Currencies Well Bid in Early Week But Fading Moves Through Aussie
Currencies are broadly higher and the Euro has been leading the way over the past few sessions, with the latest comments from European Central Bank President Trichet attributed to a good deal of the gains. The European central bank President has basically reaffirmed his intent to push rates higher and this has been used as a prop for the Euro and currencies in general. Meanwhile, on the geopolitical front, while market fears have abated somewhat in Japan as the situation stabilizes, attention has shifted back to North Africa and the Middle East, where the sacking of the cabinet in Yemen is making headlines, and the situation in Tripoli is still very much uncertain.
Relative Performance Versus USD Monday (As of 11:00GMT)
With the exception of the lower yielding Franc and Yen, all currencies are well supported on the day thus far. It seems that with the Franc and Yen so well bid of late, these currencies are taking a bit of a breather to allow for some of the others to play catch up. The commodity bloc has certainly done a good job of that, with the Australian Dollar racing back above parity and the Canadian Dollar contemplating a drop back below 0.9800. Sterling is however relatively underperforming versus the commodity bloc, with a Markit survey warning of deterioration in UK household finances over the next 2 years, and a mixed Rightmove house price showing weighing on the single currency. Bank of England Dale has managed to inspire some offsetting bids after saying that the recovery is still on track.
For the time being, the main focus will remain on the Euro and whether or not it can retest the next critical resistance which comes in by 1.4280. For now, it looks as though this is a real possibility and could continue to prop other currencies across the board. A message from the ECB that they are still able to think about raising rates despite any economic and geopolitical uncertainty is viewed as net currency positive from global macro investors and ultimately weigh on the Greenback going forward.
Looking ahead, the economic calendar for the remainder of the day is exceptionally quiet, with the only key release coming later in the day in the form of US existing home sales. US equity futures and commodities price are very well bid ahead of the North American open.
EUR/USD: The market remains very well bid with the latest surge back above 1.4000 opening the next upside extension towards key resistance from November 2010 at 1.4280. Look for a test of this level over the coming sessions, while ultimately, only a break back below 1.3980 would take the immediate pressure off of the topside.
USD/JPY: The latest violent drop-ff to fresh record lows by 76.35 has been intense, with the market threatening a fresh longer-term downside extension below 80.00. However, given the nature of the move, we would not at this point categorize the downside break as anything significant that alters the medium-term outlook. For now, the sidelines are the best place to be and we will look to see where the market closes this week to gain a clearer perspective. A weekly close below 79.75 might open a retest of the 76.35 spike lows, but any additional declines below 76.00 are seen limited. A weekly close back above 81.20 on the other hand, would take the immediate pressure off of the downside.
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. As such, we would warn that any rallies towards the figure over the coming sessions should be met with reservation, as the market could once again stall out by or ahead of the figure. In the interim, key short-term support comes in by 1.6060 and a break back below would be required to take the pressure off of the topside.
USD/CHF: The latest break to fresh record lows below 0.9000 (0.8910) 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. Look for an initial break and close back above 0.9100 to relieve immediate downside pressure, while back above 0.9370 will officially confirm reversal prospects and accelerate gains. Only a break and weekly close below the recent record spike lows at 0.8910 ultimately delays outlook.
An ACB has been a dip buyer in Eur/Usd with real money types selling around the top. A UK clearer has been on the offer in Aud/Usd with a French and Swiss name on the bid. US prime name and spec types seen on the bid in Usd/Chf.
TRADE OF THE DAY
AUD/USD: The market has been in the process of recovering since breaking below critical support at 0.9800 a few days back, with the latest rally resulting in a push back above parity. Nevertheless, we view the current bounce as corrective, and expect to see the market very well capped from here below 1.0150 on a daily close basis. Ultimately, only a break and close back above 1.0200 would negate outlook and give reason for pause. POSITION: SHORT @1.0035 FOR OPEN OBJECTIVE; STOP 1.0265. RISK NO MORE THAN 2.5% OF TOTAL EQUITY.
Written by Joel Kruger, Technical Currency Strategist
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