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Sentiment Shifting Back Towards Buck; Synopsis and Overview of Price Action

Sentiment Shifting Back Towards Buck; Synopsis and Overview of Price Action

2011-05-06 09:20:00
Joel Kruger, Technical Strategist
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I read great overview from a very well respected strategist at one of the leading banks, which offers wonderful clarity on the latest moves in the markets. I will attempt to highlight the main points in an effort to give a better insight into what exactly is going on. My colleague outlined 3 reasons why the Euro was hit so hard on Thursday and 3 reasons why risk correlated currencies were also heavily liquidated, and I could not have done a better job of making these points so clear and succinct.

Reasons for Euro Sell-Off:

  1. A Portuguese bailout that was very badly received
  2. The ECB did not use the expected “strongly vigilant” language that would warn of immediate rate hikes
  3. ECB President Trichet gave a very emphatic endorsement for strong US Dollar policy

Reasons for Sell-Off in Risk Correlated Currencies:

  1. A series of softer economic releases out of the Eurozone and US
  2. A necessary unwinding of a market long risk
  3. Reaction to some significant pullbacks in the commodities markets

Relative Performance Versus the USD Friday (as of 9:05GMT)

  1. AUD +0.86%
  2. NZD +0.42%
  3. CAD +0.05%
  4. GBP-0.04%
  5. EUR -0.08%
  6. CHF -0.32%
  7. JPY -0.35%

The report from the strategist then went on to warn that this move may still not be over despite what has proven to be a market which quite easily has bought back into risk and sold out of the US Dollar on any and every chance it gets. While reserve managers have been aggressive sellers of the US Dollar in an effort to diversify, the latest pullbacks in oil prices and the fact that these countries that have been selling USDs are in better shape then some of the major economies, may now leave these managers on the sidelines. My colleague explains that “as long as they [reserve managers] do not see each other selling USDs they may choose to stand back, especially because their economic data has not turned down nearly as sharply as G10 has.”

This transitions into the final point which is that we are now starting to see a market environment where weak economic data, even in the US, once again translates into a stronger US Dollar. With that in mind, today’s NFP number will take on added significance. Analysts have already downwardly revised their calls with the number now estimated at around 175k, and certainly anything below 140k (as cited in my colleagues report), would be viewed as extremely weak, even in light of the latest bout of negative risk sentiment. So if we do see a softer print today, then the risk selling could very well continue.

My colleague rounds things out with a fantastic conclusion, saying “Net, net we remain concerned that investors are still positioned for a near-term bounce back in what might be a more fundamental pullback.”

Moving on, currencies have stabilized in Asian trade and are now for the most part consolidating the latest moves. The Australian Dollar however once again stands out, and has been a real relative outperformer in early Friday trade. The very hawkish RBA quarterly statement on monetary policy and some upbeat comments from the Australian Treasurer have been the primary source for the strength. Although, in light of the above analysis, we would warn that any isolated moves on Australia specific developments, should be taken with a grain of salt as broader global macro themes are at play and will likely play a heavier role in determining market direction from here.

On the data front, Swiss unemployment continued to decline, while UK producer prices were higher than forecast. Looking ahead, the economic calendar is quite stacked. While it is clear that the US NFP report later today will take front and center stage, some of the other supporting acts will include; German industrial production, Canada employment, and US consumer credit. On the official circuit, there is also a good deal of speakers slated. These speakers include; BOC Carney, BOE King, ECB Bini-Smaghi, Fed Yellen, Fed Dudley and Fed Bullard. There is a lot going on today so we recommend that traders proceed with extreme caution. US equity futures and gold prices are consolidating, while oil continues to get hit hard, trading well below $100.

ECONOMIC CALENDAR

Morning_Slices_body_Picture_5.png, Sentiment Shifting Back Towards Buck; Synopsis and Overview of Price Action

TECHNICAL OUTLOOK

Morning_Slices_body_eur.png, Sentiment Shifting Back Towards Buck; Synopsis and Overview of Price Action

EUR/USD: The market has finally succumbed to some heavily overbought readings, with the price dropping significantly over the past several hours to trade back below the 20-Day SMA. The daily close below the moving average could be significant and warn of deeper setbacks to come, however, while the market holds above 1.4155, the overall structure remains bullish. Next support comes in by the 1.4450 area in the form of the 61.8% fib retrace off of the 18Apr-4May move, with 1.4325 the next level below guarding against the critical support at 1.4155. Above, look for intraday rallies to be well capped in the 1.4700-1.4750 area by the 10-Day SMA and previous support now turned resistance. It is worth noting, that a break below 1.4490 on Friday would set up the fist bearish outside week since the start of the year.

Morning_Slices_body_jpy2.png, Sentiment Shifting Back Towards Buck; Synopsis and Overview of Price Action

USD/JPY: Despite the latest slide, we continue to retain a constructive outlook for the market so long as it holds above the daily Ichimoku cloud on a weekly close basis. Ultimately, only a sustained break back below the cloud would negate constructive outlook. A break and close back above 80.70 on Friday would confirm outlook and accelerate gains, with daily studies turning up from oversold levels.

Morning_Slices_body_gbp2.png, Sentiment Shifting Back Towards Buck; Synopsis and Overview of Price Action

GBP/USD: The latest pullback has now resulted in a test of some rising trend-line support off of the late March lows, and as such, we will use Thursday’s low by 1.6350 as a gauge for directional bias. Should the market establish on a close basis below 1.6350, then we would expect to see deeper setbacks towards the 1.6000 area further down. However, should we hold above 1.6350 on a close basis, we could see the market attempt to carve a higher low ahead of the next upside extension back towards 1.6750. In the interim, we remain on the sidelines and await a clearer signal.

Morning_Slices_body_swiss1.png, Sentiment Shifting Back Towards Buck; Synopsis and Overview of Price Action

USD/CHF:The latest break to fresh record lows below 0.8600 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 the market to hold above 0.8500 on a daily close basis, while only a break and weekly close below 0.8500 ultimately delays outlook. Thursday’s strong bullish reversal day is encouraging for recovery outlook, though the market will need to continue to extend gains for confidence to build.

FLOWS

Semi-official accounts leading sales in Eur/Usd with an ACB seen buying in dips, models and real money types are seen selling in the euro/crosses. A Middle Eastern and European name have led sales in Cable.

Written by Joel Kruger, Technical Currency Strategist

If you wish to receive Joel’s reports in a more timely fashion, email jskruger@dailyfx.com and you will be added to the distribution list.

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