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Deeper Setbacks Expected in USD/JPY Before Major Bottom

Deeper Setbacks Expected in USD/JPY Before Major Bottom

2011-10-24 11:30:00
Joel Kruger, Technical Strategist
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  • No official plan but markets optimistic
  • Bank recapitalization and EFSF expansion talk driving risk bids
  • China HSBC PMIs show improvement back above 50
  • Australia’s Rio Tinto out with some strong comments
  • USD/JPY retail positioning ratio is shocking; warns of fresh drop
  • Aussie looks like it could be ready for next major lower top
  • Eurozone data comes in softer on the whole
  • Equity futures dip into red ahead of North America

Although no official plan has been unveiled to this point, market participants continue to buy into risk on the expectation that a solid plan will be implemented by EU leaders to tackle the current Eurozone financial crisis. Much of the optimism on this front has been specifically generated from progress on the topics of bank recapitalization and expansion of the EFSF. Also seen supporting risk sentiment into Monday have been some positive developments in Asia, with China showing an improved HSBC PMI back above the key 50 level, snapping 3 months of contraction, and news out of Australia that global miner Rio Tinto expects its iron ore business to grow substantially over the next 5 years.

Relative performance versus the USD on Monday (as of 11:20GMT)

  1. JPY +0.25%
  2. NZD +0.07%
  3. AUD -0.01%
  4. CAD -0.06%
  5. GBP -0.18%
  6. EUR -0.45%
  7. CHF -0.53%

Still, we continue to see risks tilted in favor of the US Dollar over the medium-term and longer-term and view the October price action as a corrective pullback in the buck within a broader uptrend. At this point, any additional currency strength should find some solid offers and we could very well be seeing this play out on Monday, following the Euro’s rejection of some fresh multi-day highs just over 1.3950. German PMIs were on the whole weaker, with the manufacturing component dipping below the key 50 level for the first time in two years. While Eurozone industrial new orders were on the stronger side, Eurozone PMIs were broadly weaker to easily offset.

On the strategy front, we are absolutely shocked with the astounding retail positioning ratio in USD/JPY. Despite the market finally breaking out of its multi-day consolidation to fresh record lows, retail traders continue to buy the market with the ratio now sitting at a dramatic 16:1 long USD/JPY. While we continue to like the idea of looking to build medium and longer-term long positions in the pair, the ratio sends a message that shorter-term, we still could see some downside to yet another record low before the market is finally ready to establish a meaningful base. Once we see USD/JPY dropping and the ratio also pulling back, we will then look to finally start building into the long USD/JPY position.

Another market we like looking to trade over the coming sessions is AUD/USD. Despite the intense rally out from the early October 0.9385 lows, we classify the move as corrective and look for the market to carve out a fresh lower top below 1.0720 ahead of the next major downside extension. As such, any additional rallies should be well capped above 1.0500, and rallies towards the psychological barrier should be aggressively sold. Fundamentally, we still contend that third wave of the global crisis has yet to fully materialize in the east, and when it does, we see the higher yielding Australian Dollar as being very exposed.

Looking ahead, the economic calendar is quite light in North America with Chicago Fed national activity index the only release. On the official circuit, Fed Dudley, Germany’s Merkel, and EU Juncker are all slated to speak. US equity futures have dipped into the red after tracking higher earlier in Europe, while commodities are higher led by gold. The yellow metal is up nearly 1%.

ECONOMIC CALENDAR

Morning_Slices_body_Picture_5.png, Deeper Setbacks Expected in USD/JPY Before Major Bottom

TECHNICAL OUTLOOK

Morning_Slices_body_eur.png, Deeper Setbacks Expected in USD/JPY Before Major Bottom

EUR/USD: At this point, although the market is showing some signs of let up intraday, there is still no official signs of reversal. However, we continue to classify the latest market rally out from 1.3145 as corrective. We contend that a fresh lower top will carve somewhere near current levels and will be on the lookout for a topside failure over the coming sessions. Rallies towards 1.4000 should therefore be aggressively sold, while back below 1.3650 would confirm bias and accelerate declines.

Morning_Slices_body_jpy2.png, Deeper Setbacks Expected in USD/JPY Before Major Bottom

USD/JPY:Although the market remains largely confined to the 76.00’s, the recent break to fresh record lows below the figure suggests that we still could see additional weakness before any meaningful recovery rally. At this point, a break back above 78.00 will officially be required to alleviate immediate short-term downside pressures, while back below 75.80 will accelerate declines towards major psychological barriers at 75.00.

Morning_Slices_body_gbp2.png, Deeper Setbacks Expected in USD/JPY Before Major Bottom

GBP/USD: The market has been well bid since breaking the neckline of a double bottom at 1.5715, with rallies extending into the 1.6000 area thus far. The measured move objective for the pattern projects additional gains into the 1.6100’s, but any additional strength beyond this area is likely to be well capped by the 200-Day SMA in favor of a resumption of a broader underlying downtrend. As such, our strategy for now is to look for opportunities to fade additional strength above 1.6100 and towards the 200-Day SMA. Back under 1.5750 will be required to more officially alleviate immediate topside pressures.

Morning_Slices_body_swiss1.png, Deeper Setbacks Expected in USD/JPY Before Major Bottom

USD/CHF: The market is in the process of consolidating its latest sharp recovery out from record lows by 0.7000. Although there are some risks over the short-term for deeper setbacks, any declines should be very well supported on a close basis above 0.8645. Back above 0.9315 will signal an end to the consolidative price action and confirm a fresh higher in place ahead of the next major upside extension back above parity. Ultimately, only a close back below 0.8500 would give reason for concern.

--- Written by Joel Kruger, Technical Currency Strategist

To contact Joel Kruger, email jskruger@dailyfx.com. Follow me on Twitter @JoelKruger

To be added to Joel Kruger’s distribution list, send an email with subject line “Distribution List” to jskruger@dailyfx.com

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