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Riks Off Tone Dominates Early Weekly Trade; Major Event Risk Ahead

Riks Off Tone Dominates Early Weekly Trade; Major Event Risk Ahead

Joel Kruger, Technical Strategist
  • Early signs of risk off trade on Monday
  • China data and outlook downgrades weigh
  • Data in European session softer on the whole
  • EURUSD remains under pressure for now
  • Key central bank rate decisions this week
  • Investors also thinking about US NFPs and next Fed policy meeting
  • Moody’s downgrade of Greece not helping sentiment
  • Commodity currencies underperform; local data not helping

Markets kick off the early week in risk off mode, with currencies and equities mostly pressured against the US Dollar. A good deal of the risk selling has come from some weak China services PMIs and an accompanying downgraded growth outlook for region. The reversal in the Euro has become a rather significant short-term development and many are left wondering whether the market correction in 2012 has finally come to an end in favor of broader underlying bear trend resumption off of the 2008 EURUSD record highs. There is quite a bit of additional event risk on the horizon, and the week is packed with central bank meetings and the all important monthly NFP report out of the US. The RBA will be the first central bank to decide on policy this week, although it is widely anticipated that they will leave policy unchanged. The RBNZ, BOE and ECB are due later in the week and also expected to remain on hold.

Relative performance versus the USD Monday (as of 12:00GMT)

  1. JPY +0.65%
  2. CHF -0.04%
  3. EUR -0.08%
  4. GBP -0.09%
  5. AUD -0.52%
  6. CAD -0.61%
  7. NZD -0.86%

Market participants will also be looking beyond this week to the next Fed rate decision, which could ultimately prove to be a very big market mover. There have been signs in recent weeks that we could be on the verge of seeing a bit of a shift in the monetary policy outlook, and many are speculating that the Fed may even remove their ultra low rates through 2014 language. This would be a USD bullish development as it would start to narrow yield differentials back in favor of the buck across the board. For now, the focus is on the latest Moody’s downgrade of Greece to the lowest level, with the rating agency citing a very real risk of default with the PSI debt swap inching closer.

Aussie and Kiwi have been among the weakest currencies on the day given the risk off theme, but the currencies have also come under added pressure on weaker local data (EU retail sales better) with Aussie AIG-CBA PSI dropping well below the 50 boom/bust level and Kiwi January migration showing a loss of 650. Meanwhile in Europe, economic data was on the whole softer than expected, highlighted by some broadly disappointing PMIs.


Risk_Off_Tone_Dominates_Early_Weekly_Trade_Major_Event_Risk_Ahead_body_Picture_5.png, Riks Off Tone Dominates Early Weekly Trade; Major Event Risk Ahead


Risk_Off_Tone_Dominates_Early_Weekly_Trade_Major_Event_Risk_Ahead_body_eur.png, Riks Off Tone Dominates Early Weekly Trade; Major Event Risk Ahead

EUR/USD: The latest failure ahead of 1.3500 and subsequent break back below 1.3350 could now warn that a lower top is finally in place ahead of the next major downside extension below the 2012 lows by 1.2620. However, there is some short-term rising trend-line support off of the 2012 lows by 1.3150 which will need to be convincingly broken before we can really get behind the idea of a full on downside acceleration. Inability to establish below 1.3150 will keep bull sin the picture and could still warn of additional corrective gains in 2012. Back above 1.3320 will also compromise bearish outlook.

Risk_Off_Tone_Dominates_Early_Weekly_Trade_Major_Event_Risk_Ahead_body_jpy2.png, Riks Off Tone Dominates Early Weekly Trade; Major Event Risk Ahead

USD/JPY:The market is doing a good job of showing the potential for the formation of a major cyclical bottom after taking out the 200-Day SMA and now clearing psychological barriers by 80.00 for the first time in 6 months. This further solidifies basing prospects and we could be in the process of seeing a major bullish structural shift that exposes a move towards 85.00-90.00 over the coming months. At this point, only back under 77.00 would delay outlook and give reason for concern. However, in the interim, it is worth noting that gains beyond the recent highs at 81.85 over the coming sessions could prove hard to come by with technical studies needing to unwind from their most overbought levels in over 10 years before a bullish continuation. As such, we would caution buying breaks above 81.70 for the time being and instead recommend looking for opportunities to buy on dips into the 78.00-80.00 area.

Risk_Off_Tone_Dominates_Early_Weekly_Trade_Major_Event_Risk_Ahead_body_gbp2.png, Riks Off Tone Dominates Early Weekly Trade; Major Event Risk Ahead

GBP/USD: Inability to establish above the 200-day SMA once again keeps the multi-day range intact, and from here we would look for a bearish resumption back down towards the 1.5650 area over the coming sessions. Look for a sustained break below 1.580 to confirm outlook, while only a daily close back above 1.5950 gives reason for concern.

Risk_Off_Tone_Dominates_Early_Weekly_Trade_Major_Event_Risk_Ahead_body_swiss1.png, Riks Off Tone Dominates Early Weekly Trade; Major Event Risk Ahead

USD/CHF: Setbacks have stalled for now just ahead of 0.8900 and the market could finally be looking to carve the next medium-term higher low ahead of a bullish resumption and eventual break back above 0.9660. Look for additional gains over the coming sessions back towards 0.9300, with a break above to confirm and accelerate. Ultimately, only a drop below 0.8930 negates and gives reason for pause.

--- Written by Joel Kruger, Technical Currency Strategist

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