For the month of October, I’ve been beating the drum that markets were closing in on a major inflection point. Many assets, including commodities, currencies, and equities, were sitting at significant levels of support as global investor sentiment deteriorated to recent lows. The point has been that oversold technical in the near-term, coupled with the correct positive fundamental catalyst, could trigger a sizeable bounce as shorts covered their position amid moderating sentiment.
The past few days, this is exactly what’s been happening: speculation over a Spanish sovereign bailout has reached critical mass to the point that investors are now seeking yield. As such, the Australian and New Zealand Dollars are outperforming alongside the Euro, while the Japanese Yen and the US Dollar, the “safe havens” of the currency market, are trailing for the second consecutive day.
The increase in speculation for a Spanish bailout comes amid two fairly important developments yesterday. First, as noted in this report yesterday, Spain has indicated it will seek an emergency line of credit via the European Stability Mechanism (ESM), and now it seems that Germany is open to such measures following comments from Michael Meister, a deputy caucus leader of Chancellor Angela Merkel’s Christian Democratic party, and Norbert Barthle, CDU’s budget spokesman.
The second development is that Moody’s Investors Service said it would keep Spain’s rating on hold at ‘Baa3’. For weeks, Spain was expected to see a downgrade from Moody’s but it ended up being Standard & Poor’s that pulled the trigger; both Moody’s and S&P have Spain’s credit rating at one notch above ‘junk’ on their respective scales. The timing of these events is no coincidence: there is a Euro-zone Summit beginning tomorrow.
Taking a look at credit, peripheral European bond yields are lower, underpinning the Euro’s strength. The Italian 2-year note yield has decreased to 2.027% (-3.1-bps) while the Spanish 2-year note yield has decreased to 2.757% (-29.8-bps). Similarly, the Italian 10-year note yield has decreased to 4.811% (-10.4-bps) while the Spanish 10-year note yield has decreased to 5.483% (-28.2-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:01 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.35% (-0.72% past 5-days)
There are two items of interest on the calendar today, both out of the United States before the US cash equity open, just like yesterday. At 08:30 EDT / 12:30 GMT, the USD Building Permits (SEP) report is due, and should show a slight gain of +1.1% m/m. Also released at that time is the USD Housing Starts (SEP) report, which is forecasted to show gains of +2.7% m/m. These data fit neatly in with the narrative for a bottoming housing market, which has seen the S&P/Case-Shiller Composite-20 Home Prices Index rise by +7.84% since February this year.
EURUSD: Yesterday I said: “Our bias is becoming more bullish now as short-term moving averages have begun to accelerate higher.” The continuation of this pattern has allowed the EURUSD to cruise past early-October highs and within striking range of its mid-September high at 1.3170/75. Resistance comes in at 1.3145 and 1.3165/75 (September high). Support comes in at 1.3070/75 (October high), 1.3000, and 1.2930/40 (61.8% Fibo on February 2012 high to July 2012 low, 20-EMA).
USDJPY: The USDJPY’s indecision after moving above key trendline resistance yesterday has put a pause on declaring this pair biased bullish. Considering that the 100-DMA has served as accompanying resistance (riding the descending trendline off of the April 20, June 25, and August 20 highs quite neatly since mid-June), we are watching for a second consecutive daily close above this level today, coming in at 78.70/75. Above, resistance comes in at 79.20/30, and 79.60/70. Support is78.40/60, 78.10/20, 77.90, and 77.65/70 (June 1 low).
GBPUSD: As previously indicated, the close above the 20-EMA (1.6080/85) and the descending trendline off of April 2011 and August 2011 highs (1.6100/20) yesterday switched our bias back to bullish. Continuation higher forces us to look back to the April and September 2012 highs as a major upside hurdle. Resistance comes in at 1.6260 (the former April swing highs by close) and 1.6300. Support comes in at 1.6135, 1.6080/85, and 1.5975/95.
AUDUSD: The pair has exploded through the 100-DMA and is close to posting its first two consecutive daily closes above since the first two-days of October. As such, we are bullish. However, it is worth noting that the AUDUSD has traded up towards a swing zone at 1.0320/45, reinforced by the 200-DMA at 1.0340/45. Resistance is there and 1.0405/25 (mid-August swing lows). Support comes in at 1.0275/80 (100-DMA), 1.0230/35, 1.0200/15, 1.0160/75 (mid-July and early-September swing levels), and 1.0145/50 (October low).
SPX500: No change from Monday: “Crucial support at 1420/25 (the 61.8% Fibo retracement on June 2012 low to September 2012 high, ascending trendline off of the June 4 and July 24 lows, 50-EMA) held, and upon further examination, it appears a Bull Flag off of the September 14 and October 5 highs may be forming; a break above 1470 could signal a move to 1500.” Support comes in at 1444/45 (20-EMA), 1420/25 and 1400. Resistance comes in at 1460, 1470, and 1498/1504.
GOLD: No change from yesterday: “Gold held our first big test level of 1735 and with burgeoning US Dollar weakness, precious metals could rebound. It is worth noting that there is massive developing RSI divergence (the last time RSI was this low price was below 1600), which portends to a bullish outcome.” Resistance is 1755/58 an 1785/1805. If the US Dollar strengthens, we look lower towards 1735 and 1715/22 (former swing levels, 50-EMA).
--- Written by Christopher Vecchio, Currency Analyst
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