EURUSD Falls to New 2013 Low Below $1.2800 after Weak Italian Auction
ASIA/EUROPE FOREX NEWS WRAP
The wheels are falling off the ‘risk’ trade today, with the Japanese Yen and US Dollar emerging as the top two performers in what can be characterized as an ugly morning in Europe. European equity markets are falling across the board, led lower by the Italian MIB and the Spanish IBEX, as both countries’ peripheral bond yields have shot up to post-Cypriot bailout announcement highs.
A soft Italian bond auction is contributing to the droll performance by the Euro this morning, with Europe’s third largest economy seeing its 5-year bonds go for 3.65% today versus 3.59% on February 27; clearly, despite the European Central Bank’s safety net of the OMT, there are some concerns that are starting to mount. Accordingly, the EURUSD has traded to underneath $1.2800, its lowest exchange rate since November 21, setting up a test of key support in the first week of April (more in the technical outlook below).
The Euro’s tumble the past few days, despite the resolution to the Cypriot bailout, is all about some commentary from Eurogroup President Jeroen Dijsselbloem, who suggested that uninsured deposit holders join the queue of recapitalization options should a downtrodden bank need more funds. While this has obvious negative implications in the short-term, I suggest reading an opinion piece I wrote yesterday, which looks at the potential long game that Mr. Dijsselbloem might be playing. Other European currencies are getting slammed today as well, with contagion in full swing. Soft data out of the United Kingdom has the British Pound stumbling again. Similarly, the Bank of England announced that UK banks have a $38 billion shortfall, making the world’s oldest currency a less likely safe haven amid capital flight resulting from the Cyprus bailout.
Taking a look at European credit, concerns over Southern Europe are picking up, sending peripheral yields higher across the board, and damaging the Euro on Wednesday. The Italian 2-year note yield has increased to 1.898% (+13.0-bps) while the Spanish 2-year note yield has increased to 2.375% (+8.5-bps). Likewise, the Italian 10-year note yield has increased to 4.704% (+14.5-bps) while the Spanish 10-year note yield has increased to 5.014 % (+10.6-bps); higher yields imply lower prices.
RELATIVE PERFORMANCE (versus USD): 11:00 GMT
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: I maintain: “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 on Monday. As I do not find the bailout terms favorable to long-lasting Euro strength, the “top” after the bailout could now be in place.” Fresh yearly lows were set below 1.2800 at the time of writing, with a clear test of 1.2660/80 (61.8% Fibonacci retracement on July 2012 to February 2013 rally, mid-November swing lows) in focus. A bearish bias holds so long as 1.3085 holds this week.
USDJPY: The USDJPY continues to consolidate near the lower rail of its ascending channel dating back to January, with the first test of 93.50 well-supported. Accordingly, with risk aversion afoot, the drive in the pair is likely lower given the compressing 2s10s Treasury spread. Nevertheless, BoJ policymakers are set to meet next week, in what should be the beginning of new, expansive monetary measures under the watchful eyes of Haruhiko Kuroda. A break below 93.50 could lead to a hasty sell-off towards 90.00/50.
GBPUSD: The failed run up to the 1.5285/375 region suggests that the rally in the GBPUSD seen the past few weeks may be nothing more than short covering and asset reallocation, rather than traders taking up new positions amid an improved interest rate outlook for the UK. Price has fallen back below the 8- and 21-EMAs after a rejection at a critical RSI level of 55. A move below 1.5000 this week would necessarily bring into view the lows near 1.4800/30 going into April.
AUDUSD:The AUDUSD uptrend remains, but after rejection in the critical 1.0475/535 region, the uptrend is being tested at 1.0435. A daily close below 1.0435 brings into focus the Symmetrical Triangle breakout zone of 1.0370/95, also where the 21-EMA and 200-DMA sit. It is of note that daily RSI failed to move through 67 – a level that has capped the daily RSI on previous run ups towards 1.0600 in mid-December and mid-January.
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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