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Euro Considers Possibilities of Bearish Continuation or Short-Term Bounce

Euro Considers Possibilities of Bearish Continuation or Short-Term Bounce

2010-05-27 09:15:00
Joel Kruger, Technical Strategist
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 MORNING SLICES

 

 

FUNDYS
 
However, ultimately, this was not to be the case, with currencies once again rolling over in the North American session, led by weakness in the Euro. The Euro was by far the biggest loser, with the market trading back below 1.2200, and stalling just shy of the recent 2010 lows by 1.2145 thus far. Talk of more troubles in the Spanish banking sector, warnings from OECD that Germany and France might not be able to manage additional losses from Spain and Portugal, and an FT article that China was reviewing its Eurozone government bond holdings, were all seen weighing heavily on the Euro. 
 
Relative Performance Versus USD on Thusday (As of 9:00GMT) – 

1) AUSSIE +1.61% 
2) CAD         +1.33%
3) KIWI +1.15% 
4) STERLING +0.67%
5) EURO +0.66%
6) SWISSIE         +0.47%
7) YEN          -0.41%
 
As a result, the USD remains very well bid on its safe haven appeal, and is actually finding some added bids on the recovery prospects for the US economy, which now seems to be much better positioned than it had been several months back. Fed Lacker has even gone as far as downplaying any impact the current Eurozone debt crisis may have on the US economy, after saying that the crisis would only shave a “a tenth or two” off of his growth forecasts for this year. 
 
The commodity currencies have been relatively better bid over the past few hours, particularly against the Euro, with Aussie finding some renewed bids after a report in a local paper said that the government was moving towards a major back-down on its proposed 40% super resources tax. But it is also worth noting that a much weaker than expected Australian private capital expenditure reading has slowed the Aussie rebound somewhat on Thursday.  Meanwhile in New Zealand, trade data came out much better than expected, with the economy showing its first trade surplus for the first time since July, 2002. Finally, Japan also managed to post a better than expected trade number. 
 
The key levels to watch in today’s trade will undoubtedly be 1.2390 and 1.2145 in Eur/Usd. A break back above 1.2390 will suggest that the market is attempting to base out and potentially looking to carve out a short-term double bottom. A break below 1.2145 will however open a fresh downside extension to new 2010/multi-year lows, and expose next critical psychological barriers by 1.2000. 
 
Looking ahead, UK CBI distributive trades are due at 10:00GMT, followed by the more heavily watched US GDP (0.9% expected) at 12:30GMT. Also due out at 12:30GMT are initial jobless claims, and continuing claims. US equity futures and oil prices have been ignoring the relative weakness in the Euro and still track considerably higher on the day. Gold is unchanged from Wednesday’s close. 
 
GRAPHIC REWIND
DXY5.27
 
TECHS
 
EUR/USD: 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. However, there is a risk of additional short-term corrective upside should we break above 1.2400 on Thursday. A break back above 1.2400 would open the door for a potential double bottom, with a neckline by 1.2670. If triggered, the double bottom would directly expose critical resistance by 1.3100 further up. For now, we remain sidelined. 
 
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. 
  
 
FLOWS
 
Central bank demand for Eur/Usd; leveraged names looking to sell on rallies. Model funds bidding Aussie. CTAs selling Eur/Cad. UK clearer on the bid in Gbp/Usd. Buy-side demand for Yen crosses. 
 
TRADE OF THE DAY
tradeofday
 
Eur/Cad: We believe that a meaningful low has been set by 1.2625 in the previous week, and the current setbacks should be used as a formidable opportunity to establish a very playable long position. The weekly chart shows the formation of a very strong bullish outside week, and as such, we do not anticipate a full retracement back towards the lows anytime soon. Weekly studies have just crossed up from oversold levels and this further encourages our bullish bias. As such, we will look to buy on a dip back towards the 78.6% fib retracement off of the 1.2625-1.3470 move, in anticipation of a resumption of the recovery and eventual break back above 1.3470 over the coming days. STRATEGY: BUY @1.2820 FOR AN OPEN OBJECTIVE; STOP 1.2690. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM NY TIME) ON THURSDAY.
 
 
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. 
 
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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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