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Solid Greek Auction Demand Mitigated by Portugal Downgrade and Mixed ZEW

Solid Greek Auction Demand Mitigated by Portugal Downgrade and Mixed ZEW

2010-07-13 11:14:00
Joel Kruger, Technical Strategist
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 MORNING SLICES

FUNDYS
 
Most of the more exciting price action transpired in Asian and European trade, with the US markets deferring to some consolidation. A fifth consecutive higher close in US equities seemed to keep the Euro and other major currencies somewhat supported, and it now remains to be seen whether we will continue to see currencies lose momentum in favor of a resumption of broader USD buying. 
 
Relative Performance Versus USD on Tuesday (As of 11:00GMT) – 

1) CAD       +0.38% 
2) STERLING +0.32%
3) YEN         +0.21% 
4) KIWI -0.01%
5) SWISSIE       -0.11%
6) EURO -0.14%
7) AUSSIE -0.15%
 
Overall, the general tone is quite cautious, with many now looking ahead to key data releases this week out of the US, China and New Zealand, while also being focused on earnings season and fiscal developments in the Eurozone and UK. All of these are factors that could sway investor sentiment in either direction, and we would expect volatility to pick up substantially over the next 48 hours. The key releases in European trade on Tuesday came in the form of an as expected UK CPI result and a mixed German ZEW print. While the economic sentiment component of the ZEW slumped from previous readings and came in well below consensus, the current conditions component was improved. As a result, it was no surprise to see the Eur/Gbp cross rate weighed down overnight. 
 
The Euro has however managed to mount a decent recovery from its overnight lows, with the single currency finding fresh bids on the back of some very solid demand at the Greek auction. Nevertheless, there seems to be some material offers on rallies towards 1.2600, and the latest Moody’s downgrade of Portugal by two notches to A1 has also not helped matters. 
 
Technically, price action suggests that whatever the results this week, the market will look to interpret the developments as net USD bullish. The Euro has stalled out by some major trend-line resistance, while currencies like the Yen and Swissie seem to have found some strong resistance against the buck as well. Meanwhile, the USD Index confirms, with this market also bouncing off of critical medium-term support. While signs of USD strength against the regional currencies are not as obvious, we favor USD buying against these currencies as well, with prices at attractive levels for USD bulls on a cyclical basis. 
 
Looking ahead to North American trade, US trade balance (-$39.2B expected) is due at 12:30GMT, along with Canada international merchandise trade. US IBD/TIPP economic optimism (45.5 expected) is then out at 14:00GMT, followed by some oil and gas inventory data at 20:30GMT. US equity futures and commodities are tracking higher by some 0.50% into New York. 
 
GRAPHIC REWIND
dxy7.13

TECHS
  
EUR/USD:  The market has undergone an impressive correction since basing out by 1.1880 in early June and could finally be poised for a bearish resumption after stalling by some major trend-line resistance off of the December 2009 highs and subsequently carving out a bearish outside day on Friday. Look for Monday’s close back below 1.2600 to confirm bearish outlook and accelerate declines towards next key support by 1.2480. Only back above 1.2725 ultimately negates and delays structure. 
 
USD/JPY: Despite the latest choppy directionless trade, our overall outlook remains highly constructive so long as the price remains above 87.00 on a close basis. Look for an eventual push back towards and through 95.00, above which should accelerate gains to next critical topside barriers by 100.00. Last Thursday’s break back above 88.20 confirms basing prospects and should now accelerate towards next resistance by 90.00 over the coming sessions.  
 
GBP/USD: The recent rally in the market has been classed as corrective with the pair looking to carve out a fresh medium-term lower top below 1.5500.  The latest price action seems to confirm our outlook with the formation of a double top just over 1.5200 on the daily chart, following the break back below neckline support at 1.5080 which now could accelerate declines towards next key support by 1.4870 over the coming sessions. Ultimately, only a break back above 1.5500 would negate bearish outlook. 
 
USD/CHF: Could finally be poised for some significant upside after the market stalled out by key multi-week support in the 1.0500 area and bounced to end a sequence of 11 consecutive daily lower highs. Daily studies have turned up but still track in oversold territory to suggest that there is plenty of room for a major bounce. Look for Monday’s  close above 1.0600 to help confirm newly adopted constructive outlook, while only a close back below 1.0500 gives reason for concern. 
 
FLOWS
 
Leveraged and technical names selling Eur/Gbp. Macro and real money demand for Eur/Usd; offers on rallies beyond 1.2600. Increasing demand for Usd/Chf in the 1.0500’s. Solid bids and offers in Usd/Jpy with market currently unable to commit. 
 
TRADE OF THE DAY
tradeofday
 
NZD/USD: The market seems to be struggling to hold onto gains above 0.7100 and given the broader resurgence in USD demand over the past few days, we like the idea of looking to fade the current strength if given the opportunity. We have already established a short position in Aud/Usd from earlier in the week, and will look to sell this market as well should we break back below the current daily low which resides at 0.7075. This should open a direct retest of key short-term support by 0.7055 below which will confirm bias and accelerate declines to likely end a sequence of 5 consecutive positive daily closes. STRATEGY: SELL @0.7070 FOR AN OPEN OBJECTIVE; STOP 0.7170. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON TUESDAY. 
 
 
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 
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