Although the Greenback continued to track lower on Wednesday against most of the major currencies, the setbacks were not all that significant from a technical standpoint with the Euro still failing to close above multi-week resistance by 1.3500. While we would certainly not rule out a clear break and close above 1.3500 in the Euro over the coming days, inability to do so to this point leaves us hanging on to our core USD bullish bias.
With the US Dollar more positively correlating in recent weeks to US economic data and local equity performance, it has not at all been surprising to see the Buck come under pressure as data has cooled off a bit in recent days, while US equities are also showing signs of topping. Housing starts were much weaker on Wednesday, and Q4 earnings out of the US financial and banking sector were quite mixed. Meanwhile, US equities started to roll over from their impressive gains with the Nasdaq putting in a near bearish outside day, the S&P putting in a bearish reversal day, and the DJIA putting in a bearish close.
Still, overall data out of the US has been more solid than weak, and should we see a pullback in equity prices into Thursday, we would also not discount the possibility that the Greenback does in fact mount a rally on a flight to safety bid. The Swiss Franc and Yen were well bid on Wednesday because of this fact, and although the Dollar closed lower on the day, it did manage to rally quite nicely in the North American session.
We also should not dismiss ongoing developments in the Eurozone and the impact they have on the Euro and currency markets in general. The Euro has been rather well bid of late on the back of a new aid facility for the beleaguered peripherals, some rather hawkish comments from ECB President Trichet at the previous week's ECB press conference, and news that Spain is on the verge of ramping up bailouts for local banks as it looks to inject billions of Euros into these troubled institutions over the coming days. However, we must not forget that despite some positives out of the region, there are still a ton of problems and unknowns that ultimately should continue to weigh on the Euro. Notoriously hawkish ECB member Stark has also let some of the air out of the Euro rally after saying that there was no change in the ECB's medium-term inflation view, and that prices in the short-term were not a warning of rate hikes per se.
Moving on, the one currency that has been doing its own thing and underperforming even against the buck has been the Canadian Dollar, which we have been warning about over the past few days. In our analysis from earlier in the week, we suggested that CAD was relatively overvalued and subject to some weakness on technical factors. We also warned that a fundamental catalyst for a reversal would be around the corner and it has finally come, with the Bank of Canada expressing concern over the rise in the local currency and its negative impact on exports. The daily chart is now showing the potential formation of a double bottom with a break back above 0.9980 to trigger the pattern and open an acceleration back above 1.0100, while the weekly chart is showing the potential for the first bullish outside week in some time pending a break above 0.9985 and positive weekly close. Furthermore, we have seen a massive reduction in long retail positions in USD/CAD over the past few sessions, which lends support to the idea that the pair could very well be poised for some major upside as retail traders are finally starting to give up on their long positions. Generally speaking, whichever direction retail traders are is not the direction that yields profitable results. As such, we have gone ahead and issued a buy recommendation for Thursday @0.9940 with an open objective and stop-loss at 0.9790.
Another interesting point we would like to offer in terms of the overall price action of late is that gains in currencies over the past few sessions have been somewhat deceptive in terms of their timing and could be a mitigating factor to any validity to broader USD weakness. We have noticed that past few trading days that the Asian session has been uncharacteristically pushing the Dollar aggressively lower instead of what is more commonly some uneventful consolidation ahead of European trade. While we can not entirely make sense of this price action, we do find it interesting and are certainly less convinced of any USD selling that goes on during this session. In fact, we have actually seen the USD attempt to rally back in North American trade over the past few days where price action is generally more reliable and relevant.
On the data front, the antipodeans have been hit rather hard of late, with some softer Australian consumer confidence and lower than expected New Zealand inflation readings opening the door for some relative underperformance in the commodity currencies. We continue to like the idea of being short the commodity currencies across the board in 2011, with our trade of the year recommendation being long EUR/AUD. Year to date, the Euro is up 2.45% against the Australian Dollar. A slowdown in China, softer commodities prices, weaker economic data, and narrowing yield differentials should all contribute to the continued underperformance in these currencies.
Looking ahead, it will be interesting to see how markets respond to the latest Chinese economic data, with a balance of stronger growth numbers and more contained inflation making a good recipe for increased risk appetite. In the European session the focus will be on German producer prices, Swiss ZEW and UK CBI trends. Things heat up in the North American session with a heavy batch of data including; Canada leading indicators and wholesale sales, US initial jobless claims, continuing claims, existing home sales, Philly Fed and leading indicators. As mentioned above, US equities are looking rather top heavy and we could see an acceleration of selling into Thursday trade.
EUR/USD:Although the market has rallied quite impressively out from the recent multi-week lows set by 1.2875, we continue to classify the bounce as corrective, with any additional rallies expected to be well capped by the 1.3500 range highs on a daily close basis ahead of some fresh weakness. Ultimately, only a close back above 1.3500 would give reason for concern and delay outlook. A break and close back below 1.3365 will confirm bias and accelerate declines.
USD/JPY: The market appears to be locked in some consolidation with clear directional bias not easily determined. The latest rally has stalled out by the Ichimoku cloud top to suggest that the pressure still remains on the downside for now. Back below 82.00 should accelerate declines and expose the multi-year lows from 2010 just ahead of 80.00, while back above 83.70 will relieve downside pressures and shift structure back to the topside. In the interim, we remain sidelined and await a clearer signal.
GBP/USD: The latest break back above 1.5910 delays bearish prospects for the time being and now opens the door for additional strength towards the key 78.6% fib retrace off of the October-November major move which comes in by 1.6090. Nevertheless, our core bias still remains bearish and any rallies into this fib retrace are viewed as a formidable sell opportunity in favor of some renewed downside pressures. Look for a break and close back below 1.5835 to officially confirm bearish bias and accelerate. A close above 1.6100 concerns.
USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. The latest bounce back above 0.9600 is certainly encouraging and the rally has also triggered the break of a previous weekly high to set up a bullish reversal week. Look for continued acceleration of gains back above parity over the coming sessions, with any setbacks expected to be well supported above 0.9400 on a close basis.
Written by Joel Kruger, Technical Currency Strategist
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