Forex: Euro, Yen Higher Against US Dollar to Start December
ASIA/EUROPE FOREX NEWS WRAP
The beginning of the month offers new seasonal trends and a final period of trading for those investors left behind during the mid-summer rally. Indeed, if there was a time for those behind in their returns to scoop up some profit before closing the books for the year, it’s now: since 1950, the S&P 500 has gained, on average, +0.082% per trading session in December, good for an average monthly return of +1.72%. This amounts to nothing short of the (in)famous Santa Claus rally that will dominate mainstream media financial news coverage for the coming few weeks.
Boosted by some improving global PMI figures, particularly in Asia (Europe still looks weak, especially on the periphery), December has started out with a bang for global market participants, with the US Dollar underperforming on the whole, while riskier currencies like the Euro, and even the heavily manipulated currencies (then again, which aren’t these days?) the Japanese Yen and the Swiss Franc, are posting gains against the US Dollar.
There are two valid interpretations of today’s FX price action, which has seemingly diverged from typical correlations with other asset classes. While European equity markets and US stock futures are higher, the commodity currencies, the Australian, Canadian, and New Zealand Dollars, are struggling, failing to confirm the move, suggesting that today’s price action may not be so valid; or that the outperformance by the safe havens outside of the US Dollar suggests that the tensions over the fiscal cliff/slope may be worth respecting, and a bumpier road may be ahead. We’ll be exploring the role of the other safe havens throughout this month.
Taking a look at European credit, peripheral bond yields are lower, allowing the Euro to run higher. The Italian 2-year note yield has decreased to 1.866% (-6.4-bps) while the Spanish 2-year note yield has decreased to 2.767% (-2.5-bps). Likewise, the Italian 10-year note yield has decreased to 4.380% (-10.6-bps) while the Spanish 10-year note yield has decreased to 5.152% (-13.1-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 11:55 GMT
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TECHNICAL ANALYSIS OUTLOOK
EUR/USD: The EUR/USD closed November near its monthly high and has started December out on a positive note, which portends to further gains given seasonal tendencies. For now, however, we remain neutral, if not close to shifting to bullish for the near-term, as the daily RSI nears overbought territory ahead of a run at 2H’12 highs. Accordingly, I continue to await resolution of 1.3010/20 to the upside (breaking today) and 1.2800/40 to the downside. Below, support comes in at 1.2740/45. Above, resistance is 1.3140/45 and 1.3170/75.
USD/JPY: A Bearish Engulfing bar is forming today, as failure at recent highs on Friday has led to a small pullback. As noted on Friday,“Signs of progress on the US fiscal cliff/slope will remove credit risk from the USD-side of the pair, which is bullish for the USD/JPY, while continued political tensions in Japan and threats of unlimited Bank of Japan easing have heightened both central bank risk and political risk to the JPY-side of the pair, which is bullish for the USD/JPY.”With US policymakers issuing partisan commentary by the end of the week, the fundamental impetus to move higher was somewhat diminishing. Support comes in at 81.75, 81.15, and 80.50/70 (former November high).Resistance is 82.90/83.00 and 83.30/55.
GBP/USD: November was a wash for the GBP/USD (monthly Doji candle) but December has started with a retention of Friday’s low and a push to near-term highs in the pair. Now, the GBP/USD is back above long-term trendline resistance at 1.6030/45 (descending trendline resistance off of the April 2011 and April 2012 highs), a point of failure on Tuesday and Friday. As noted last week, “A break of this level also coincides with a tentative break of a downtrend that’s been in place for the past two months.” Resistance comes in at 1.6170/80 (late-October highs). Support is 1.5985/95 (20-EMA, 50-EMA), 1.5920/25 (100-DMA), and 1.5855/60 (200-DMA).
AUD/USD: No change from Wednesday: “As the pair has traded towards its Symmetrical Triangle termination point, and appears to be making a move to the upside; when considered in the big picture, the current pause witnessed the past year or so may be viewed as a consolidation. Support is at 1.0370/1.0405 (trendline support off of the June 1 and October 23 lows) and 1.0235/80. Resistance is 1.0475/80 (November high) and 1.0500/15.”
S&P 500: The view the past few days I’ve maintained: “The rally off of the 61.8 Fibonacci retracement (June 2012 low to September 2012 high) has carried the S&P 500 back into a confluence of resistance at 1400/10 (20-EMA, 50-EMA, 100-EMA). A breakout above this area would suggest a more substantial rebound may yet be ahead.” Indeed, with price trading through following Wednesday’s daily Hammer, targets higher are eyed at 1425 and 1460. Support comes in at 1385 (200-DMA, held yesterday) and 1345/50 (November low).
GOLD: No change as Gold remains range-bound since the US elections: “Fresh November highs are in place after Friday’s rally, and with the US fiscal cliff/slope negotiations grinding slower, there may be some upside yet. I still expect the 1700 area to be defended vigorously on declines, and will continue to look to get long as low as 1675. Resistance is 1755/58 and 1785/1805. Support is 1735, 1700, 1690/95 (100-DMA, November low), and 1660/65 (200-DMA).”
--- Written by Christopher Vecchio, Currency Analyst
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