Risk Appetite Flows Back Into Markets Following Holiday Trade
Markets return to normal form on Tuesday following the lightened UK and US Monday holiday session, and there has been a fresh injection of risk appetite to go with the resumption in fuller trading conditions. Risk related currencies have been mostly very well bid, with end of month flows also seen driving additional volatility. The Euro has been able to rally back above the 1.4400 handle as market participants become more optimistic of an end to the Greek woes, while the New Zealand Dollar once again stands out after breaking to yet another 26-year high above 0.8250.
Relative Performance Versus the USD on Tuesday (as of 11:00GMT)
In Asia, a stronger than expected business confidence reading out of New Zealand has been attributed for the relative Kiwi outperformance, although the currency could still be at risk for a pullback following comments from Prime Minister Key who expressed concern over the strength in local currency. Elsewhere, Moody’s has placed Japan’s Aa2 rating on review for possible downgrade, with the Yen finding offers on the rating agency announcement. Meanwhile, in Australia, a widening in the trade deficit and softer private sector credit were seen opening yet another round of selling in AUD/NZD.
Moving on, European markets built on price action from Asian trade, with the Euro finding additional bids after German unemployment dropped. Although the change in unemployment was not as encouraging, the drop in the unemployment rate seemed enough to keep confidence bolstered. Also out was Swiss GDP which came in a good deal softer than expected, and opened the door for some much needed corrective selling in the Franc from its record highs against both the USD and Euro.
Looking ahead, key event risk in North American trade will come in the form of the Canada interest rate decision due at 13:00GMT. While no change is expected on rates, any accompanying statements from the BOC could prove to be market moving. Also out in the North American session are Chicago PMI, US consumer confidence and Dallas Fed manufacturing. US equity futures and oil prices are well bid and gold trades flat.
EUR/USD: In the process of a corrective bounce following a 10 big figure drop in May with the market rallying from below 1.4000 and in search of a fresh lower top ahead of the next major downside extension below 1.3970. From here, look for any rallies to be well capped in the 1.4400-1.4550 area, with only a break back above 1.4550 negating negative outlook and giving reason for concern. Back below 1.4255 confirms and should accelerate declines.
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 weeks.
GBP/USD: The 100-Day SMA has proven to be formidable support for the pair, with the price rallying substantially out from the 1.6060 lows to trade back above 1.6500. However, we would expect rallies to now be well capped below 1.6600 on a daily close basis. Look for a lower top in the 1.6500 area ahead of the next major downside extension below 1.6000 over the coming days. Ultimately, only a daily close back above 1.6600 would negate outlook.
USD/CHF: The latest minor recovery has proved to be just that, with the market finding a fresh lower top ahead of 0.9000 in favor of a drop to yet another record low below 0.8500. Daily studies are however still looking quite stretched to us, and we continue to like the idea of taking shots at buying on dips in anticipation of a major base. Look for current declines to hold around the 0.8500 area and a break back above 0.8740 to encourage basing prospects and open the door for the potential formation of a major interday double bottom (neckline by 0.8950) projecting gains back towards 0.9500. A daily close below 0.8400 would negate.
European central banks have been large buyers of euros on month end needs in Eur/Usd but also cited on euro/crosses. A French corporate type has been large seller in Eur/Chf. A Canadian account and spec types seen as medium size buyers in Usd/Cad. Real money, momentum types and funds have all been paring longs in Aud/Usd.
Written by Joel Kruger, Technical Currency Strategist
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