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Euro Breaks to Fresh 2010 Lows; Contemplates Next Move

Euro Breaks to Fresh 2010 Lows; Contemplates Next Move

2010-05-14 06:25:00
Joel Kruger, Technical Strategist
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MORNING SLICES (Early Edition)

 

FUNDYS
 
Sterling has also been a big loser of late with the single currency underperforming against all other major currencies on the back of some weaker trade data and commonalities with the Eurozone, in that the rating agencies have also asked the UK to implement fiscal reforms. Some late Thursday warnings on the outlook for the global economy from the likes of Ex-Fed Chair Volcker and institutional bond giant Pimco, have not done anything to help stall the USD safe haven demand. 
 
Relative Performance Versus USD on Friday (As of 6:15GMT) – 

1) EURO +0.11% 
2) SWISSIE         +0.09%
3) YEN          -0.06% 
4) AUSSIE -0.11%
5) STERLING -0.16%
6) CAD         -0.24%
7) KIWI -0.36%
 
The commodity currencies remain relatively bid, with cross rates like Eur/Aud, Eur/Nzd, Eur/Cad, Gbp/Aud, Gbp/Nzd, and Gbp/Cad, all under some intense pressure, trading by multi-year lows. We would however recommend that commodity bloc bulls proceed with caution at current levels, as it would not be uncommon for these currencies to start take a serious hit in the event of another escalation in the global macro economic crisis, or even on the back of some tightening measures from China. Nevertheless, for now, the long commodity currency plays seem to be favored on more attractive fundamentals. Kiwi is the weakest of the three commodity currencies on Friday, as New Zealand retail sales data has come in well below consensus estimates. 
 
Elsewhere, the Eur/Chf cross is now locked in some very tight trade just over 1.4000, and it has become clear yet again that the SNB is actively defending the barrier. The central bank remains committed to preventing an excessive appreciation in the Franc, and will continue to show its hand in an effort to slow and market determined desire to see the local currency trade higher. It would be hard to see a situation on Friday where 1.4000 is not more clearly taken out to the downside, with stops eyed below the figure. 
 
In our opinion, the greater risk to the next wave of substantial SNB intervention will come in a net USD bearish environment. If the Franc continues to remain under pressure against the buck, it at least given the SNB some form of breathing room. But should currencies start to rebound, the threat of Franc appreciation against both the buck and Euro should prove too much to ignore. It will be interesting to see how things play out with the Eur/Chf cross trading by record lows. 
 
Looking ahead, there are no major releases due in the European session, with market participants left to trade on broader global macro developments and themes. The key release on the day doesn’t come until the North American open, in the form of US retail sales (0.5% expected) due at 12:30GMT. Also due at 12:30GMT are Canada manufacturing shipments (1.0% expected) and Canada new motor vehicle sales (-4.0% expected). US capacity utilization (73.8% expected) and industrial production (0.7% expected) are then out at 13:15GMT, with University of Michigan confidence (73.5 expected) at 13:55GMT. Business inventories (0.4% expected) caps things off for the day at 14:00GMT. On the official circuit, Fed Evans speaks in Illinois at 17:40GMT. US equity futures are relatively flat in early Friday trade, while commodities are mixed with oil lower and gold moderately higher. 
 
TECHS
  
EUR/USD: The latest bout of consolidation has been broken with a fresh lower top by 1.3100 being confirmed following the drop to fresh 2010 lows below 1.2530 on Thursday. From here, next key support comes in by 1.2330, which represents the 2009 lows. A daily close back above 1.2680 will be required at a minimum to delay the bearish momentum, while ultimately, only back above 1.3100 will shift the short-term structure.  
 
USD/JPY: The whipsaw price action from violent trade in early May 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 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 additional consolidation above 1.4500 (on a close basis) before the market sets to break lower. Any inter-day rallies should be well capped ahead of 1.5000. 
 
USD/CHF: The overall outlook remains highly constructive and while daily studies do not rule out the possibility for some additional short-term consolidation 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. A close back above 1.1245 opens next upside extension. 
 
 
FLOWS
 
Offers is Usd/Jpy from exporters; buy-side demand on dips. Spec accounts book profits on Aussie shorts; model fund demand. Canadian importer buying Usd/Cad; Canadian fund looking to sell. Central bank activity in Eur/Chf by 1.4000. Heavy stops below 1.2500 in Eur/Usd
 
 
 

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

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