Investors Still Waiting on Greece; Euro Attempts to Hold Above 1.3000
- Euro remain relative underperformer and posts record lows on commodity crosses
- Yen finding offers against buck to avoid direct retest of record levels from October
- BOJ Shirakawa warns of the severity of deflation and Yen strength
- Aussie comes under a bit of pressure on softer retail sales data
- RBA set to meet early Tuesday and additional rate cut expected
- Moody’s warns of contagion to Asia as Eurozone crisis lingers on
- Key deadline for Greece on Monday which will have market moving influence
The market response to the solid US employment data on Friday was impressive, with risk correlated assets very well bid, led by gains in the commodity bloc currencies. The Euro however came under some intense pressure against the buck and was the standout underperformer on the day due to the ongoing crisis in the Eurozone and inability for officials to come up with a formal agreement on Greece. This resulted in a break to fresh record lows in some of the Euro/commodity crosses, with EUR/AUD and EUR/NZD coming under some intense pressure.
Relative performance versus the USD Monday (as of 11:55GMT)
Elsewhere, the Yen has managed to find some offers ahead of its record highs against the buck, and it will be interesting to see if this trend reversal can persist. Clearly broader flows have forced the Yen to fresh record highs in recent months despite attempts by local Japanese officials to intervene on behalf of the currency. Most recently, BOJ Shirakawa has been on the wires saying that current deflation and the Yen strength are very “severe” and that steady policy needs to be implemented by investigating economic conditions.
Moving on, the Australian Dollar has come under some pressure on Monday along with most currencies, but has added reason for relative underperformance following the softer than expected retail sales data. The RBA is slated to meet on Tuesday and another rate cut of 25bps can be expected. A combination of the ongoing Eurozone crisis and some deteriorating local fundamentals are seen as the primary drivers for the additional accommodation. Moody’s has also been out on Monday warning that the sovereign debt crisis in the Eurozone has increased the threat of contagion to Asia which would expose the Australian economy.
Overall, we remain skeptical with the rally in risk correlated assets and see currencies and equities at risk for significant declines in the days ahead. We remain somewhat confounded with the performance in the US equity markets, with equities nearly back to the record highs from 2007 despite the global recession. For now, the FX market will be watching the developments out of the Eurozone, with Greek leaders needing to respond to Troika and international creditors today on the country’s austerity and structural reforms. Failure to do so will increase the probability for a default, which could come as soon as March according to the latest from EU Juncker.
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 1.3340, 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. A daily close back under 1.3025 would suggest that a lower top is now in place and open a more immediate bearish resumption.
USD/JPY:The market could once again be looking to carve an interim base after setbacks stalled shy of the record lows from October by 75.55. A bullish reversal day from last Friday has shown some decent follow through and a daily close back above 77.00 will do a good job of alleviating immediate downside pressures and reintroducing longer-term basing prospects. Inability to establish back above 77.00 will however keep the focus on the downside and on a retest of the record lows.
GBP/USD: The latest break back above 1.5800 now compromises a multi-week consolidation, with the pair now looking to break towards next key resistance by 1.6000. However, despite the upside move, we see any additional gains from here as limited and would look for a topside failure somewhere ahead of 1.6000 in favor of a bearish resumption. Daily studies confirm and look stretched and selling rallies above 1.5900 over the coming sessions is the preferred strategy. A close back under 1.5750 will also suggest that the market has peaked out for now in favor of bearish resumption.
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 0.9250 would alleviate immediate downside pressures and reaffirm outlook.
--- Written by Joel Kruger, Technical Currency Strategist
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