China News Helps to Bolster Risk Appetite Overnight; Currencies Bid for Now
Any element of fear and uncertainty has been taken out of the markets for the time being, with currencies getting a reprieve against the US Dollar and attempting to mount more sizable corrective efforts. Currency gains accelerated in early Thursday trade, with the Euro contemplating a push back above 1.4200. The antipodeans have been finding some relative strength on the day with news out of China that the country could invest several billion dollars in the New Zealand economy and hundreds of billions in the Australian economy, helping to generate additional bids. An FT report also says that China has interest in European bail-out bonds and this is also contributing to the risk positive environment. Finally ECB President Trichet was on the wires with some hawkish talk after acknowledging upside risks to inflation.
Relative Performance Versus the USD Thursday (as of 11:15GMT)
On the data front, Australian capex data came in quite solid, although RBA Battellino did mitigate some of the positive reaction after expressing concern over the pressure of rising interest rates on the housing sector. This contributed to yet another drop off in Aud/Nzd, which has been under intense pressure over the past several days. Still, Battellino offered an overall encouraging outlook for the local economy and we could see the Australian Dollar look to extend gains for the remainder of the day. Elsewhere, the resurgence in risk appetite helped to bid the Eur/Chf cross of its record lows below 1.2300. Various SNB officials have been on the wires in recent days expressing concern over the rapid appreciation in the Franc, and we would recommend keeping a close watch on price action in this currency. In Germany, import prices were softer, while in Switzerland, the Swiss trade balance showed improvement driven by surging exports.
On Wednesday we warned of the potential for a currency bounce following a sizeable broad based USD rally, and we are seeing this play out right now. However, we still would take the latest price action with a grain of salt as the global macro economy faces some significant risks, particularly with respect to the Eurozone economy and the fate of the peripheral nations.
Looking ahead, US GDP and initial jobless claims stand out on the North American calendar. US equity futures are tracking slightly higher, while commodities have reversed course and are in the red ahead of the North American open.
EUR/USD: The market continues to show signs of weakness following the break below 1.4155 support several days back, and the risks from here are for deeper setbacks over the coming days towards next key support in the 1.3800’s. Look for a clear break below 1.4045 to confirm and accelerate, while current rallies should be well capped ahead of 1.4350.
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 starting to give way, with the price settling back below the 50-Day SMA to warn of additional declines over the coming sessions. Look for deeper setbacks below 1.6000, with current 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 for two consecutive weeks and breaking back above the previous weekly high. 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 current intraday setbacks to be well supported above 0.8650 on a daily close basis. Ultimately, only a daily close back below 0.8650 delays and gives reason for concern.
A Japanese exporter has led sales in Usd/Jpy with specs on the bid. Central banks are active bidders in Eur/Usd with momentum types and a Far East name trying to cap gains. Decent size French and UK clearer sales in Cable.
Written by Joel Kruger, Technical Currency Strategist
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