Currencies Find Bids on Short Covering; Stronger Eurozone Data Helps
Things have picked up in European trade after the Asia session had been confined to tight ranges. The direction has been across the board USD bearish, with the buck selling off following an impressive rally in recent days. It seems as though a very solid round of GDP data out of the Eurozone, highlighted by the German GDP numbers, has been used as the primary catalyst and driver for the resurgence in broader currency buying with the Euro leading the charge. This has also helped to inspire some short covering in the commodities markets with oil breaking back above $100 and gold above $1510.
Relative Performance Versus the USD Friday (as of 8:15GMT)
Meanwhile, both the Franc and Yen have also found some bids on the Dollar selling, but Swiss gains are arguably more questionable given the much softer the anticipated PPI data which already follows some softer CPI data earlier in the week. The only currency underperforming against the buck on the day thus far has been the New Zealand Dollar after RBNZ Bollard reiterated that rates would stay on hold at record low levels for some time. Mr. Bollard cited risks to the local economy and the aftereffects from the earthquake as his reasons for leaving monetary policy accommodative, and said that rates would not move higher until downside risks passed and the economy started show signs of recovery.
Overall, whether currencies manage to mount a little more of a rally against the buck in the coming sessions, we see these rallies as being well offered with more upside for the Greenback. In our opinion, there has been a serious disconnect between rallying currencies, equities and commodities in recent weeks and on the whole consistently weak global economic data. Although market participants have been persistently buying back into risk, the justification for the risk buying appears to be less and less substantiated. As such, we continue to forecast more currency, equity and commodity selling ahead, with the US Dollar to be the main beneficiary of these moves.
Looking ahead, US CPI and Michigan confidence are the main economic releases due out in the North American session. However, we continue to expect to see the markets trade off of broader macro themes and developments. Appetite for risk (or lack there of) will play a major role in the direction of the markets and should contribute to volatility in Friday trade. US equity futures and commodities are decently bid into the final session for the week.
EUR/USD: Setbacks have stalled for now after just taking out some critical support by the 1.4155 lows from 18Apr. At this point, it is difficult to determine whether the market will look to consolidate the latest intense declines and possibly bounce a bit back towards the 1.4500 area, or will continue to decline and accelerate below 1.4155 to officially signal a shift in the medium-term structure in favor of the USD. Either way, the strategy from here should be to look to sell, with any rallies now seen well capped in the 1.4500 area, as the break below 1.4155 is significant, ending a sequence of consecutive higher lows in 2011. In the interim, we remain sidelined and await a clearer signal.
USD/JPY: After undergoing a fairly intense drop off from the 85.50 area several days back, the market looks to have finally found some support by the bottom of the daily Ichimoku cloud and could be in the process of carving out some form of a base. Look for setbacks to continue to be well supported in the 80.00’s with only a close back below 79.50 to give reason for concern. From here we see the risks for a fresh upside extension back towards the recent range highs at 85.50 over the coming days.
GBP/USD: The market is staring to give way with the price now dropping back below the 50-Day SMA to warn of additional declines over the coming sessions. Look for deeper setbacks towards the 1.6000 area, with any rallies now expected to be well capped ahead of 1.6500. Ultimately, only back above 1.6520 gives reason for concern.
USD/CHF: Starting to show signs of basing off of the recently established record lows by 0.8550, with the market putting in a solid bullish close on the weekly and now breaking back above the previous weekly high to end a sequence of consecutive weekly lower tops. Next key resistance comes in by 0.9000 and a break above will further confirm recovery structure and open the door for a move back towards a medium-term lower top at 0.9340. Look for any intraday setbacks to be well supported above 0.8700 on a daily close basis. Ultimately, only a daily close back below 0.8700 delays and gives reason for concern.
An ACB and corporate account have led buyers in Gbp/Usd. A model account has been an aggressive seller in Gbp/Jpy. Real money accounts, leveraged accounts and Swiss names have led buying in Eur/Usd.
Written by Joel Kruger, Technical Currency Strategist
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