Commodity Bloc Boosted After Confident RBA; Euro at 5-week Low vs Yen
ASIA/EUROPE FOREX NEWS WRAP
A growing divergence between the commodity currencies and the European currencies has formed the past several weeks, as near-crisis trading conditions have slowly receded: the tight ‘risk-on, risk-off’ atmosphere that saw the majors move in lockstep against the Japanese Yen and the US Dollar has given way to a new dynamic. Now, as has transpired overnight, the Australian, Canadian, and New Zealand Dollars are appreciating relatively to their weaker European counterparts, the British Pound, the Swiss Franc, and the Euro.
In the Asian trading session on Tuesday, the Reserve Bank of Australia kept its key rate on hold at 3.00% as expected, and amid renewed confidence that its easing of monetary policy during “late 2011 and 2012 is having an expansionary effect on the economy,” the Australian Dollar has surged back towards the $1.0500 level against the US Dollar. Similarly, on the back of a much stronger than expected commodity price gauge, the New Zealand Dollar is heading back towards its yearly highs. The Australian and New Zealand Dollars are the two top performers this year.
In Europe, the big news is that the Euro-zone Unemployment Rate ticked up to 12.0% in February (although the January figure was revised higher to 12.0% from 11.9%, technically making it two months at this horrid level), underscoring the likelihood that contraction gripped the region in the 1Q’13. The ECB is scheduled to meet on Thursday, where it is widely expected that they will keep their key interest rate on hold at 0.75%. I suspect that, despite the broken policy transmission mechanism (German and French companies/banks field substantially lower rates than their Italian and Spanish counterparts). As the economic divergence between the Euro-zone and the United States grows midyear, the ECB will be more open to a rate cut, just not now.
Taking a look at European credit, modest relief in peripheral yields has helped buffer the Euro from a deeper sell-off on Tuesday. The Italian 2-year note yield has decreased to 1.793% (-9.8-bps) while the Spanish 2-year note yield has decreased to 2.266% (-12.0-bps). Likewise, the Italian 10-year note yield has decreased to 4.687% (-6.3-bps) while the Spanish 10-year note yield has decreased to 4.986% (-5.6-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:50 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): 0.00% (-0.28% past 5-days)
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: No change: “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 [on Wednesday], 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: No change: “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: No change: “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.” A potential Bearish Rising Wedge has developed (clearer on the 4H timeframe, which would suggest a retest of the lows near 1.4830. The pattern is valid so long as 1.5260/65 holds to the upside.
AUDUSD:No change: “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.” Now that price has closed below 1.0435, a further pullback to 1.0370/95 is in scope before buying interest returns.
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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