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Euro Welcomes Intraday Relief from ECB Mersch Following Wild Early Trade

Euro Welcomes Intraday Relief from ECB Mersch Following Wild Early Trade

2011-02-22 11:54:00
Joel Kruger, Technical Strategist
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Most of the major currencies have been hit with a deluge of risk negative developments over the past several hours and no currency has been hit harder than the New Zealand Dollar which has been crushed on the back of a devastating earthquake in Christchurch. The quake has resulted in many deaths, while several of the city’s buildings have been compromised and the local airport has been shut down. Our thoughts and prayers go out to those close to the disaster and we wish all of New Zealand a quick and healthy recovery.

However, we have seen a bit of a reprieve ahead of the North American session after ECB Mersch came out with some rather hawkish comments to give the Euro a +100 point jolt off of its intraday lows. The central banker initially was reported as saying that ECB Trichet may step up inflation talk at next week’s meeting and could warn of upside risks. This would put Trichet firmly back in the hawkish camp and this has therefore benefited the Euro. Mersch went on to say that the ECB wouldn’t be looking for a signal from the Fed for direction on their policy moves. Reuters headlines on the subject did manage to take some of the steam out of the Euro move, with their quotes from Mersch sounding decidedly less hawkish (albeit still hawkish).

Relative Performance Versus USD Tuesday (As of 11:05GMT)

  1. CHF +0.41%
  2. JPY +0.24%
  3. CAD -0.26%
  4. EUR -0.29%
  5. GBP -0.35%
  6. AUD -0.65%
  7. NZD -1.90%

From a price action standpoint, the break below 0.7500 in Kiwi is critical, with the market breaking to fresh yearly lows and opening the door for a more significant decline towards next key support which comes in by 0.7340 further down. We had already been projecting Kiwi weakness before the quake on a technical and fundamental basis (expectation for a narrowing of yield differentials), and unfortunately, this latest development should only exacerbate the situation. To add further fuel to the fire, a combination of elevated risk aversion on geopolitical fears, and some isolated downside pressures in the Euro have not helped matters.

The elevated geopolitical tensions have certainly been playing their part, with oil prices skyrocketing on Monday on heightened tensions in North Africa and the Middle East. Most recently, two Libyan planes landed in Malta in an effort to defect rather than follow orders to bomb protestors, while the Libyan ambassador to India has resigned and called for the UN to act to protect the Libyan people. Moreover, Libya’s mission to the UN has abandoned the regime and is calling for an international intervention to stop the genocide. Of course, the Iranians are taking full advantage of the chaos with wires reporting 2 Iranian war ships entering the Suez Canal and heading towards the Mediterranean.

Moving on, there have been some Eurozone specific factors that have been weighing on the Euro despite the ECB Mersch comments, with the larger than expected defeat of German PM Merkel in the state election fueling speculation that any positive consensus on sovereign debt will erode. Any change in sentiment towards policy which shifts to a focus on a broader national fiscal adjustment rather than on simply eliminating the tail risk, specifically from the beleaguered Eurozone economies, acts as a major weight on the Euro and opens the door for additional downside risks to the currency. The latest article from Weber which outlines a call for a more nationalized fiscal adjustment could therefore make waves if this now becomes the majority opinion in Germany.

Finally, the Yen has also managed to make headlines for its own specific merits, with the single currency trading lower on the day despite safe haven bids, after Moody’s came out and downgraded Japan’s Aa2 government rating outlook to negative. Technically, USD/JPY is attempting to put in a bullish outside day (needs daily close above 83.15) and could be getting set for an eventual break above critical topside resistance by 84.50 over the coming sessions. Fresh bids are seen on intraday dips towards 82.60.

On the data front, the Australian Dollar which has already been weighed down by the negative risk environment, has found some additional offers on a lower NAB business confidence reading, while Sterling setbacks have been somewhat buoyed by the strongest public finance data since January of 2009. German GfK consumer confidence was slightly better than expected, and the Swiss trade balance filed to materially influence price action.

Looking ahead, Canada retail sales( 0.0% expected) are due at 13:30GMT, with US Case Shiller house prices (-0.5% expected) following at 14:00GMT. US consumer confidence (65 expected) and Richmond Fed manufacturing (18 expected) then round things out for the day at 15:00GMT. On the official circuit, Fed Kocherlakota is slated to speak at 18:00GMT. US equity futures and gold prices are tracking a good deal lower, while oil remains extremely well bid and consolidates the latest massive gains.

TECHNICAL OUTLOOK

Euro_Welcomes_Intraday_Relief_body_eur.png, Euro Welcomes Intraday Relief from ECB Mersch Following Wild Early Trade

EUR/USD:The market looks to be in the process of seeking out a fresh lower top below 1.3745 at 1.3715 ahead of the next downside extension towards the measured move objective off of a head & shoulders top formation which comes in by the 1.3300 area. Look for confirmation of the fresh lower top on a break back below 1.3425 over the coming sessions. Only a break and close back above 1.3745 negates short-term bearish outlook and gives reason for pause.

Euro_Welcomes_Intraday_Relief_body_jpy2.png, Euro Welcomes Intraday Relief from ECB Mersch Following Wild Early Trade

USD/JPY: The market continues to remain extremely well bid, with the latest surge back above 83.00 really encouraging longer-term recovery prospects and opening the door for a potential break of key topside resistance by 84.50 over the coming days. Longer-term cyclical studies certainly suggest that the market could be poised for a major bullish reversal and we would look for a break and weekly close back above 84.50 to help confirm outlook. Any dips from here should be well supported ahead of 82.50, while only a break and close back below 82.00 would concern. A potential bullish outside day formation on Tuesday helps to confirm outlook.

Euro_Welcomes_Intraday_Relief_body_gbp2.png, Euro Welcomes Intraday Relief from ECB Mersch Following Wild Early Trade

GBP/USD: The market largely remains locked in some consolidation after continuously stalling out by and ahead of key resistance at 1.6300. From here, it is difficult to establish a clear directional bias and we will need to see a sustained break above 1.6300 or back below 1.5960 for additional clarity. In the interim, in light of yet another topside failure ahead of 1.6300, we look for a short-term bearish resumption back towards 1.5960 over the coming sessions.

Euro_Welcomes_Intraday_Relief_body_swiss1.png, Euro Welcomes Intraday Relief from ECB Mersch Following Wild Early Trade

USD/CHF: The market has been in the process of pulling back after stalling out ahead of key short-term resistance by 0.9785 in the previous week. Still we see any additional declines well propped above 0.9425 (minor 78.6% fib retrace) on a close basis and look for the formation of a fresh higher low ahead of the next major upside extension back through 0.9785 and towards more critical resistance by 1.0070 further up. Only a close below 0.9425 will give reason for concern. Monday’s bullish close and Tuesday’s subsequent break back above Monday’s high further encourages constructive outlook.

FLOWS

ACB demand in Eur/Usd off the lows, a macro account leading sales by model and prop types in Usd/ Jpy. Leveraged account seen buying Usd/Cad around lows with real money offers. A UK Clearer has been seen as a repeat seller in Cable all the way down.

TRADE(S) OF THE DAY

Euro_Welcomes_Intraday_Relief_body_tradeofday2.png, Euro Welcomes Intraday Relief from ECB Mersch Following Wild Early Trade

EUR/CHF: This market has also come under some intense pressure on Tuesday with the latest sharp drop resulting in heavily oversold hourly studies and a market that has already met its daily average true range. However, with medium-term studies looking more constructive and showing the formation of a potential major base by record lows at 1.2400 from late 2010, we like the idea of buying into this dip from 1.3200 in anticipation of a higher platform somewhere in the mid-1.2700’s to lower 1.2800’s. POSITION: LONG @1.2830 FOR AN OPEN OBJECTIVE; STOP 1.2680.

Euro_Welcomes_Intraday_Relief_body_cad2.png, Euro Welcomes Intraday Relief from ECB Mersch Following Wild Early Trade

USD/CAD: Daily studies are starting to look a little stretched, and this in conjunction with longer-term cyclical studies which warn of a major base, leave us looking for opportunities to buy rather then selling into the downtrend. The 0.9800 figure seems to be offering itself as a formidable support zone for now, and any dips back towards or slightly below the figure over the coming sessions are viewed as an excellent opportunity to establish a very playable counter-trend long position. Ultimately, only a daily close back below 0.9700 would delay outlook and give reason for pause. STRATEGY: BUY @0.9800 FOR AN OPEN OBJECTIVE; STOP 0.9645. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM NY) ON TUESDAY.

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Written by Joel Kruger, Technical Currency Strategist

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