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Short Covering Seen in AUD and NZD; EUR/JPY Fails at ¥129.00

Short Covering Seen in AUD and NZD; EUR/JPY Fails at ¥129.00

Christopher Vecchio, CFA, Senior Strategist


It’s no secret that the global market has a strong disdain for the Australian and New Zealand Dollars: year-to-date, they were the second and third worst performing majors against the US Dollar, shedding -9.31% and -5.00%, respectively, through yesterday. However, with market positioning extremely one-sided – as Senior Technical Strategist Jamie Saettele notes, a record short position for speculators and a record long position for commercials – it was likely that a correction occurred. Simply put, there were too few sellers in the market to sustain further downside price action in the Aussie and the Kiwi.

Accordingly, today we’re seeing one of the strongest performances out of the commodity currencies over the past year. At the time of writing, the AUDUSD had a 1-day rate of change of +1.90%, and over the past year, this has only happened twice: June 29, 2012, after the Euro-zone summit; and last Monday, June 3, 2013. Nevertheless, this rally in the commodity currency that is unfolding is a longer-term selling opportunity, but reentries should be on hold until market positioning moderates slightly – this is viewed as a short covering rally, not the establishment of new long positions.

Elsewhere, the Japanese Yen has given back some of its gains from yesterday, when a sharp decline in the US Dollar started in the US afternoon session. The Yen piques my interest over the next week to the long side for several reasons still. First, the Bank of Japan refused to act, meaning that there’s little reason to suspect the anxiety Japanese market participants have faced over the past three weeks will end. Second, the USDJPY has slid despite US Treasury yields hitting their highest levels in 16-months (a bearish divergence). Finally, in light of the higher US yields, I think that when the Federal Reserve stands pat next week with QE3, yields will pullback significantly, which historically has been negative for the USDJPY.

Taking a look at European credit, a sharp rebound in government debt across the region – lower yields – has failed to lift the Euro, with the EURJPY rejected on its advance towards ¥129.00. The Italian 2-year note yield has decreased to 1.591% (-6.0-bps) while the Spanish 2-year note yield has decreased to 2.011% (-8.6-bps). Similarly, the Italian 10-year note yield has decreased to 4.286% (-7.7-bps) while the Spanish 10-year note yield has increased to 4.523% (-11.4-bps); higher yields imply lower prices.


NZD: +1.41%

AUD: +1.22%

GBP: +0.10%





Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.06% (-1.25% prior 5-days)


Short_Covering_Seen_in_AUD_and_NZD_EURJPY_Fails_at_129.00_body_Picture_1.png, Short Covering Seen in AUD and NZD; EUR/JPY Fails at ¥129.00

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Short_Covering_Seen_in_AUD_and_NZD_EURJPY_Fails_at_129.00_body_x0000_i1028.png, Short Covering Seen in AUD and NZD; EUR/JPY Fails at ¥129.00

EURUSD: No change: “With daily RSI divergence presenting itself dating back to the yearly high set in February, the EURUSD is facing resistance at 1.3300/20 (late-February swing high post-Italian election, 23.6% Fibonacci retracement on Jul’12 low to Feb’13 high). At this point in time, I still favor a bullish bias, but there is evidence of overextension in the near-term given 1H and 4H RSI divergence. Now, the bigger pattern (Head & Shoulders) is in conflict with momentum (8-EMA>21-EMA>200-SMA); I prefer to stay neutral.” We had a tag of the level where the Right Shoulder should form – 1.3225 – with a small overshoot to 1.3333. Price has come off since then, and considered in context of (1) the USDCHF failing to set a new monthly low as the EURUSD set a new monthly high today and (2) the EURJPY reversing sharply off of ¥129.00, there is evidence building that a turn may be coming.

Short_Covering_Seen_in_AUD_and_NZD_EURJPY_Fails_at_129.00_body_x0000_i1029.png, Short Covering Seen in AUD and NZD; EUR/JPY Fails at ¥129.00

USDJPY: The failure to achieve the 50% retracement of the selloff from the May 22 to the June 7 low at ¥99.35 bodes poorly (99.28 reached and rejected on Monday), and with US Treasury yields at their highest level in 16-months and the USDJPY sinking, there is probably trouble ahead (I don’t think Fed begins QE3 taper in June; thus yields fall as bond prices move up, weighing on USDJPY). Levels to watch to the upside – 97.70, 97.70, 98.60, and 99.25/35; levels to watch to the downside – 96.50, 95.90, 95.60, and 95.00.

Short_Covering_Seen_in_AUD_and_NZD_EURJPY_Fails_at_129.00_body_x0000_i1030.png, Short Covering Seen in AUD and NZD; EUR/JPY Fails at ¥129.00

GBPUSD: No change from Friday: “Indeed, the pair has rallied to the 200-SMA at 1.5700 before reversing, and finds itself holding near early-May highs, as well as the 50% Fibonacci retracement of the January high to March low, at 1.5585. Similarly, the pair found resistance at the top rail of the ascending channel off of the March and May lows (drawn to the early-May high); and in context of the daily RSI failing at 66 again.” The GBPUSD is creeping back towards its 200-SMA once more, at 1.5698, but thus far has failed on the swing higher and is working on a lower high relative to last Thursday. Once more, “A near-term top may be forming, but it’s best to be neutral in my opinion.”

Short_Covering_Seen_in_AUD_and_NZD_EURJPY_Fails_at_129.00_body_x0000_i1031.png, Short Covering Seen in AUD and NZD; EUR/JPY Fails at ¥129.00

AUDUSD: The daily Hammer yesterday at major support – the Oct’11 low as well as the Nov’09 and Apr’10 highs between $0.9380/410 – has yielded to a surge higher today, back to the 8-EMA at 0.9538. It’s worth pointing out that the last big countertrend rebound – June 3 – produced a rally back to the 23.6% Fibonacci retracement from the April high to May low (at the time), and then failed. If this happens again, the AUDUSD could climb back to 0.9620/25 before sellers reemerge.

Short_Covering_Seen_in_AUD_and_NZD_EURJPY_Fails_at_129.00_body_x0000_i1032.png, Short Covering Seen in AUD and NZD; EUR/JPY Fails at ¥129.00

S&P 500: No change: “The S&P 500 found support ahead of the 61.8% Fibonacci retracement of the April swing low to May swing high (1593.6) on Thursday, and following the better NFP print, and closed the week above the conflux of the 8-/21-EMA at 1630/33. Now price faces a new challenge: the 61.8% Fibonacci retracement of the decline from the May high to the low on Thursday at 1653. A daily close here opens the door for a run back at the yearly high of 1687.4.”

Short_Covering_Seen_in_AUD_and_NZD_EURJPY_Fails_at_129.00_body_x0000_i1033.png, Short Covering Seen in AUD and NZD; EUR/JPY Fails at ¥129.00

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.”

--- Written by Christopher Vecchio, Currency Analyst

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