Safe Haven Currencies Gain Further as Aussie and Euro Lead Way Lower
Risk-aversion is afoot this morning with the three major safe havens – the Japanese Yen, the Swiss Franc, and the US Dollar – leading the way higher against high beta and risk-correlated currencies – the Australian Dollar and the Euro. This is not something we see that often anymore: since the September 6, 2011 EURCHF floor implemented by the Swiss National Bank, the Euro and the Swiss Franc have held a +0.94 daily correlation (i.e. if EURUSD appreciates then USDCHF depreciates).
As we’ve been stressing since the European Central Bank’s decision to unveil an unlimited sterilized bond-buying program on September 6, 2012 (ironic that two major Euro-zone milestones took place exactly one-year apart, but that’s neither here nor there), the conditions that come along with the debt monetization scheme are unpalatable for Italy and Spain. Soon after the ECB’s plan was unveiled, Italian Prime Minister Mario Draghi said "Italy would not accept conditions beyond those already agreed and which we are already respecting,” which leads us to believe that the ECB will not be supporting Italy. Good luck.
The Spanish situation is slightly different. After taking a €100 billion bailout for its heavily indebted banking sector – plagued by a housing crisis, not so different than the US housing crisis circa 2007 – it’s looking increasingly likely that Spain will need a sovereign bailout. Why? The situation is analogous to what happened with Ireland: the country nationalized its banks and took their bad loans on, and eventually, it was shut out of the funding markets. If Spain is to stay solvent, it cannot allow its banking crisis to proliferate; and the only way that happens is if Spain receives another capital injection. Lower bond yields will help, but this of course – as explicitly outlined by ECB President Mario Draghi – will only come with “the condition.” With no bailout in the works, yields are back up, and this game of back and forth will continue until market participants implicitly force Spain to take a bailout.
Taking a look at credit, peripheral European bond yields are back up, underpinning Euro weakness thus far today. The Italian 2-year note yield has increased to 2.304% (+3.4-bps) while the Spanish 2-year note yield has increased to 3.227% (+3.1-bps). Conversely, the Italian 10-year note yield has decreased to 5.068% (-1.5-bps) while the Spanish 10-year note yield has decreased to 5.877% (-3.8-bps); higher yields imply lower prices.
RELATIVE PERFORMANCE (versus USD): 10:38 GMT
The docket is a bit more saturated today, with three releases due out that could impact volatility and intraday trends. At 08:30 EDT / 12:30 GMT, the USD Current Account Balance (2Q) will be released, and the narrowing deficit suggests this could be supportive of the US Dollar. At 09:00 EDT / 13:00 GMT, the USD Net Long-term TIC Flows (JUL) report is due, which details demand for USD-denominated assets like Treasuries. At 10:00 EDT / 14:00 GMT, the USD NAHB Housing Market Index (SEP) will be released, and is expected to show a slight uptick.
EURUSD: The EURUSD has pulled back from its 76.4% Fibonacci retracement on the February 2012 high to the July 2012 low at 1.3145, closing below the key ratio for the second consecutive day on Monday. With the daily RSI very overbought, it appears a correction may be underway. Near-term resistance lies at 1.3145, 1.3165/70, 1.3240, 1.3265/85, and 1.3360. It is possible that a long-term bottom is now in at the 1.2040/45 low set in late-July. Interim support comes in at 1.3020/25 (5-EMA), 1.2930/35, and 1.2820/30 (200-DMA, late-April swing high).
BB represents Bollinger Bands ®
USDJPY: The USDJPY has steadied today as it remains supported by a relatively elevated US 10-year Treasury Note (2s10s spread remains wider post-FOMC). The June 1 swing low at 77.65/70 was broken on Thursday leading to a washout in new lows below 77.30, something repeatedly noted over the past weeks as a potential occurrence. A close above 78.60 leaves open the possibility for 79.10/30 (100-DMA, 200-DMA, descending trendline off of the April 20 and June 25 highs). A close below 78.60 has interim support at 78.10/20, 77.90, 77.65/70 (June 1 low), 77.45/50, and 77.10/15 (September low).
GBPUSD: Nothing has changed with the pair putting in an Inside Day; though we caution that an Inside Day alongside a significantly overbought daily RSI reading could signal a turning point. “The key 1.6120/40 level cracked with ease on Friday and our bias looks longer for the foreseeable future. The weekly close above said level opens the door for a move towards 1.6400 in the coming days. The former April swing highs at 1.6260 (by close), 1.6300 (by high) are in focus, now that the descending trendline off of the April 2011 and August 2011 highs broke last week. Below 1.5930/40, near-term support comes in at 1.5860/75 (ascending trendline off of August 2 and August 31 lows), 1.5770/85 (late-August swing lows), and 1.5700.”
AUDUSD: The AUDUSD appears to have failed for its breakout on Friday, with an Inverse Hammer/Shooting Star forming on the daily chart at the descending trendline off of the February 2012 and August 2012 highs coming in at 1.0540/50 today. Near-term resistance comes in at 1.0480/85, 1.0550/60, 1.0600/15 (August high) and 1.0630. Should we see a rally up towards 1.0600 again, another failure would mark a Double Top and signal a push for a test of 1.0250/70 (ascending trendline off of the June 1 and September 6 lows) then 1.0200/05 (100-DMA). Support comes in at 1.0425/45 (swing zone on 4-hour chart back to July 19), 1.0410 (mid-August swing lows), 1.0325 (200-DMA), and 1.0250/70.
--- Written by Christopher Vecchio, Currency Analyst
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