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Euro Continues To Ignore Oversold Readings; Aussie and Cad to Fresh 2010 Lows

Euro Continues To Ignore Oversold Readings; Aussie and Cad to Fresh 2010 Lows

2010-05-25 11:10:00
Joel Kruger, Technical Strategist



We have been hearing talk of real money accounts in the process of diversifying out from Euros, and it is simply amazing to hear talk of diversification from a currency that is not the USD; quite a departure from several months ago. Overseas equities have been slammed with the Nikkei having opened up at its lowest level in over 5 months, and the FTSE easily trading back below 5000. The triple digit sell-off on Wall Street has not helped matters and currencies across the board are back under pressure against the safe haven USD flows. 
Relative Performance Versus USD on Tuesday (As of 11:00GMT) – 

1) YEN         +0.94% 
2) STERLING -0.74%
3) SWISSIE         -0.80% 
4) KIWI -1.30%
5) EURO -1.45%
6) CAD         -1.65%
7) AUSSIE -1.94%
To make matters worse, North and South Korea tensions have escalated over the past few hours, with Kim Jong Il calling his troops to be “battle ready.” Equities and currencies have not been the only markets hit, with oil also suffering at the hands of the elevated risk aversion and dropping to trade below $70. Japan’s FinMin Kan has been out saying that Europe faces deep rooted issues and he hopes that the turmoil will ease and the markets will calm, while Japan’s strategy minister has taken things a step further and said that the risks from the European problems to the global and Japanese economies are “extremely big.” 
The Euro has been crushed with the market dropping by well over 200 points and taking out 1.2200 barriers to put the immediate focus back on the recent 2010 lows by 1.2145. Talk of the need to use the ECB emergency lending facility in light of the Spanish banking woes, and the news that German economic minister has rejected the Eurobond proposal for the EU have not helped matters and only worsened the state of investor confidence and elevated risk aversion all the more. 
Surprisingly, Sterling managed to hold up relatively well, with the as expected GDP result and improvement from the previous print, helping to drive the relative strength. However, the commodity currencies could not avoid the massive appeal for the USD, with Aussie and Cad slipping to fresh 2010 lows in European trade. The Yen crosses were also under intense pressure, with Eur/Jpy adding to the list of yearly lows. 
Looking ahead, the North American calendar is quite busy, with Case Shiller kicking things off at 13:00GMT, followed by consumer confidence (59.0 expected), the house price index, and Richmond Fed manufacturing (25 expected) at 14:00GMT. Crude inventory data is out into the afternoon at 20:30GMT. On the official circuit, Fed Bullard is set to speak in London at 15:15GMT. US equity futures have been hammered and point to a lower open of more than 2%, while oil is also devastated on correlated themes. Gold has held up quite well on its safe haven appeal and only track marginally lower.  

EUR/USD: Although the market has bounced quite significantly out from the recent 1.2145 2010/multi-year lows, into the 1.2600’s thus far, the overall trend remains intensely bearish and any rallies are still classed as corrective. Look for a lower top to now carve out below 1.3100, ideally by 1.2670, ahead of the next fresh downside extension back towards and eventually through 1.2145. Below 1.2145 exposes psychological barriers at 1.2000 further down. Ultimately, only back above 1.3100 would negate bearish outlook and give reason for pause. 
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 days. At this point however, with daily studies looking stretched, the market has entered a period of consolidation to allow for daily studies to unwind, and we would not rule out the possibility for a short-term corrective bounce back towards 1.4700-1.4900 before bearish trend resumption. It is worth noting that the 78.6% fib retracement off of the major 2009, 1.3500-1.7050 move, has been tested in the 1.4200’s, and this area could provide the necessary support to help trigger a bounce.  
USD/CHF: The overall outlook remains highly constructive and while daily studies do not rule out the possibility for some form a pullback to allow for technicals to unwind, any setbacks should be very well supported ahead of 1.1200, in favor of an eventual push towards 1.2000. In the interim, short-term support comes in by 1.1430 and a break and close below will be required to trigger the onset of a short-term corrective pullback. 
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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