE SHOULD BE UNLEVERAGED. 

AUD/USD STRATEGY: SELL @0.9130 FOR AN OPEN OBJECTIVE; STOP 0.9230. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM NY TIME) ON MONDAY. POSITION SIZE SHOULD BE UNLEVERAGED. 
 
 
PORTFOLIO OVERVIEW
 
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. 
 
p&l
 
 

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

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