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Euro Comes Under Pressure But Weakness is Isolated

Euro Comes Under Pressure But Weakness is Isolated

2010-07-21 10:36:00
Joel Kruger, Technical Strategist


This has resulted in a rally in global equities prices and interestingly enough, some isolated weakness in the Euro ahead of Friday’s stress test results. Weaker demand at the Portugal auction on Wednesday has also not helped the Euro’s cause. Price action in the non-major commodity currencies certainly makes sense and falls in line with familiar correlations, as Aussie, Kiwi and Cad have all benefited greatly from the turnaround. 
Relative Performance Versus USD on Wednesday (As of 10:25GMT) – 

1) CAD         +0.62% 
2) YEN          +0.54%
3) KIWI +0.21% 
4) SWISSIE         +0.14%
5) STERLING +0.10%
6) AUSSIE +0.07%
7) EURO -0.35%
The Australian Dollar has surged back to its recent range highs just below the 100-Day SMA, with the single currency also finding some relative strength on an RBA Minutes which left the door wide open for additional rate hikes. Meanwhile, the Loonie has managed to mount an impressive rally, and extend gains into Wednesday, with Usd/Cad dropping back towards 1.0300. The strength in the Canadian Dollar has intensified since the Bank of Canada went ahead and raised rates by 25bps on Tuesday. 
Also seen bolstering sentiment has been a solid round of earnings from the US with market participants downplaying any weakness from yesterday’s Goldman Sachs earnings as a one-off deal due to the recent legal woes at the firm that have now been fully resolved. The focus now shifts to Ben Bernanke who is slated to testify in front of the Senate Banking Committee later in the day. Any signs of a willingness to adopt more accommodative policy will most probably have a negative impact on the USD and positive impact on global equities as investors welcome the additional breathing room from the Fed. However, we do not think the Fed will take any new measures and instead will leave things as is, with an already very accommodative policy in place. 
While many have shied away from the buck over the past several weeks, we continue to advocate buying the Greenback as we see the US economy much better positioned than any other major economy going forward. With this in mind, the USD arguably stands to benefit on an improvement in domestic fundamentals as the Fed begins to consider raising rates, while the buck also stands to benefit on a risk averse market, with the buck finding flight to safety bids. 
Looking ahead, the economic calendar is light in North American trade, with the only key release coming out of Canada a 12:30GMT in the form of wholesale sales (0.4% expected). All eyes then turn to the highly anticipated testimony from Ben Bernanke at 14:00GMT.  US equity futures point to a firmer open, while oil is also bid and gold trades flat.

EUR/USD:  The market has broken back below the 100-Day SMA after holding above for 2 days and it looks as though we could be in the process of rolling over with daily studies also showing stretched and in need of a pullback. Price action on Tuesday has also take the form of a very bearish outside day, with the market initially racing to fresh multi-day highs by 1.3030 early on and the reversing course sharply to take out Monday’s low and close lower on the day. The bearish outside day also managed to not only consume price action from Monday but from Friday as well. Look for a break back below 1.2835 to confirm bearish bias and accelerate declines. Inability to break back below 1.2835 would be concerning and delay any hopes for renewed weakness.  
USD/JPY: The latest round of setbacks below 87.00 have been very well supported and daily studies have now turned up from oversold levels with the market looking like it wants to carve out a base. Look for additional gains over the coming sessions back towards 89.15, with a break of this level to likely accelerate gains and force a more material shift in the structure. Back below 86.25 would negate and shift focus back towards the multi-year lows by 84.80. 
GBP/USD: The latest rally has stalled out ahead of key resistance just over 1.5500 and we look for a medium-term lower top to now carve out by 1.5470 ahead of the next major downside extension below 1.5000. Key short-term support now comes in by 1.5155, and a break below this level will be required to confirm bearish bias and accelerate declines. Back above 1.5400 delays outlook and gives reason for concern. 
USD/CHF: The market could be in the process of carving out a material base after closing back above the 10-Day SMA on Monday for the first time since early June when the price was above 1.1600. Any setbacks into Tuesday were very well supported just ahead of Monday’s lows, with the market once again recovering to close back above the 10-Day SMA for the second consecutive day. This should be encouraging for bulls, and we look for some more bullish confirmation on a break above next key resistance by 1.0680 over the coming sessions. Back below 1.0400 would negate outlook and give reason for concern. 
Specs, short-term accounts and European corporates on the offer in Eur/Usd; Mid-East and Russian buyers. SNB also rumored to be on the offer in Eur/Usd. 
USD/CAD: (Trade failed to trigger on Tuesday and we will look to buy into another dip on Wednesday as the same analysis applies and may get us better entry. Although with the Euro starting to drop off, the prospects for a trigger are fading). The latest hold on a close basis above the 100-Day SMA down by 1.0300 was highly impressive and in our opinion solidified the prospects for significant upside. Indeed, the market managed to rally some 300 points over the past few days since bouncing out from the 100-Day, and we continue to see the risks for major upside ahead, with any dips to be used as a formidable opportunity to build on longs. STRATEGY: BUY @1.0320 FOR AN OPEN OBJECTIVE; STOP 1.0220. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON WEDNESDAY. 
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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