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Currencies Locked in Directionless Trade but US Dollar Should Emerge

Currencies Locked in Directionless Trade but US Dollar Should Emerge

2011-12-05 11:49:00
Joel Kruger, Technical Strategist
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  • US Dollar finds bids on positive US economic data
  • EU Summit will be key event this week
  • Central bank meetings also in focus; ECB and RBA expected to cut
  • Sarkozy and Merkel meeting will influence trade for remainder of day
  • Eurzone economic data mixed
  • UK services PMIs come in stronger than expected

The US Dollar has regained a bid tone into the new week, but at this point we are still unsure whether the broader US Dollar uptrend is ready for bullish resumption. Interestingly enough, the latest surge in the Greenback has been driven by a positive risk event, with the better than expected US employment data helping to inspire a fresh round of bids. Still, price action is locked in no-man’s land and as far as the Euro is concerned, we will need to see a break and close back above 1.3550 or close below 1.3360 for a clearer short-term directional insight.

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

  1. NZD +0.36%
  2. CAD +0.33%
  3. EUR +0.32%
  4. AUD +0.29%
  5. GBP +0.25%
  6. CHF -0.02%
  7. JPY -0.06%

The central focus this week will be on the EU Summit and market participants will be looking for an aggressive response to the Eurozone crisis. Inability to come up with a sound plan will likely inject another dose of fear and uncertainty and weigh heavily on risk correlated assets. A meeting between French PM Sarkozy and Germany’s Merkel today could shed some light on whether anything will get done at the Summit later in the week. On the central bank front, the RBA and ECB are expected to once again cut rates, while the RBNZ, BOC and BOE will be looking to leave policy unchanged.

The key takeaway from recent price action is that the US Dollar can in fact benefit on positive US economic data. Throughout the crisis this has not been the case, and any sign of strength in US data has often inspired a fresh round of broad based selling in the buck. Again, we are not sure just yet whether markets are ready to start buying the buck aggressively on positive data in the US, but we have anticipated a point in the near future where the US Dollar will in fact start to find relative bids on positive local economic developments.

The rationale is that the US was the first into the crisis and therefore could very well be the first to emerge from the depths of economic turmoil. Should the US economy start to show signs of sustained recovery, the Fed will be forced to consider reversing monetary policy which ultimately will narrow yield differentials back in favor of the buck. This is why we like the US Dollar over the coming months as the currency stands to benefit both in risk on and risk off (safe haven) environments.

Economic data produced in the European session was largely mixed with services PMIs coming in all over the place, while Eurozone retail sales were better and confidence data was softer. Meanwhile, in the UK, services PMIs better analyst forecasts. US equity futures are tracking a good deal higher ahead of North America, while commodities are mixed with oil slightly bid and gold moderately offered. US factory order and ISM non-manufacturing are the key releases in North America on Monday.

ECONOMIC CALENDAR

Currencies_Locked_in_Directionless_Trade_but_US_Dollar_Should_Emerge_body_Picture_5.png, Currencies Locked in Directionless Trade but US Dollar Should Emerge

TECHNICAL OUTLOOK

Currencies_Locked_in_Directionless_Trade_but_US_Dollar_Should_Emerge_body_eur.png, Currencies Locked in Directionless Trade but US Dollar Should Emerge

EUR/USD: Remains locked in some consolidation following the bounce out from 1.3200. The key levels to watch above and below come in at 1.3550 and 1.3360 respectively and a daily close above or below will be required for a clearer short-term directional bias. A break and close back above 1.3550 will suggest that the market is still in the process of correcting and could head back into the 1.3800 area, while a break and close back below 1.3360 will open the door for a bearish resumption and retest of the key October lows at 1.3145.

Currencies_Locked_in_Directionless_Trade_but_US_Dollar_Should_Emerge_body_jpy2.png, Currencies Locked in Directionless Trade but US Dollar Should Emerge

USD/JPY:The market has managed to successfully hold above the bottom of the daily Ichimoku cloud to further strengthen our constructive outlook and we look for the formation of a inter-day higher low by 76.55 ahead of the next major upside extension back towards and eventually through the recent multi-day highs by 79.55. Ultimately, only a close back below the bottom of the Ichimoku cloud would negate outlook and give reason for pause, while a daily close back above 78.30 accelerates.

Currencies_Locked_in_Directionless_Trade_but_US_Dollar_Should_Emerge_body_gbp2.png, Currencies Locked in Directionless Trade but US Dollar Should Emerge

GBP/USD: The market correction out from the recent lows at 1.5420 appears to have finally stalled out and we will be looking for a daily close back under 1.5575 on Monday to confirm bias and accelerate declines. A close below 1.5575 should accelerate declines towards 1.5420, below which will open an even deeper setback to retest critical support by the October lows at 1.5270. Ultimately, only back above 1.5800 would delay and give reason for concern.

Currencies_Locked_in_Directionless_Trade_but_US_Dollar_Should_Emerge_body_swiss1.png, Currencies Locked in Directionless Trade but US Dollar Should Emerge

USD/CHF: The recent break above the critical October highs at 0.9315 is significant and now opens the door for the next major upside extension over the coming weeks back towards parity. Daily studies are looking slightly stretched at current levels, so we would not rule out the potential for some corrective selling, but ultimately, look for any setbacks to be well supported in the 0.9000 area, where a fresh higher low is sought out.

--- Written by Joel Kruger, Technical Currency Strategist

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

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