Euro Upside Limited to 100-Day SMA; Looking for Bearish Resumption
- Euro could still push higher but additional upside limited
- Greece talks still of key importance; EU Summit could offer resolution
- Eurozone data produces mixed results
- China remains at risk for a more aggressive slowdown
- Australian Dollar could start to underperform as equities look top heavy
- Fitch places four Aussie banks on negative rating watch
We enter the new week with a market that is still long currencies and broadly short the US Dollar. While our core views are aggressively bullish on the US Dollar over the medium-term, over the past few weeks we have also been calling for the current USD decline. From here, we still see the possibility for additional currency gains, with the Euro potentially extending into the 1.3400 area before finally stalling out. The rally in the currency markets that we have seen in early 2012 has therefore been nothing more than a necessary technical correction in the Greenback and we see any additional currency strength from here as limited.
Relative performance versus the USD Monday (as of 12:00GMT)
Fundamentally, a combination of some more encouraging data out of the Eurozone and a dovish Fed policy have been driving the Euro move, but ultimately, there is still a lot of work that needs to get done in the Eurozone in order to restore any lasting confidence in the region. There has been a lot of talk about the need for a unified Eurozone push to get through the crisis, and the first order of business right now is certainly some form of an official agreement on Greece. Today’s EU Summit will be closely watched and it will be interesting to see if there is in fact any progress on the Greek front. Chatter in the financial world today involved the possible impending ratification of a new EU-wide fiscal pact which is being debated in Brussels.
Moreover, we see a weaker fundamental outlook for China going forward which should weigh more heavily on the highly correlated Australian Dollar. We are seeing more and more concerning headlines out of China, and the implication would be that the fastest growing economy in the world could be on the verge of a major cool down. We see this cool down in China as representative of phase three of the global recession and look for underperformance in the commodity bloc and emerging markets.
The Australian Dollar could also be at risk going forward given a potential shift in the construct of the global equity markets. A good deal of evidence is now supporting the possibility of a bearish reversal and downside pressures over the coming weeks. Aussie is highly correlated to risk appetite and any reversal in equities could weigh more heavily in this currency. Finally, Fitch has come out placing four Australian banks on a negative rating watch, and this could add to the pressure on the higher yielding currency.
EUR/USD: Although gains in this market have been quite impressive in recent days, the price action is still classified as corrective with the market locked in a broader underlying downtrend. From here we would still leave the door open for additional upside to test the 100-Day SMA by 1.3400, but any additional gains should be well capped below 1.3500 on a daily close basis in favor of the formation of the next major lower top ahead of bearish resumption. Ultimately we see risks for a move back below the 2012 lows at 1.2620 and towards the 1.2000 area over the coming months.
USD/JPY:Despite the latest pullbacks, we continue to hold onto our constructive outlook while the market holds above 76.55 on a daily close basis. We believe that any setbacks from here should be limited in favor of a fresh upside extension back towards 79.55 over the coming weeks. Look for a break above 78.30 to confirm and accelerate, while only a daily close below 76.55 negates and gives reason for pause.
GBP/USD: The market has mostly been locked in some sideways chop over the past few weeks with any rallies very well capped ahead of 1.5800 and setbacks supported on dips below 1.5300. Until either side is convincingly broken, we would expect to see additional range trade. Therefore the preferred strategy is to look to buy range dips and sell by range highs. Only a weekly close above 1.5800 or below 1.5250 would give reason for outlook shift.
USD/CHF: Although our overall outlook remains intensely bullish, the market is in the process of some interday consolidation before the next major upside extension beyond 0.9600 and towards parity. However, with the latest consolidative declines now finally testing the 100-Day SMA, any additional downside should be limited in favor of a fresh upside extension. Ultimately, only a daily close back below 0.9000 would give reason for concern. Alternatively, a close back above 0.9230 would alleviate immediate downside pressures and reaffirm outlook.
--- Written by Joel Kruger, Technical Currency Strategist
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