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European Equities Show Signs of Stalling; Warn of Potential Reversal in Currencies

European Equities Show Signs of Stalling; Warn of Potential Reversal in Currencies

2010-07-14 11:43:00
Joel Kruger, Technical Strategist
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 MORNING SLICES

 

FUNDYS
 
The relative gains in the single currency come on the back of a solid round of data overnight in the form of some better than expected nationwide consumer confidence and stronger than forecast employment data. Also seen propping the Pound have been comments from Bank of England’s Sentance who says that it is finally time for the central bank to look to raise interest rates. The central banker has however been a well known hawk for some time, so we do not expect the comment to have any material impact on the market other than adding a minor contribution to the latest rally. 
 
Relative Performance Versus USD on Wednesday (As of 11:25GMT) – 

1) STERLING +0.51% 
2) YEN         +0.17%
3) AUSSIE -0.11% 
4) EURO -0.15%
5) KIWI -0.24%
6) SWISSIE         -0.26%
7) CAD         -0.36%
 
Overall, market participants seemed to be locked in a holding pattern ahead of North American trade with many now contemplating whether the Euro will begin its next ascent towards 1.2800, or begin to falter to warn of a resumption of broad based USD buying. Data released out of the Eurozone would certainly not favor a higher Euro rate, with inflation coming in as expected, while industrial production was softer. But it seems as though market dynamics at present are not as focused on the economic releases, with the Euro showing well bid this week despite some consistently weak data, a recent downgrade of Portgual by Moody’s and ongoing speculation and concern over the results of the European bank stress tests. 
 
Bond auctions in the Eurozone have however been well received and this could be helping to prop the single currency somewhat. Also adding to the bid tone has been a string of six consecutive positive closes in major equity markets that bodes well for risk appetite and demand for all currencies but the USD and Yen. European equities are tracking marginally lower at present and we would warn that any setbacks in US equities could force a shift in the general construct of the markets and ultimately trigger a shift back into safe haven currencies like the USD and Yen. Other data released on Tuesday includes a much weaker than expected New Zealand retail sales, and surging Australian consumer confidence. Finally, the Bank of Japan has kicked off its monetary policy meeting. 
 
Looking ahead all eyes now turn to the 12:30GMT US retail sales (-0.2% expected) release. Also out at 12:30GMT are US import prices (-0.3% expected), followed by business inventories (0.3% expected) and oil and gas inventories at 14:00GMT. Later in the day at 18:00GMT, the Fed publishes the Minutes of the most recent meeting which could move markets should the Minutes reveal any signs of a shift in the outlook from the central bank. US equity futures point to a marginally higher open, while oil is slightly lower and gold trades flat. 
 
GRAPHIC REWIND
dxy7.14

TECHS
  
EUR/USD:  Tuesday’s break back above 1.2725 and subsequent close above 1.2700 should be concerning for bears, with the market negating a bearish outside day formation from the previous week and also breaching downtrend resistance off of the early December 2009 highs. While we continue to retain a bearish outlook for the major, the latest price action leaves us sidelined, as a greater probability now exists for additional upside into next resistance, which initially comes in by 1.2775-1.2800 in the form of the 50% fib retrace off of the 1.2690-1.1880 move, and some internal falling channel resistance off of the yearly highs. Any sustained gains beyond 1.2800 will then expose 1.3000 further up.  Key support now comes in by 1.2480 and a break back below this level will be required to relieve topside pressures and once again put the focus back on the downside.   
 
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: Any attempts for a bearish resumption have been put on hold with the market being well supported on dips into the 1.5000 area which coincides with both the 20/100-Day SMAs. Nevertheless, we retain a bearish outlook and look for any additional rallies to be well capped ahead of 1.5500, ideally bellow 1.5400, where a fresh medium-term lower top is sought out ahead of the next major downside extension. Key support comes in by 1.4945, and a break back below this level will be required to take the pressure off of the topside.  
 
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. We are however somewhat concerned with the bearish reversal day on Tuesday, but will retain our constructive outlook so long as the market holds above 1.0500 on a close basis. 
 
 
FLOWS
 
Macro accounts bidding Gbp/Usd and selling Eur/Gbp; US custodial name also on the offer in Eur/Gbp. Japanese exported sales in Usd/Jpy. Middle Eastern names on the offer in Eur/Usd; option barriers by 1.2750 and 1.2800. 
 
TRADE OF THE DAY
tradeofday
 
EUR/AUD: We contend that the market has already put in a major low below 1.4000 from a few weeks back and is now in the process of carving out a material base. As such, we will look to take advantage of the latest setbacks to establish a long position.  The pullback has stalled out by the 61.8 fib retrace of the latest move, and subsequently produced a bullish outside day formation on Tuesday. Look for a break back above Tuesday’s high to now confirm outlook and likely set up the next higher low ahead of the next upside extension beyond 1.5015. STRATEGY: BUY @1.4465 FOR AN OPEN OBJECTIVE; STOP 1.4320. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON WEDNESDAY. 
 
 
Written by Joel Kruger, Technical Currency Strategist for DailyFX.com 
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