Majors Consolidate Around US Dollar as FOMC Awaits; Cyprus Simmers
ASIA/EUROPE FOREX NEWS WRAP
The US Dollar has continued its mid-March swoon on the whole this week, despite continued constructive price action against the Euro. This is more or a less a function of how susceptible the Euro is to weakness right now, even for small reasons – Cyprus – which only represents 0.4% of overall Euro-zone GDP.
While I was out the past two days, I’ve had some time to digest the news of the Cypriot bailout, from the initial reports to musings after the failed parliamentary vote yesterday. The exact numbers of the bailout don’t concern me; rather, the potential precedence set by having depositors chip in for the bailout is what the issue is. If depositors in Italy or Spain (or any other Euro-zone country, for that matter) don’t believe that their funds are ‘safe’ should a bailout situation arise, there exists potential for massive capital flight, which we’ve already gotten a glimpse of in Cyprus the past few days.
The bottom line for Cyprus and the broader Euro-zone is that politicians continue to arrogantly and stubbornly implement fiscal policies based on political beliefs, rendering all outlets but for monetary policy available to provide any extra support. Accordingly, even if no doomsday scenario (like during September-October 2011; or May-July 2012) emerges from the Cypriot situation, the European Central Bank’s balance sheet could swell in order to constrain the financial aspects of the debt crisis.
A quick word on the Fed meeting today: expect a brighter outlook, but the fiscal drag is likely to temper any enthusiasm. Accordingly, the uptick in US data pales in comparison to what officials actually want – sustained labor market momentum without sacrificing price stability. Neither situation has emerged yet (Unemployment = 6.5% or CPI >2.5% y/y), so the $85B/month pace of QE3 is here to stay, for now.
Taking a look at European credit, peripheral yields have compressed, giving the Euro breathing room to rally on Wednesday. The Italian 2-year note yield has decreased to 1.834% (-3.5-bps) while the Spanish 2-year note yield has decreased to 2.314% (-5.8-bps). Likewise, the Italian 10-year note yield has decreased to 4.644% (-7.0-bps) while the Spanish 10-year note yield has decreased to 4.975% (-4.0-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:45 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.13% (-0.62% past 5-days)
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: I was watching a potential Bullish Falling Wedge scenario last week, but carefully noted that “the breach of the yearly lows…following better than expected US data has increased the likelihood of further losses before a rebound.” The breach was the key for the move lower, with buyers giving a last-gasp effort before capitulating. Key support remains at 1.2860/80, for the same three reasons: the 50.0% Fibonacci retracement on the July 24 low to the February 1 high; the 200-DMA; and the late-November and early-December swing lows. Although there’s been a small bounce today, failure in this area could lead to a ‘waterfall’ sell-off towards 1.2660. Resistance is at 1.2975 (8-EMA) and 1.3070/75 (21-EMA). Support comes in at 1.2860/80 and 1.2660.
USDJPY: I maintain: “The USDJPY has set fresh highs for the year, as the RSI breakout on 2/28 was the cue for further strength. As US equity markets have hit fresh all-time nominal highs, the USDJPY finally confirmed, on the back of a widening 2s10s Treasury spread (exactly what I’ve been waiting for). Accordingly, the Bull Flag consolidation now points towards 97.70 as the next key area higher. Downside pressure has been prevalent again on Wednesday, though bulls continue to fight the downturn. Price has rebounded firmly above 96.00, and a test of the yearly high near 96.70 could be around the corner.”
GBPUSD: The Bullish Falling Wedge pattern noted last week has thus far played out, but now a Bull Flag may be forming on the daily chart, with the 100% swing extensions coming in at 1.5285, just short of the key 1.5300 former range support from 2010 through early-2013. I maintain that “reselling this area for new lows makes sense, it being major support over the past several years – the range dating back to August 2010, from 1.5300 to 1.6300.” Resistance comes in at 1.5160/75 (21-EMA) and 1.5250/320. Support comes in at 1.5080/85 (8-EMA), and 1.4830/40.
AUDUSD:No change: “A break of 1.0340/80 points to 1.0460/80. An alternative bullish view of an Inverse Head & Shoulders may have formed on the 4H chart, adding further evidence for a run back towards the late-January swing highs. Deceivingly strong Australian employment data has provoked the pair to rip into 1.0380, where it has been rejected thus far today, although the mid-February swing highs were tested. Failure could lead to a pullback below 1.0300 before the next drive higher.” It is worth noting that a bullish 8-/21-EMA crossover is in place on the daily chart, so the March low at 1.0110 may have been set.
S&P 500: No change: “The near-term set back at 1530 took place for less than two weeks, but the break higher hasn’t been marked by high volume; no, it has been a volumeless rally, with the breakout occurring on volumes around 80% of the daily average in 2013. This is not a ‘technically strong move.’ The float higher could continue, towards the all-time high at 1576.1, but might be cut short in the 1565/70 zone, where two key Fibonacci extensions lay. I’m very skeptical up here – markets seem to be ignoring Italy and the derisive politics in the United States at the moment (this also happened in 2011 and 2012 at the beginning of those years).”
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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