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Currencies See Whipsaw Price Action Overnight As Markets Receive Mixed Signals

Currencies See Whipsaw Price Action Overnight As Markets Receive Mixed Signals

2010-07-19 11:16:00
Joel Kruger, Technical Strategist


While the commodity bloc had come under some pressure on the back of some renewed risk aversion, the major currencies were less influenced, with the Euro coming in as the top performer following a serious reduction in concerns over the state of the Eurozone debt crisis. This in conjunction with a much less hawkish than expected Federal Reserve, as reflected through the previous week’s minutes, has shaken confidence in the USD and also resulted in some major flows back into the Euro. 
Relative Performance Versus USD on Monday (As of 11:00GMT) – 

1) CAD        +0.62% 
2) EURO +0.21%
3) AUSSIE +0.02% 
4) STERLING -0.10%
5) SWISSIE        -0.17%
6) KIWI -0.52%
7) YEN         -0.59%
Price action overnight has been nothing short of whacky, and although most currencies trade not too far away from Friday’s closing levels, there has been a large amount of whipsaw trade. The Euro had initially been weighed down in early Asia on news of the suspension by the IMF and EU of a 20B credit line for Hungary, and a Moody’s Ireland downgrade, but was very well bid into European trade, as these fears were mitigated by some massive flows reported in demand for the Euro from various real money accounts and a sovereign name. The narrowing in Spanish bond yields even in the face of the Ireland and Hungary news was also seen helping to prop demand for the Euro. Other price action influencing Euro trade was attributed to strong cross related demand for Eur/Chf which continues to mount its impressive comeback from record lows a few weeks back. The Greenback has also fallen out of favor with investors and this is yet another variable in the price action equation. 
US corporate earnings have indeed been impressive on the whole, but weakness within the economic data and fears of a double dip recession have trumped the silver lining from the corporate earnings. Fed Chair Bernanke will testify this week on Wednesday in front of the Senate Banking Committee, and all will be watching closely for more insight into the direction of monetary policy. Many now fear that the Fed will look to introduce a second round of quantitative easing. Interestingly enough, the latest IMM data shows speculative positioning net short the USD for the first time since March, which could suggest that any additional USD selling will be hard to come by in the days ahead. 
Elsewhere, the Yen has been getting a lot of attention following the latest bout of strength (Usd/Jpy weakness). Usd/Jpy is now very close to the 14-year lows by 84.80 and a move back to test this level, will surely fuel more and more talk of potential intervention from the Bank of Japan. The central bank has shied away from this policy over the past couple of years, but is certainly well known for its ability to actively intervene on the currency markets and force a major depreciation in the Yen. There have been no signs of intervention as of yet, and we are well aware of the new government policy which has been much less supportive of such a policy. However, any additional appreciation in the single currency could prove too much of a strain on the local economy and may indeed force the central bank to act. 
Key data out of the US this week will come in the form of housing data, with NAHB later today, housing starts and building permits on Tuesday, and existing home sales on Thursday. Moving away from the US, the central focus will undoubtedly be on the European bank stress test results due this Friday. Initial comments from various EU officials are encouraging, and we believe this has factored into the Euro buying. However, there is also a decent risk that the markets will perceive the tests to be too lax if the banks pass with flying colors and in turn look to re-establish short positions in the Euro. 
Data this week out of the Eurozone is highlighted by German IFO, while in the UK, the focus will be on retail sales and GDP. On the commodity currency front, the Bank of Canada will meet on Tuesday and if the central bank decides to hold, this could really start to weigh on the commodity bloc. RBA Governor Stevens is also slated to speak on Tuesday just after the release of the RBA minutes and his comments should also have some form of an impact on price action in the Australian Dollar and commodity currencies. 
EUR/USD:  Price action producing some mixed signals at current levels and difficult to establish clear directional bias. On the one hand, we have seen a 2 day close above the 100-Day SMA with the market very well bid over the past several weeks to suggest that more significant upside is to be expected. However, on the other hand, the broader downtrend still remains intact and there is also the strong possibility for a bearish resumption with daily studies now looking stretched and the market reversing course after finally taking out 1.3000 on Friday. As such, we recommend that traders stay on the sidelines and look to see where the market settles at the Monday close for a better indication of where we could be headed. Next key topside resistance comes in by 1.3090, while there is no real support until 1.2780. 
USD/JPY: The break and close back below 87.00 on Friday is concerning and could now open the door for additional declines towards the multi-year lows by 84.80 over the coming days. Daily studies are however oversold and any additional setbacks beyond 85.00 should ultimately be limited. As such, our recommendation is to look to buy into any dips towards 84.80 over the coming sessions in anticipation of a major upside reversal. 87.50 is the key short-term level to watch above and a break should relieve downside pressures. 
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 capped ahead of 1.5500 on a close basis. Friday’s price action is somewhat reassuring with the market stalling out ahead of 1.5500 and reversing sharply to close back below 1.5300. Next support comes in by 1.5235 and a close below this level will be required to accelerate declines. Only back above 1.5500 negates and gives reason for concern.   
USD/CHF: Setbacks have finally found some interim support by 1.0400 ahead of the latest minor bounce. Daily studies have been highly oversold, and the latest positive cross of the RSI back above 30 could finally warn that a base is in place. Longer-term technical studies show good reason for the market to try and base out at current levels and as such, we like the idea of some major upside over the coming days and weeks. However, a break back above 1.0680 will now be required to confirm basing prospects and accelerate gains.  
Decent offers in Eur/Gbp ahead of 0.8500. Middle Eastern, real money and sovereign names on the bid in Eur/Usd; macro accounts on the offer. Talk of official demand in Usd/Jpy around 85.00. Option related interest in Nzd/Usd by 0.7000. 
EUR/GBP: Although the market has finally breached some bear channel resistance off of the yearly highs to trade back above 0.8400 thus far, the cross is still confined to a broader downtrend off of the yearly highs and looks to be in search of the next medium-term lower top below 0.8800 ahead of the next major downside extension. The daily average true range for the cross is 80 points and this would now project a potential daily high by 0.8500. The 0.8500 level is also expected to be a formidable resistance point as it is also a major psychological barrier. Hourly studies are already overbought and as such, we like the idea of fading a test of 0.8500 today. STRATEGY: SELL @0.8500 FOR AN OPEN OBJECTIVE; STOP 0.8610. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON MONDAY. 
Written by Joel Kruger, Technical Currency Strategist for DailyFX.com 
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