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EUR/USD Fights for $1.3000 amid Month-End Rebalancing

EUR/USD Fights for $1.3000 amid Month-End Rebalancing

Christopher Vecchio, CFA, Senior Strategist


After spiking to ¥103.73 last Wednesday against the Japanese Yen, the US Dollar has been mired in a bit of a slog. On one hand, economic data hasn’t been quite as shiny as it had been in the beginning part of the month; on the other, the US Dollar has had quite a run the past few months, and with the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) trading near yearly at highs towards the end of May, a round of profit taking – and much needed technical relief – was due.

With that said, after yesterday’s slide during the US session, following the slight revision lower in the 1Q’13 GDP report (+2.4% versus +2.5% expected, on an annualized basis), the buck has rebounded across the board this morning, but for resiliency by the Yen amid signs of a lessening deflation threat in the world’s third largest economy. In particular, the EURUSD slid back under $1.3000 today after touching its highest level since May 9 at 1.3063 yesterday, amid further signs of the deepening economic recession in Europe. Of note, the Euro-zone Unemployment Rate (APR) hit 12.2%, the highest rate ever. With additional inflation data showing that price pressures remained below the ECB’s +2% yearly target (CPI Estimate (APR) at +1.4% y/y, CPI Core (APR) at +1.2% y/y), Italian ECB Governing Council member Ignazio Visco said earlier today that the ECB “stands ready to intervene” to push yields lower.

At this point, as investors weigh the efficacy of Japan’s deflation-fighting measures, when the Fed will taper QE3, and if the ECB will venture towards negative deposit rates, the recent moves seen in the US Dollar are viewed as profit taking and month-end rebalancing, as there has been little material shift in the US economy’s improved forecast, while concerns over Chinese and European growth continue to run rampant.

Taking a look at European credit, weakness in the periphery and strength in the core suggests a general ‘risk off’ tone in Europe, weighing on the Euro today. The Italian 2-year note yield has increased to 1.24% (+2.7-bps) while the Spanish 2-year note yield has increased to 1.904% (+5.4-bps). Likewise, the Italian 10-year note yield has increased to 4.136% (+2.8-bps) while the Spanish 10-year note yield has increased to 4.403% (+5.9-bps); higher yields imply lower prices.


JPY: +0.05%

CHF: -0.24%

GBP: -0.28%





Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.34% (-0.13% past 5-days)


EURUSD_Fights_for_1.3000_amid_Month-End_Rebalancing_body_Picture_1.png, EUR/USD Fights for $1.3000 amid Month-End Rebalancing

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EURUSD_Fights_for_1.3000_amid_Month-End_Rebalancing_body_x0000_i1028.png, EUR/USD Fights for $1.3000 amid Month-End Rebalancing

EURUSD: Yesterday I said: " It appears a Symmetrical Triangle has formed on the daily chart, and given the move lower, my initial feeling is that this is a consolidation waiting to break lower. As the range plays out, I’m in wait-and-see mode.” We’ve hit the topside of the triangle already today and nearly broke after touching $1.3007, but so far, no break. I thus maintain a bearish bias, but a close > 1.3000/30 will negate and imply a rally towards 1.3220/50 (mid-April swing highs). To the downside, a break of 1.2795/800 would confirm the move towards 1.2750 and 1.2680.

EURUSD_Fights_for_1.3000_amid_Month-End_Rebalancing_body_x0000_i1029.png, EUR/USD Fights for $1.3000 amid Month-End Rebalancing

USDJPY: Yesterday I said: “Overall, price is relatively unchanged from the past several days, with the 21-EMA pacing the ascending trendline support off of the April 2 and April 31 lows as support, holding today once more. Although the daily RSI uptrend appeared to be back in play, today’s selling has a clear break once more. A further breakdown through trend support eyes a move towards 100.00, then 97.50.” It appeared that the big break may have been coming, but a Hammer at the 21-EMA after setting new weekly lows has opened the door for a rally back towards 102.50 – a strong US GDP report is key.

EURUSD_Fights_for_1.3000_amid_Month-End_Rebalancing_body_x0000_i1030.png, EUR/USD Fights for $1.3000 amid Month-End Rebalancing

GBPUSD: Although a new May low was set at $1.5007, price has reversed the past 24-hours and encroached the 21-EMA, as well as former mid-April support, at 1.5190/250, but price has shifted lower amid the US Dollar rally the past hour-plus, and now an Inverted Hammer has formed on the daily chart. While I said yesterday that my “bearish bias is valid unless 1.5165 trades,” this might have been the US Dollar pullback we were looking for. Today’s close is crucial to determine if this rebound was merely a reaction off of the psychologically significant 1.5000 level.

EURUSD_Fights_for_1.3000_amid_Month-End_Rebalancing_body_x0000_i1031.png, EUR/USD Fights for $1.3000 amid Month-End Rebalancing

AUDUSD: No change: “The past several weeks I’ve maintained: a deeper pullback towards 0.9580 and 0.9380/400 is beginning. Price has been steady below the ascending trendline off of the October 2011 and June 2012 lows, suggesting that a top in the pair is in place, going back to the July 2011 high at 1.107. I maintain that I’m awaiting a monthly close below $0.9860, but that seems all but guaranteed with two days left in the month. The first target of 0.9580 was hit overnight and I expect a reaction at this level, given its significance as the 50% Fibonacci retracement from the May 2010 low to the July 2011 high, as well as the 2012 low set (coincidentally) this week last year. In the very near-term, with the weekly RSI at the lowest level since the height of the global financial crisis in the 4Q’08, the AUDUSD is probably close to a point of near-term exhaustion. Rebounds should be sold.”

EURUSD_Fights_for_1.3000_amid_Month-End_Rebalancing_body_x0000_i1032.png, EUR/USD Fights for $1.3000 amid Month-End Rebalancing

S&P 500: The S&P 500 has traded back to former channel resistance, which contained the US equity market from late-February to early-May (drawn off of the February 25 and April 18 lows, to the April 11 high). The support coincides with the 21-EMA currently, forming a zone of support from 1639 to 1650. In conjunction with a descending trendline off of the May 22 and May 28 highs, it appears a triangle may be forming for a push higher. Bulls hopes would be squandered below 1634.

EURUSD_Fights_for_1.3000_amid_Month-End_Rebalancing_body_x0000_i1033.png, EUR/USD Fights for $1.3000 amid Month-End Rebalancing

GOLD: No change: “If the US Dollar turns around, however (as many of the techs are starting to point to), then Gold will have a difficult gaining momentum higher. Indeed this has been the case, with Gold failing to reclaim the 61.8% Fibonacci retracement of the April meltdown at $1487.65, only peaking above it by 35 cents for a moment a few weeks ago.” Price is back under 1400, and if US yields keep firming, a return to the lows at 1321.59 shouldn’t be ruled out.

--- Written by Christopher Vecchio, Currency Analyst

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