Aussie Gains on RBA Hold, Despite Slowing China; S&P 500 Rally Bunk
ASIA/EUROPE FOREX NEWS WRAP
The S&P 500 is testing its highs of the year near 1530 despite the US budget sequestration that came into effect on Friday, although I can’t say I’m buying into the rally. As explained in the technical section of this article for the past several weeks, there is a very ominous Bearish Rising Wedge forming off of the 2009 lows, which has been characterized by falling volumes and diverging technical indicators (RSI, MACD, Slow Stochastics).
Although I was away from the markets yesterday, a quick glance at the stats on the S&P 500’s push towards the highs fits very neatly in this narrative: trading volumes were 25% lower than the 2013 daily average. A tenet of technical analysis is that a move by an asset (commodities, currencies, equities, etc) is considered to be ‘technically strong’ if there is strong volume supporting the move. Such has not been the case. Volume has been lacking behind the recent gains in equity markets in recent days, drawing into question the validity of such ‘bullish’ price action.
With my doubts about the rally against the US Dollar (and thus, by high beta currencies and riskier assets) growing, I turned to the Australian Dollar, who has seen a bit of strong movement the past two days, despite no material change in its medium- or long-term prospects. On the outside, China appears to be prepping the world for a slower economy, with a significant focus on the housing bubble, which looks like it could be bursting. The Reserve Bank of Australia, on the other hand, has kept its key rate on hold at 3.00%, but with the Credit Suisse Overnight Index Swaps showing only near a 20% chance of a 25-bps rate cut, no change was essentially priced in. Even as these rate cut expectations have dwindled, we’ve noted that the Australian Dollar has been weak – this foreshadows forthcoming weakness, in my opinion.
Taking a look at European credit, peripheral yields have fallen back amid some positive commentary from Standard & Poor’s regarding the Italian elections. The Italian 2-year note yield has decreased to 1.854% (-11.4-bps) while the Spanish 2-year note yield has decreased to 2.389% (-6.8-bps). Similarly, the Italian 10-year note yield has decreased to 4.762% (-10.7-bps) while the Spanish 10-year note yield has decreased to 5.042% (-3.3-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 11:30 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.30% (-0.13% past 5-days)
See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.
TECHNICAL ANALYSIS OUTLOOK
EURUSD: No change as the pair tests the 2013 lows: “The pair has broken the major uptrend off the July and November lows, breaking at 1.3200/20 yesterday, leading to a cataclysmic sell-off into the January swing lows at 1.2995/3035. Although the EURUSD is near oversold conditions, we note that momentum amid political distress tends to supersede RSI. If 1.2995 breaks, a move into 1.2875 and 1.2660 shouldn’t be ruled out.”
USDJPY: I’ve maintained: “The Bull Flag turned out to be a topping pattern, with the 92.30-94.80 range breaking to the downside. Now, with momentum heading lower, and significant event risk on tap, further selling into 90.00/20 would not be a surprise. Barring a collapse in Treasury yields (specifically, the 2s10s spread), the USDJPY remains a long-term buy.” Treasury yields have not collapsed despite the pullback in the S&P 500, and now the USDJPY has rallied above its 8- and 21-EMAs. I’m decisively neutral for now.
GBPUSD: I maintain: “Selling persists amid weak data, a dovish and divided Bank of England, and the United Kingdom losing its revered ‘Aaa’ rating. The opening gap this week was filled at 1.5160 after opening at 1.5072, suggesting that further downside may be in the cards. With uncertainty prevalent on the horizon – the US budget sequester coming on Friday – and the Federal Reserve tilting more hawkish, it’s possible to see a break below 1.5000 this week. With the ascending trendline off of the 2009 and 2010 lows breaking, as well as the 2010 to 2013 range bottom lows breaking near 1.5300, my bias is to sell rallies.” Fresh 2013 lows were hit today at 1.5025, at the time this report was written. Further downside is expected.
AUDUSD:No change: “The bounce from the 1.0265/90 area may have completed, with the rally halted at the 200-DMA at 1.0305/10. Although there was an overshoot into 1.0360, former support, failure has occurred, signaling further downside is possible…I’m still looking for a move into 1.0135/75…Selling has persisted as anticipated despite a two week respite; interaction in the 1.0135/75 zone is key for future action. I anticipate a violent break for a move below parity. Price has steadied just above this region, for now. Only a move back above 1.0345/75 negates the bearish bias.”
S&P 500: No change: “The 100% Fibonacci extension on the fiscal cliff rally and flag comes in at 1530. Bottom line: I’m expecting a significant setback (-10%) in the S&P 500 unless volumes accelerate rapidly, given the disconnect from reality. The setback has started, with the S&P 500 reversing sharply off of 1530, and putting in a daily Bearish Key Reversal yesterday. Time to start looking lower. Support comes in at 1500 and 1475. Resistance is 1520 and 1530.” 1475 is in focus now – the post-QE3 announcement highs in September.
GOLD: No change: “Gold broke below trendline support off of the January 2011 and May 2012 lows at 1650 last week, prompting a sharp sell-off into 1600, where price broke out in mid-August before a rally into the post-QE3 high at 1785/1805. However, with oversold conditions persisting on the 4H and daily timeframes, a rebound should not be ruled out; each of the past two daily RSI oversold readings has produced a rally in short order. Resistance is 1625 and 1645/50. Support is 1585 and 1555/60. It should be noted that Gold has entered a major support zone from the past 18-months from 1520 to 1575.”
--- Written by Christopher Vecchio, Currency Analyst
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