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Greenback Rally Facing First Real Test; Buck Needs Response in North America

Greenback Rally Facing First Real Test; Buck Needs Response in North America

2011-03-09 12:30:00
Joel Kruger, Technical Strategist
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It hasn’t taken long for currency bulls to reassert, with the Euro well supported by previous resistance and the 10-Day SMA in the 1.3860 area and popping back above 1.3900 ahead of the North American open. The latest rally has been driven by rumors that the ECB is out buying peripheral debt and solid German industrial production numbers. Meanwhile, the Swiss Franc has once again emerged as the strongest currency, and the relative strength seems to be coming from a hotter than expected Swiss CPI print, along with some ongoing geopolitical tensions in North Africa and the Middle East. Elsewhere, the Pound has regained its footing a bit, in line with the broader currency buying while finding some relative strength on the back a much stronger than expected UK trade balance.

Relative Performance Versus USD Wednesday (As of 12:00GMT)

  1. CHF +0.77%
  2. GBP +0.24%
  3. CAD +0.32%
  4. AUD +0.21%
  5. EUR +0.20%
  6. NZD +0.19%
  7. JPY +0.01%

Although the Australian Dollar is higher on the day on the broader flows, the tide continues to turn in Australia where economic data is getting progressively worse. The latest batch of data shows a very discouraging consumer confidence report at a nine month low, as well as house finance data which fell for the first time in seven months by a margin that was a good deal lower than the market consensus. While the Australian Dollar has been seemingly immune to everything negative thrown at it in recent years, we feel that pressures are continuing to build which will eventually and inevitably open the door for a major liquidation of meaningful long positions in the antipodean over the coming days and weeks.

The North American session on Wednesday will be an important one for the US Dollar and a test to see whether the Greenback can hold on to its latest rally and build on it. The first step for the buck is to be able to absorb any selling seen intraday, as we have already seen in today’s session. Looking ahead, the economic calendar is rather quiet, with the key releases coming in the form of Canada housing data and US wholesale inventories. US equity futures and gold prices are tracking moderately higher into the North American open, while oil trades flat.

ECONOMIC CALENDAR

Greenback_Rally_Facing_First_Real_Test_body_Picture_5.png, Greenback Rally Facing First Real Test; Buck Needs Response in North America

TECHNICAL OUTLOOK

Greenback_Rally_Facing_First_Real_Test_body_eur.png, Greenback Rally Facing First Real Test; Buck Needs Response in North America

EUR/USD: The market has since stalled out after breaking above 1.4000 and the latest topside failure should not be taken lightly, with the price stalling around some key resistance at the 78.6% fib retrace off of the major November-January high-low move and by the psychological round number barrier. Tuesday’s bearish close helps to reaffirm topping prospects and from here, deeper setbacks are seen towards 1.3700 over the coming sessions. Any intraday rallies should be well capped below 1.4000.

Greenback_Rally_Facing_First_Real_Test_body_jpy2.png, Greenback Rally Facing First Real Test; Buck Needs Response in North America

USD/JPY: Although the market has come under some intense pressure in recent trade back below 82.00, overall price action remains largely consolidative with the market once again very 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 into the latest dips in favor of a bullish reversal back towards the key 84.50 multi-day range highs over the coming days. Intraday setbacks should now be well supported ahead of 82.00.

Greenback_Rally_Facing_First_Real_Test_body_gbp2.png, Greenback Rally Facing First Real Test; Buck Needs Response in North America

GBP/USD: The 1.6300 handle continues to be a difficult obstacle for bulls, with the market unable to hold above the figure for any meaningful period of time. Monday’s bearish outside day was impressive with the market engulfing the previous 2 day range and closing just under 1.6200 to now open the door for deeper setbacks over the coming sessions. Look for a drop towards the 1.6000 area, while back under 1.5960 accelerates further. Intraday rallies should be well capped ahead of 1.6250. Only back above 1.6345 negates.

Greenback_Rally_Facing_First_Real_Test_body_swiss1.png, Greenback Rally Facing First Real Test; Buck Needs Response in North America

USD/CHF: The latest break to fresh record lows by 0.9200 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 for an eventual break back above parity. The latest break and close back above 0.9330 strengthens the outlook and could now accelerate gains. Intraday setbacks should be well supported ahead of 0.9260.

FLOWS

Large scale selling by a US investment bank has dominated Usd/Chf. Dividend payment related flows on the demand side in Aud/Usd. Real money account supply seen in Eur/Usd with a Middle Eastern name leading bids.

TRADE OF THE DAY

Greenback_Rally_Facing_First_Real_Test_body_cad2.png, Greenback Rally Facing First Real Test; Buck Needs Response in North America

USD/CAD: We established a fresh long position earlier today and on an intraday basis we are certainly taking a bit of a beating right now with the market dropping to fresh multi-month lows below 0.9680. However, with that said, we continue to like the idea of the formation of a material base by current levels and see the risks for additional setbacks from here as limited. Our stop-loss has been placed accordingly and we expect to see some bids emerge into the mid-0.9600 area. Retail traders had been long at a dramatic 10:1 and this is on the surface a bit discouraging, but the fact that the market has moved lower and the ratio is dropping (instead of building) tells us that these traders are getting taken out and giving up on the long. This is what we like to see as it suggests that the market could finally be poised for a major bullish reversal. We have also noticed (thanks to the insights of a loyal follower), that the daily ATR is near historic lows which implies a major breakout in volatility. Again, given that we see the market trading by cyclical lows, we project that the price direction through this volatility will be to the upside. POSITION: LONG @0.9712 FOR AN OPEN OBJECTIVE; STOP 0.9562.

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Written by Joel Kruger, Technical Currency Strategist

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