More Bad News for Eurozone While Broader Risk Sentiment Also Shifting
We had been looking for the US Dollar to successfully hold the line on Wednesday, with the currency under pressure and needing to defend well for the broad based Dollar rally to continue and even gain momentum into Thursday. The Greenback did not disappoint, and any selling of the Dollar in Asian and European trade was well absorbed into North America. As a result, currencies are showing weakness once again against the buck on Thursday and we expect that this will continue. The EUR/USD daily chart is looking top heavy, and with all of the hawkish ECB talk behind us, the focus has once again shifted to problems in the Eurozone peripherals and the potential strain on the local economy. Dr. Gloom, Nouriel Roubini is back in the headlines after saying that he felt that the ECB might be making a mistake if it chooses to hike rates. Roubini cited rising oil costs and EU debt problems when making his case.
Relative Performance Versus USD Wednesday (As of 11:05GMT)
Most recently, Moody’s has come out and downgraded Spain’s rating to AA2 from AA1 while maintaining a negative outlook for the economy. This has opened the door for a drop to fresh weekly lows in the Euro. The latest Spain downgrade has caught investors off guard and follows a downgrade of Greece earlier in the week. We would expect the move to influence trade for the remainder of the day, with broader price action already broadly currency negative.
Market sentiment has already been damaged on Thursday, with the latest China trade numbers showing a surprising and highly disappointing trade deficit after the market had all but priced in some form of a surplus. The highly correlated Australian Dollar has been the hardest hit in reaction to this news, with the antipodean having already been exposed to weakness earlier in the session after a softer than expected jobs report. Australian data this week has been awful, also highlighted by some softer housing data and terrible consumer confidence readings on Wednesday. We have been warning of a major bearish reversal in the Australian Dollar this year, and continue to see this as a very real possibility. Many of the larger FX participants have been aggressively buying the commodity currency in recent years, but we are quite confident that a slower China and consistently weaker than forecast Australian data will start to weigh even more heavily on Aussie going forward.
It is actually quite interesting to see the Australian Dollar even underperforming against the New Zealand Dollar thus far on Thursday, after the RBNZ came out and cut rates by a more aggressive 50 basis points to 2.50%, when most had been looking for a 25 basis point cut, and some had even been calling for a rate hold. Nevertheless, even with the more aggressive cut, Kiwi managed to consolidate near recent levels. Much of this price action probably had to do with the fact that a good deal of weakness had already been priced into the Kiwi market following the earthquake and we most probably were seeing some sell the rumor buy the fact price reactions in the New Zealand Dollar. Also seen propping the New Zealand Dollar somewhat, were comments from the RBNZ that there would be no further easing.
While it is no surprise to see that the Franc and Yen have not been as badly hit as the Australian Dollar on same safe haven flows, the Canadian Dollar continues to assert its dominance in the FX markets. We have certainly been seeing a clear divergence between the Canadian Dollar and its other commodity bloc cousins, with this market finding relative strength while the others suffer from relative weakness. The impressive dominance of the Loonie in recent trade, which has the currency by multi-month highs against the US Dollar, is attributed to some stronger than expected local data and an oil market which remains very well bid and refuses to back down.
Still, the contrarian in us has us screaming for a reversal and we feel that given the overextended move in oil and string of really impressive data, the risks from here are for a let down, and a sizeable bearish reversal in the Canadian Dollar is forecast. We are long USD/CAD from 0.9712 and look for a move well back above parity over the medium-term. Any additional USD/CAD weakness should be limited to the 0.9600’s.
On the data front, weaker German trade numbers did not help the Euro, while the Pound found some support on the much better than expected industrial production and manufacturing production numbers. This opened the door for some additional selling in EUR/GBP which is once again finding some very solid medium-term resistance ahead of 0.8700. The Bank of England is set to decide on rates and while we could see some volatility on streaming headlines following the decision, we do not expect to see any changes to current policy.
Looking ahead, the Bank of England will be the big event risk in early North American trade, while market participants will also be looking to US trade numbers and initial jobless claims. Some focus should also be placed on Canadian data, with the Loonie so well bid and potentially at risk for a correction on any catalyst. US equity futures are pointing a good deal lower into European trade, while oil is mildly bid and gold trades flat.
EUR/USD: The market is looking really top heavy and rallies look to have stalled out for now by 1.4035, with the formation of a short-term top. The key levels to watch now come in by previous resistance and the 10-Day SMA by 1.3860 and 1.3880 respectively, and a daily close below these levels will likely accelerate declines towards next key support in the lower 1.3700’s. Any intraday rallies are now expected to be well capped ahead of 1.3950.
USD/JPY: The market continues to respect a multi-week range with setbacks most recently stalling out by 81.00 area support and bouncing back into the mid-range. From here, we see risks for continued upside and look for a test of the multi-week range resistance by 84.50 over the coming days. A break and close above 84.50 will be required to open the door for a more significant rally, while any intraday setbacks from here should be well supported above 82.00 on a daily close basis.
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 open the door for deeper setbacks over the coming sessions. Look for a drop towards the 1.6000 area initially, while back under 1.5960 accelerates further. Intraday rallies should be well capped ahead of 1.6250. Only back above 1.6345 ultimately negates.
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.
A sovereign account and Middle Eastern type have helped contain losses in Eur/Usd, talk of large stops building to the downside,US names have been major euro sellers over-night with momentum types joining the offers. A semi official account on the bid in Cable around the lows along with a UK corp.
Written by Joel Kruger, Technical Currency Strategist
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