FOREX - Sentiment Buckles Under Heavy Euro After Spanish Downgrades
ASIA/EUROPE FOREX NEWS WRAP
Despite an early-Asian session rebound in high beta currencies and risk-correlated assets, investor sentiment deteriorated throughout the night, dragging the S&P 500 futures lower and pushing the US Dollar higher. In fact, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) has risen back to its highest level since September 7, the day the US Dollar was crushed following the European Central Bank’s official unveiling of its bond-buying scheme, the OMTs.
Certainly, markets globally are in a precarious position. Overnight trading as resulted in the S&P 500 breaking out of a potential Bull Flag (sounds good…) lower and through the 50-EMA and its October lows (…but was a break to the wrong side!). Keeping the view simple, based on recent channels the S&P 500 has traded in over the past year, this would suggest support doesn’t come in until the mid-1300s: this would imply further US Dollar strength and weakness just about everywhere else, including the Australian and New Zealand Dollars, and the Euro.
The news overnight leading to this downside was Moody’s Investors Service downgrading five Spanish regions, including the increasingly separatist and economically strong Catalonia region. Moody’s said that the cuts were “driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves.” Furthermore, Spanish newspaper El Confidencial said Prime Minister Mariano Rajoy’s government told the European Union it will miss its budget deficit target this year. While the latter is discouraging, it does add fuel to the ‘Spain needs outside help’ (a bailout) fire. As such, the Euro is heavy today and testing the psychologically significant 1.3000 level again.
Taking a look at credit, weakness in peripheral European bond markets is underpinning Euro weakness. The Italian 2-year note yield has increased to 2.109% (+8.6-bps) while the Spanish 2-year note yield has increased to 2.900% (+8.4-bps). Likewise, the Italian 10-year note yield has increased to 4.776% (+2.3-bps) while the Spanish 10-year note yield has increased to 5.492% (+4.6-bps); higher yields imply lower prices.
RELATIVE PERFORMANCE (versus USD): 10:35 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.25% (+0.86% past 5-days)
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: Thursday I said: “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.” Yesterday I said: “With an Inside Day forming at support, the pair could be basing for a move towards the September highs at 1.3165/75.” However, upon hitting our first level of resistance at 1.3070/75 (former October high), price fell back quickly, and the pair now trades back to support. Resistance comes in at 1.3070/75, 1.3145, and 1.3165/75. Support comes in at 1.3000/20, 1.2970/85 (50-EMA, descending trendline off of September 17 and October 5 highs), 1.2920/40 (61.8% Fibo on February 2012 high to July 2012 low), and 1.2830/35 (200-DMA).
USDJPY: The USDJPY’s run higher has finally stalled, just below the psychologically significant 80.00 figure – a level only to be broken if the uptrend is ‘true.’ Additionally, the daily RSI has entered overbought territory. As such, we’re looking to buy the USDJPY on dips for a move towards 80.60/65 (June highs). Resistance comes in there and just below at 80.00. Support is79.60/70, 79.35/40, 79.20, and 78.40/60.
GBPUSD: The pair has broken through 1.0600/15 (former channel resistance off of June 20 and August 23 highs, 50-EMA) and is now testing 1.5975/95, which served as support as each of the past two weeks. Even on this recent breakdown, the daily RSI has held above 40 – a break below would suggest the uptrend is over. Support comes in at 1.5975/80, and 1.5770/85 (late-August swing lows). Resistance comes in at 1.6000/15, 1.6080/1.6100, 1.6170/80 (last week’s highs), 1.6260 (the former April swing highs by close), and 1.6300.
AUDUSD: The 100-DMA at 1.0295/1.0300 did not hold today, having us look lower. The pair is now testing soft support at 1.0270 (ascending trendline off of October 8 and October 15 lows). Support is there, 1.0230/35, and 1.0200/15. Resistance is at 1.0330/45 (50-EMA, 200-DMA), 1.0405/25, and 1.0500/15.
SPX500: After finding 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) on three occasions the past two weeks, pressure today finally cracked the crucial level, and it alters our outlook. A close below 1430/32 (50-EMA, ascending trendline off of the June 4 and July 24 lows) would signal a top is in and targets near 1355 would come into focus. Support comes in at 1420/25 and 1400. Resistance comes in at 1430/32, 1441 (20-EMA), 1460, 1470, and 1498/1504.
GOLD: Gold is breaking further, now down below 1715 (mid-September swing low), and with the daily RSI breaking below 40 (a key level in uptrends), our bias is quickly shifting from neutral to bearish. Yesterday it appeared that a Hammer was forming as the daily candlestick, but this was a false signal. Resistance is 1715, 1735, 1755/58 and 1785/1805. Support is 1690/95 and 1660/65 (100-DMA, 200-DMA).
--- Written by Christopher Vecchio, Currency Analyst
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