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Eurozone Headlines Fail to Impress But Single Currency Holding Up

Eurozone Headlines Fail to Impress But Single Currency Holding Up

2011-10-26 11:40:00
Joel Kruger, Technical Strategist
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  • Aussie hit hard and underperforms on softer inflation
  • Aussie technical studies suggest more weakness ahead
  • Yen remains well bid by record highs against buck
  • Markets getting ready for EU Summit communiqué
  • China comes out with some balanced EU Summit comments
  • FT articles are overall EU Summit negative and weigh a bit

The Australian Dollar has been the hardest hit currency on the day thus far and has been getting a lot of attention in early Wednesday trade. The relative underperformance comes on the back of some much softer inflation readings which have now fueled speculation of a potential rate cut at next week’s central bank meeting. This coupled with a significant decline in iron ore prices on a reduced demand from China, have not done any favors for Aussie and we project additional weakness ahead for the higher yielding commodity currency. Our technical studies actually show the October market rally stalling out in a very good spot, just under the upper end of the daily Ichimoku cloud, to confirm that the pair is still locked in a broader downtrend. The recent highs just shy of 1.0500 make for an ideal medium-term lower top, with the market looking to carve out the next lower high below the previous lower top by 1.0765 from early September. A break and daily close back below 1.0315 should relieve immediate topside pressures and accelerate declines.

Morning_Slices_body_aud2.png, Eurozone Headlines Fail to Impress But Single Currency Holding Up

Elsewhere, the Yen continues to remain well bid, with USD/JPY recently posting yet another record low below 76.00. Although the dips have been shallow, retail positioning still shows an overwhelming ratio of long USD/JPY positions at over 13:1, which suggests there is still more weakness ahead. MOF Azumi has been on the wires but has failed to influence price action, while BOJ Shirakawa comments have had the same impact, with the market going nowhere after the central banker expressing reluctance to adopt further accommodative measures at tomorrow’s meeting.

Relative performance versus the USD on Wednesday (as of 11:30GMT)

  1. CHF +0.40%
  2. JPY +0.30%
  3. CAD +0.23%
  4. EUR +0.22%
  5. NZD -0.06%
  6. GBP -0.11%
  7. AUD -0.49%

Moving on, while the economic calendar is exceptionally light on Wednesday, investors will not be disappointed with the highly anticipated EU Summit expected to generate more than enough volatility with which to deal. Comments from EU Juncker of a “final and even ground breaking decision” have kept the Euro supported , but rallies have been equally well offered as market participants remain cautious. An FT article suggesting that the communiqué from the Summit will not announce a completed deal on Greek haircuts and will also not disclose specific numbers on EFSF expansion, could also weigh more heavily as the day progresses. Other news around the event includes an announcement from Beijing that it support EU efforts to deal with the crisis but the administration is unsure whether it will make an additional investment in the EFSF.

On the data front, UK CBI manufacturing orders were the weakest in a year coming in well below consensus estimates. Looking ahead, things pick up a bit in North America with US durable goods, new home sales and the Bank of Canada monetary policy report due. US equity futures and commodities are bid into North American trade.

ECONOMIC CALENDAR

Morning_Slices_body_Picture_6.png, Eurozone Headlines Fail to Impress But Single Currency Holding Up

TECHNICAL OUTLOOK

Morning_Slices_body_eur.png, Eurozone Headlines Fail to Impress But Single Currency Holding Up

EUR/USD: At this point there are still no signs of let up, although 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 1.3820 would confirm bias and accelerate declines. It is worth paying attention to the daily Ichimoku cloud which shows the market still in a downtrend and stalling into cloud resistance.

Morning_Slices_body_jpy2.png, Eurozone Headlines Fail to Impress But Single Currency Holding Up

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, Eurozone Headlines Fail to Impress But Single Currency Holding Up

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 1.6000 and towards the 200-Day SMA. It is worth paying attention to the daily Ichimoku cloud which shows the market still in a downtrend and trading into key cloud resistance. A daily close back under 1.5900 will however be required to more officially alleviate immediate topside pressures.

Morning_Slices_body_swiss1.png, Eurozone Headlines Fail to Impress But Single Currency Holding Up

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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