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Buck Still Stumbling Despite Softer EZ Inflation and Geopolitic Risk

Buck Still Stumbling Despite Softer EZ Inflation and Geopolitic Risk

2011-02-28 11:52:00
Joel Kruger, Technical Strategist
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Despite stalling out ahead the critical short-term resistance at 1.3860 on Friday, the Euro still remains bid on dips for now, and we will need to see a break and close back below 1.3700 to alleviate topside pressures and encourage prospects for any kind of reversal. For now, currencies in general remain very well bid against the buck, with the Swiss Franc just off record highs on safe haven bids, and the Yen similarly bid on risk aversion and geopolitical concerns. Tensions in North Africa and the Middle East remain elevated and the latest news has the UN Secretary General calling for an urgent gathering to discuss the turmoil in the Ivory Coast. Meanwhile the Canadian Dollar has mounted an impressive rally as USD/CAD drops to fresh multi-month lows below 0.9800. Although the antipodeans have been less bid of late, there is still some solid demand for these currencies, with Aussie trading back towards 1.0200 and Kiwi recovering from its post earthquake lows to trade back above 0.7500.

Relative Performance Versus USD Monday (As of 11:45GMT)

  1. GBP +0.71%
  2. EUR +0.59%
  3. NZD +0.01%
  4. CHF -0.01%
  5. CAD -0.02%
  6. JPY -0.27%
  7. AUD -0.31%

As we head into the North American session, the Euro trades bid and has managed to push back above Friday’s highs despite a softer than expected inflation result. It seems as though ongoing diversification away from the buck continues to play a material role in price action, while the market has also found some additional support on weekend comments from ECB Draghi who said that monetary policy in the Euro area is set to be tightened. Draghi expressed concern over the threat of inflation and the need to return to normal monetary policy. However, many have also been talking of the potential impact of the Irish elections with the newly elected Irish PM Kenny already rumored to have warned Germany’s Merkel and France’s Sarkozy that a massive Irish backlash against austerity measures means that the current Eur72B bail-out will need to be renegotiated. Also potentially weighing on additional gains could be comments from Portugal’s Dos Santos who said that markets are especially nervous about the EU in general in an effort to deflect specific attention away from his country.

Moving on, New Zealand trade data came out slightly better than expected on Monday, and this has helped to fuel some additional bids, although comments from NZ FinMin English have offset some of these gains, after the official said that the damage from the earthquake would lead to slower H1 growth and that it would also help to fuel speculation of a rate cut over the coming months. English added that the government would be bearing the full cost of the reconstruction and would be looking to take on some short-term debt. Meanwhile in Australia, private sector credit came in as expected, and the single currency managed to regain any initial setbacks in early Asian trade, despite comments from China’s Wen that the target for average annual GDP growth would be revised lower to 7.0% over the next 5 years from the 7.5% target that had been in place in the previous 5 years.

Looking ahead, the calendar in North America is quite busy (see below), with the key risk coming from Canada GDP data due at 13:30GMT. US equity futures are marginally lower, while gold trades flat. Oil has been quite volatile and has come back quite a bit after tracking a good deal higher earlier in the day.

ECONOMIC CALENDAR FOR NORTH AMERICA:

Buck_Still_Stumbling_Despite_Softer_EZ_Inflation_body_Picture_5.png, Buck Still Stumbling Despite Softer EZ Inflation and Geopolitic Risk

TECHNICAL OUTLOOK

Buck_Still_Stumbling_Despite_Softer_EZ_Inflation_body_eur.png, Buck Still Stumbling Despite Softer EZ Inflation and Geopolitic Risk

EUR/USD:The market remains very well bid, with key short-term resistance by 1.3745-65 being easily cleared to now put the focus on next topside barriers at 1.3860. The 1.3860 level represents the current yearly high, and a break above will then open the door for a fresh upside extension towards psychological barriers by 1.4000 which also guard against the more significant medium-term resistance at 1.4285 from November 2010. There is still however the risk that the market stalls out in the 1.3800’s, but a failure at or near 1.3860, and break back below 1.3700 would be required at a minimum to relieve current topside pressures.

Buck_Still_Stumbling_Despite_Softer_EZ_Inflation_body_jpy2.png, Buck Still Stumbling Despite Softer EZ Inflation and Geopolitic Risk

USD/JPY: Although the market has come under some intense pressure in recent trade back below 82.00, overall price action remains largely consolidative and we would expect to see the market once again well supported in the 81.00’s. For now, 81.00 remains the key level to watch below, and only a close below this figure would negate the current range-bound price action and give reason for concern. As such, we like the idea of buying on dips into the 81.00’s in favor of a bullish reversal and close back above 82.00.

Buck_Still_Stumbling_Despite_Softer_EZ_Inflation_body_gbp2.png, Buck Still Stumbling Despite Softer EZ Inflation and Geopolitic Risk

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 daily close back below 1.6100 for additional clarity.

Buck_Still_Stumbling_Despite_Softer_EZ_Inflation_body_swiss1.png, Buck Still Stumbling Despite Softer EZ Inflation and Geopolitic Risk

USD/CHF: The latest break to fresh record lows below 0.9250 is certainly concerning and threatens our longer-term recovery outlook. Still, we do not see setbacks extending much further and continue to favor the formation of some form of a material base over the coming weeks in favor of an eventual break back above parity. From here, big figures become key support as we are in unchartered territory, while a break back and close back above 0.9320 would be required to relieve immediate downside pressures.

FLOWS

Mild Eur/Usd offers ahead of 1.3900; Asian and UK clearer bids. Local bids in Usd/Cad below 0.9800; offers reported towards 0.9850. Russian account offers in Gbp/Usd; model fund demand. Spec and exporter offers in Usd/Jpy; leveraged accounts on the bid. Decent two-way action in Aud/Usd. End of month flows could result in additional volatility.

TRADE(S) OF THE DAY

Buck_Still_Stumbling_Despite_Softer_EZ_Inflation_body_aud2.png, Buck Still Stumbling Despite Softer EZ Inflation and Geopolitic Risk

AUD/USD: Although setbacks have stalled out for now ahead of 0.9800, we continue to favor risks for additional downside and like the idea of selling into current rallies. Ultimately, we see the market in the process of carving out a major top and any rallies from here should be well capped below 1.0200 on a close basis. Only back above 1.0200 gives reason for concern, while below 0.9945 should accelerate to 0.9800 and below. POSITION: SHORT @1.0170 FOR AN OPEN OBJECTIVE; STOP 1.0320.

Buck_Still_Stumbling_Despite_Softer_EZ_Inflation_body_cad2.png, Buck Still Stumbling Despite Softer EZ Inflation and Geopolitic Risk

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 latest dip below the 0.9800 figure is viewed as an excellent opportunity to establish a very playable counter-trend long position, with the market seen well supported in the 0.9700’s (see 2008 range lows). Ultimately, only a daily close back below 0.9700 would delay outlook and give reason for concern. POSITION: LONG @0.9765 FOR AN OPEN OBJECTIVE; STOP 0.9615.

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Written by Joel Kruger, Technical Currency Strategist

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