Dollar Bloc Maintains Gains as EUR and GBP Steady Ahead of ECB, BoE
ASIA/EUROPE FOREX NEWS WRAP
Some ‘positive’ news out of Europe this morning has helped lift the European currencies out of their slump versus the rest of the majors, while the commodity currencies have continued their relative outperformance thanks to some better than expected data out of Australia and China. In regards to Europe, the International Monetary Fund announced that it would give €1 billion to Cyprus as part of its aid deal; of course, any deal comes with conditions – the restructuring of Cyprus’ two largest banks, reducing budget deficits at the sovereign level, and an overhaul of the country’s pension and wage structures.
In reality, the IMF news is non-news, but there’s still some slight boost to the Euro as a result. The Euro is likely to remain rather stuck the next 24-hours, as the European Central Bank meets tomorrow; typically, volatility thins out ahead of policy meetings as traders await any signs of new policy action. Considering that the ECB had just revised its forecasts last month, I believe that the April meeting will result in a “hold,” as another downgrade of its forecasts could provoke a reconsideration of the ECB’s credibility, 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, likely in May or June, just not now.
The Australian Dollar is outperforming once more on the back of a significantly narrower trade deficit in February, suggesting that demand for the country’s primary export – iron ore – is starting to pick back up again. Coupled with stronger non-manufacturing data out of China – both the official government and private sector Services PMIs beat – the dollar bloc is well-supported this first week of April.
Taking a look at European credit, more modest relief in peripheral yields has helped buffer the Euro on Wednesday. The Italian 2-year note yield has decreased to 1.626% (-11.8-bps) while the Spanish 2-year note yield has decreased to 2.113% (-8.5-bps). Likewise, the Italian 10-year note yield has decreased to 4.548% (-6.0-bps) while the Spanish 10-year note yield has decreased to 4.844% (-7.4-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:20 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.01% (-0.16% past 5-days)
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: I maintain: “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 [last 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 1.3025 holds this week.” A Bear Flag may have formed on the daily chart against 1.2880, pointing to a move lower to 1.2660/80.
USDJPY: The USDJPY has broken below the lower rail of its ascending channel dating back to January, with 93.50 giving way. BoJ policymakers are set to meet today/tomorrow in what should be the beginning of new, expansive monetary measures under the watchful eyes of Haruhiko Kuroda – although nothing major is expected. A break below 93.50 with no new policies could lead to a hasty sell-off towards 90.00/50.
GBPUSD: Last week I said: “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 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.” Price has moved lower, initiating both the Double Top and Bearish Rising Wedge patterns.
AUDUSD:Early last week I said: “The AUDUSD uptrend remains, but after rejection in the critical 1.0475/535 region, the uptrend is being tested at 1.0435,” then on Thursday, “Now that price has closed below 1.0435, a further pullback to 1.0370/95 is in scope before buying interest returns.” Price fell to 1.0385 – my target zone – and rebounded firmly back to the 1.0475/535 zone. Failure here would initiate a Double Top pattern, pointing to a retest of 1.0250/75. A break of 1.0475/535 points to 1.0600/35 higher.
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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