Euro-zone Leaders Hit Snooze, Push Decision to November; Euro Barely Lower
European leaders were wrapping up the umpteenth Euro-zone Summit as this report was being written, but there were few major developments out of an ultimately boring conference: there was more jawboning on Greece (‘Greece’s place is in the Euro-zone,’ yawn); and no material developments on the Spanish bailout (Spanish Prime Minister Mariano Rajoy did say that he would take a bailout if necessary, though). The Euro is trading slightly lower against its major counterparts as the Summit concludes, but because expectations for anything were, broadly speaking, so low, there’s been little collateral damage.
Nevertheless, the results of this Summit are disappointing. Once more, when provided with the opportunity to make a grand statement about European solidarity, the stewards of the world’s largest single market balked. Why? – the markets aren’t putting pressure on them to right now. Just take a look at yields (below): ever since the European Central Bank promised to cap Italian and Spanish bond yields, it has been the assumption that if the socioeconomic situations in Europe’s third and fourth largest countries deteriorate further, only then would a bailout come about. Furthermore, with the region’s bailout fund, the European Stability Mechanism (ESM) online, there’s even less pressure to implement reforms and for leaders to work towards a more unified Europe, knowing full-well that ‘relief’ can be tapped at any point.
So for now, Euro-zone leaders hit the ‘snooze’ button on the proverbial crisis clock, pushing back anything substantive until the next round of meetings next month. This blown opportunity to make efforts when the markets aren’t applying pressure might just come back and haunt leaders, particular the Spanish Prime Minister: he and others will look foolish if yields rise too quickly now and a hasty meeting needs to be convened to agree to the terms of a bailout.
Taking a look at credit, peripheral European bond yields are mixed, adding to the Euro’s indecision on the day. The Italian 2-year note yield has increased to 2.059% (+4.1-bps) while the Spanish 2-year note yield has increased to 2.668% (+4.5-bps). Conversely, the Italian 10-year note yield has decreased to 4.733% (-1.1-bps) while the Spanish 10-year note yield has decreased to 5.281% (-1.5-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:42 GMT
EURUSD: No change from yesterday: “The EURUSD has traded into a near-term top at 1.3145 (76.4% Fibo on February 2012 high to July 2012 low), right below September highs. Overextension on short-term charts might warrant a pullback first before the next drive higher.” I’m a buyer above 1.3000/20 (Symmetrical Triangle breakout), but recognize the potential for a slightly deeper retracement towards 1.2920/40. Resistance comes in at 1.3070/75 (former October high), 1.3145, and 1.3165/75 (September high). Support comes in at 1.3000, 1.2920/40 (61.8% Fibo on February 2012 high to July 2012 low), and 1.2830 (200-DMA).
USDJPY: After a sharp run higher this week, the USDJPY looks exhausted at 78.35/40 (200-DMA). There’s also some bearish RSI divergence forming, suggesting that there could be a pullback before the next move higher towards 80.60/65. Resistance comes in at 79.35/40, 79.60/70, and 80.60/65 (former mid-year swing highs). Support is79.20, 78.40/60, 78.10/20, 77.90, and 77.65/70 (June 1 low).
GBPUSD: Failure to move out of the descending channel in place since the mid-September top led to a massive breakdown yesterday. Our bias switched back to neutral following the break of 1.6100/20 (the descending trendline off of April 2011 and August 2011 highs). We are thus watching 1.5975/95 (former channel resistance off of June 20 and August 23 highs, 50-EMA), which served as support as recently as last week. Support comes in there and 1.5770/85 (late-August swing lows). Resistance comes in at 1.6080/1.6100, 1.6170/80 (this week’s highs), 1.6260 (the former April swing highs by close), and 1.6300.
AUDUSD: The AUDUSD rally into key resistance at 1.0405/25 (mid-August swing lows, ascending trendline off of June 1 and September 5 lows) and subsequent failure suggests that a retest of the sharp uptrend that has supported the pair this week may be in order. We are thus looking for a pullback to 1.0350, but remain bullish through the rest of the month above the 100-DMA at 1.0285/90 (the 200-DMA has been inconsequential). Resistance is at 1.0405/25 and 1.0500/15. Support comes in at 1.0330/50 (intraweek ascending trendline, 50-EMA, 200-DMA), 1.0285/90, 1.0230/35, and 1.0200/15.
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 1446/47 (20-EMA), 1420/25 and 1400. Resistance comes in at 1460, 1470, and 1498/1504.
GOLD: No change from Tuesday: “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 and 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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