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Commodity Currencies Find Lift on PBoC; EUR/USD Falls to $1.3000

Commodity Currencies Find Lift on PBoC; EUR/USD Falls to $1.3000

Christopher Vecchio, CFA, Senior Strategist


After being briefly lower in the start of Asian trading, the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is on pace for its seventh close higher out of the past eight session, on the back of weakness seen across the European currencies. In fact, the other components of the USDOLLAR, the Australian Dollar and the Japanese Yen, are positive on the day and have shown signs of potentially turning around against the US Dollar, at least on a technical basis (more below).

Notably, the Aussie and the New Zealand Dollar are finding follow through after the People’s Bank of China yesterday announced that it had been active in providing additional liquidity to the credit-strapped system. Just last week the Chinese interbank lending rate (SHIBOR) hit 25%, underscoring the hastened pace of the engineered slowdown the Chinese economy is currently enduring. Because PBoC policy isn’t changing, any boost seen by the commodity currencies resulting from short-term liquidity measures provides an opportunity to fade said rallies; this is not a bullish long-term fundamental development.

Elsewhere, the Euro is the laggard on the day after European Central Bank President Mario Draghi said that ECB policy would “stay accommodative for the foreseeable future,” while subsequently noting that the ECB has “an open mind about all other possible instruments that we may consider proper to adopt.” The implication here is that the ECB could be backpedaling on its June 6 policy decision that negative interest rates were inappropriate at present time; should negative deposit rate speculation pick back up (it was a central driver of Euro weakness in late-April/early-May)

Taking a look at European credit, peripheral credit has rebounded after the dovish commentary from ECB President Draghi, but the stronger debt has done little to spur appetite for the Euro. The Italian 2-year note yield has decreased to 2.164% (-10.6-bps) while the Spanish 2-year note yield has decreased to 2.324% (-16.6-bps). Likewise, the Italian 10-year note yield has decreased to 4.730% (-11.8-bps) while the Spanish 10-year note yield has decreased to 4.888% (-16.7-bps); lower yields imply higher prices.


NZD: +0.36%

CAD: +0.23%

JPY: +0.23%





Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.03% (+0.83%prior 5-days)


Commodity_Currencies_Find_Lift_on_PBoC_EURUSD_Falls_to_13000_body_Picture_1.png, Commodity Currencies Find Lift on PBoC; EUR/USD Falls to $1.3000

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Commodity_Currencies_Find_Lift_on_PBoC_EURUSD_Falls_to_13000_body_x0000_i1028.png, Commodity Currencies Find Lift on PBoC; EUR/USD Falls to $1.3000

EURUSD: The Right Shoulder of the Head & Shoulders pattern dating back to September 2012 continues to develop (formed last week around $1.34000), and upside momentum from the mid-May lows has been snapped (as determined by daily RSI). However, weakness may be overcooked in the near-term, as short-term (H1, H4) Slow Stochastics (5,3,3) have turned bullish as the pair has found support just below 1.3100. Support comes in at 1.3000/20 and 1.2940. Resistance comes in at 1.3070/80 (38.2% Fib July 2012 low to February 2013 high, 50% Fib April low to June high).

Commodity_Currencies_Find_Lift_on_PBoC_EURUSD_Falls_to_13000_body_x0000_i1029.png, Commodity Currencies Find Lift on PBoC; EUR/USD Falls to $1.3000

USDJPY: The beginning of June yielded the start of a Bearish Broadening Wedge (off of the February 25 and April 4 lows), but near-term bullish momentum has signaled a false breakout now that the USDJPY rests above the wedge’s support, at ¥96.65/80 today. Although the USDJPY broke the RSI downtrend last week, near-term divergence has formed as the rally has seen RSI take out prior swing highs without the same occurring in price, as the pair has failed to achieve the 50% Fib retracement from the May high to the June low – the same occurred after the first major June low was set on June 7 (price rallied to 99.28, 50% at 99.35; now price has rallied to 98.70, 50% at 98.76). The 98.70 high this week also comes in below 98.80 (38.2% Fib February low to May high).I’m short against 98.75.

Commodity_Currencies_Find_Lift_on_PBoC_EURUSD_Falls_to_13000_body_x0000_i1030.png, Commodity Currencies Find Lift on PBoC; EUR/USD Falls to $1.3000

GBPUSD: No change: “The GBPUSD has traded in a slight ascending channel off of the March 14 and May 29 lows (parallel to May 1 high), and the conflux of the 200-SMA and said channel resistance just under $1.5750 provoked a pushback midweek. Now, price finds itself at the 38.2% Fibonacci retracement of the January high to March low as well as the March low to May high. With US yields rallying, the USD component of this pair looks well-supported, and any rallies seen in the coming days are viewed as selling opportunities. 1.5230 is the first big support lower. Further US Dollar strength is contingent upon sentiment remaining that the Fed will taper QE3, and the more evidence that builds on the fundamental side, the greater the probability that the ascending channel that has guided price the past three months is only a Bear Flag. Big picture: the GBPUSD broke the uptrend off of the 2009, 2010, and 2012 lows, signaling the beginning of a greater selloff towards 1.4200. Any rallies in the pair look to be sold; price could climb to 1.5530/35 (23.6% Fib March low to May high) before the next leg lower begins.

Commodity_Currencies_Find_Lift_on_PBoC_EURUSD_Falls_to_13000_body_x0000_i1031.png, Commodity Currencies Find Lift on PBoC; EUR/USD Falls to $1.3000

AUDUSD: Bullish RSI divergence on the daily chart (price sets new lows but momentum fails to keep pace) suggests that the selloff may be exhausted in the near-term. However, given the scope of recent declines – over 1200-pips in ten weeks – it’s evident that a new paradigm is guiding the AUDUSD. As such, we prefer selling rallies in the pair but note that a major support zone at $0.9140/220 (38.2% Fib October 2008 low to July 2011 high, 61.8% Fib March 2010 low to July 2011 high) will require new catalysts for a break.On bounces during the downtrend since April 11, the AUDUSD has often traded back towards the 23.6% from the April high to the low at the time before turning. In this case, that would suggest breaking former June lows at 0.9320 before 0.9485/90 (23.6% Fib April high to June low).

Commodity_Currencies_Find_Lift_on_PBoC_EURUSD_Falls_to_13000_body_x0000_i1032.png, Commodity Currencies Find Lift on PBoC; EUR/USD Falls to $1.3000

S&P 500: No change: “The 2013 uptrend off of the December 28, 2012 and April 18, 2013 lows gave way on Thursday, and with a sustained break by the end of the week, the technical bias is for a deeper pullback in the near-term. The 61.8% Fibonacci retracement of the Feb low/May high serves as near-term support at 1561, followed by mid-April swing lows near 1535. A bearish bias is appropriate unless 1605/08 is broken.”

Commodity_Currencies_Find_Lift_on_PBoC_EURUSD_Falls_to_13000_body_x0000_i1033.png, Commodity Currencies Find Lift on PBoC; EUR/USD Falls to $1.3000

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.” This has played out, with fresh yearly lows at 1228.42 today, and pressure remains biased for a move lower so long as US yields remain elevated.

--- Written by Christopher Vecchio, Currency Analyst

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