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Consolidation Afoot as Dijsselbloem Commentary Keeps Euro Lower

Consolidation Afoot as Dijsselbloem Commentary Keeps Euro Lower

2013-03-26 12:15:00
Christopher Vecchio, CFA, Senior Strategist
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ASIA/EUROPE FOREX NEWS WRAP

The majors are consolidating on Tuesday after explosive moves the past several days, all thanks to some untimely and ill-advised commentary from the new Eurogroup president, Jorgen Dijsselbloem. Having replaced Jean-Claude Juncker as the head of the Euro-zone’s finance ministers, Mr. Dijsselbloem’s words carry significant weight; it is of no surprise that the Euro plummeted yesterday after he spoke.

Essentially, Mr. Dijsselbloem called the Cypriot bailout – one which looped in depositors to take the fall for banks’ poor investing (gambling) decisions – a “template” for the rest of Europe. This is unprecedented, as was the Cypriot bailout: according to the IMF, not one of the 147 financial crises since 1970 has required depositors to contribute to the bailout/in of their banks; this is an atypical result. Stemming from this unique event was the notion that depositors with €100,000 or more would be uninsured.

As I said yesterday, “The decision to tax savers is important because of how the European sovereign debt crisis has flowed: each policy undertaken has set precedence for the next bailout; if Cypriot savers had to contribute to the bailout of its banks, then why wouldn’t the same measures be forced upon Italian and Spanish savers? The Troika will be forced to give the same terms at minimum in order to prevent alienating Cyprus – the Euro is about unity, anything short would paint Cyprus as a second-class citizen.” (Addendum: treating Cyprus as a second class citizen, unfair treatment, would lead to its exit from the region). The big question now: if you have over €100,000 in a country whose banking system is on life support, do you feel that your money is safe?

Taking a look at European credit, peripheral yields have compressed, serving as a counterweight to concerns lingering after the Cypriot bailout, allowing the Euro to rally on Tuesday. The Italian 2-year note yield has decreased to 1.750% (-4.9-bps) while the Spanish 2-year note yield has decreased to 2.265% (-6.2-bps). Likewise, the Italian 10-year note yield has decreased to 4.532% (-6.8-bps) while the Spanish 10-year note yield has decreased to 4.881% (-5.4-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:45 GMT

EUR: +0.12%

CAD: +0.06%

AUD: +0.05%

GBP:+0.02%

CHF:-0.01%

NZD:-0.01%

JPY:-0.17%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.03% (-0.55% past 5-days)

ECONOMIC CALENDAR

Consolidation_Afoot_as_Dijsselbloom_Commentary_Keeps_Euro_Lower__body_Picture_7.png, Consolidation Afoot as Dijsselbloem Commentary Keeps Euro Lower

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

TECHNICAL ANALYSIS OUTLOOK

Consolidation_Afoot_as_Dijsselbloom_Commentary_Keeps_Euro_Lower__body_Picture_6.png, Consolidation Afoot as Dijsselbloem Commentary Keeps Euro Lower

EURUSD: The headlines of Cyprus’ bailout pushed the EURUSD through the descending TL off of the February 1 and March 15 highs, at 1.2990/300, to its 21-EMA at 1.3042, before failure ensued today. As I do not find the bailout terms favorable to long-lasting Euro strength, the “top” after the bailout could now be in place. As long as price holds below 1.3085 this week – the trendline off of the highs from late-February/early-March – price action could be consolidating for another drive lower towards 1.2660.

Consolidation_Afoot_as_Dijsselbloom_Commentary_Keeps_Euro_Lower__body_Picture_5.png, Consolidation Afoot as Dijsselbloem Commentary Keeps Euro Lower

USDJPY: No change: “The USDJPY continues to range in an ascending channel, as it has been since the start of the year, with another test of the 21-EMA occurring today. However, with recent swing lows at 93.00 coinciding with the bottom rail of the ascending channel, a further drop – coinciding with a pullback in US equities or a rally in precious metals – looks to be bought, as the divergence between Fed and BoJ policies continues to grow. A weekly close above 96.00 eyes 97.00, 97.70, and 98.50/80 to the upside. Below 93.00, critical support doesn’t appear until 90.00/50.”

Consolidation_Afoot_as_Dijsselbloom_Commentary_Keeps_Euro_Lower__body_Picture_4.png, Consolidation Afoot as Dijsselbloem Commentary Keeps Euro Lower

GBPUSD: No change, though the Bull Flag first noted on Thursday appears to be materializing: “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 1.5285/375. Support comes in at 1.5160/70 (21-EMA), 1.5115/20 (8-EMA), and 1.4830/40.

Consolidation_Afoot_as_Dijsselbloom_Commentary_Keeps_Euro_Lower__body_Picture_3.png, Consolidation Afoot as Dijsselbloem Commentary Keeps Euro Lower

AUDUSD:No change: “Throughout mid-March I’ve said that “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…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.” Now that 1.0340/80 has been cleared, and a Bullish Symmetrical triangle on the 4H/daily time frames yielded a positive result, I will look into 1.0460/80 and 1.0495/520 as potential resistance higher.”

Consolidation_Afoot_as_Dijsselbloom_Commentary_Keeps_Euro_Lower__body_Picture_2.png, Consolidation Afoot as Dijsselbloem Commentary Keeps Euro Lower

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).”

Consolidation_Afoot_as_Dijsselbloom_Commentary_Keeps_Euro_Lower__body_Picture_1.png, Consolidation Afoot as Dijsselbloem Commentary Keeps Euro Lower

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

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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