Euro breaks down to fresh 2009 lows. Dollar/Yen continues to surge now approaching 100.00. Talk of China stimulus package bolsters investor sentiment. Kiwi stands out as outperformer on day; Sterling also well bid on stronger overnight data. We will be looking to sell rallies to the 200-Day SMA in Dollar/Yen.
Fundys - The Euro finally broke down through 1.2515 to fresh yearly lows while more Dollar/Yen buying was seen overnight, with massive speculative and macro account demand as the pair approaches key psychological barriers by 100.00. While ever weakening Japanese fundamentals have been attributed to the gains, even in the face of a continued slide in global equities, today’s rebound in stock markets around the world, aided by talk of a major China stimulus package, could also be helping to prop. The highest yielding (developed economies) Kiwi has been the outperformer on the day, with the single currency benefiting from the resurgence in risk appetite and China stimulus talk, along with upbeat comments from RBNZ Governor Bollard who showed a proactive approach by urging local banks to not be “ultra-conservative” in their lending. Bollard also assured that the RBNZ would introduce more policies to ensure adequate liquidity at the banks. This in conjunction with the weaker overnight GDP data in Australia, helped to generate fresh cross related Kiwi interest with Aud/Kiwi falling back from its near multi-year highs just shy of 1.3000. Elsewhere, Sterling was also an outperformer with the UK currency benefiting from the better than expected overnight consumer confidence and more impressive PMI data. This helped to put the Eur/Gbp cross rate back under pressure with the market easily breaking down below 0.8900. The Bank of England has kicked off its two-day MPC meeting this morning which is expected to culminate in a 50bp cut to 0.50% on Thursday. Looking ahead to the North American calendar, key event risk comes in the form of Treasury Secretary Geithner’s testimony to the Senate Panel on the federal budget at 15:00GMT.
Techs - EUR/USD has finally broken down through 1.2515 to fresh 2009 lows with the market now eyeing a retest of the key trend lows from late October at 1.2330 over the coming days. We do warn that with 1.2515 now broken, we could see an initial sharp bounce before a resumption of the broader down-trend. Only back above 1.2680 however will delay the bearish structure. Key levels to watch over the coming session come in by 1.2570 and 1.2455. USD/JPY (See below). GBP/USD doji close on Tuesday has opened the latest minor bounce into Wednesday thus far. A break back above 1.4160 today would open the door for additional corrective upside, while below 1.3960 should accelerate declines towards 1.3500. Ultimately, any rallies should be limited to the 50-Day SMA by 1.4440. USD/CHF remains locked in tight multi-day consolidation, with an eventual breakout favored to the upside given the bullish form of consolidation. Wednesday’s constructive price actions reaffirms with the market now looking to take out the recent range highs by 1.1890. Key levels to watch above and below over the coming session come in by 1.1890 and 1.1750 respectively.
Flows - Prop accounts selling Aussie Asian central bank on bid. Swiss bank on the offer in Eur/Usd. Sterling demand from Middle Eastern names and system funds. US prime name on the offer in Eur/Gbp. Directional account on the bid in Usd/Cad. Soveriegn wealth fund, US investment bank and central bank bidding of Usd/Jpy.
Trade of the Day - Usd/Jpy: The latest three day consolidation has been broken and despite highly overbought readings the price has pushed higher to easily exceed previous resistance by 98.70-90 (26Feb high/50% fib retracement) into the mid 99.00’s thus far. While in the more medium-term we favor additional upside above 100.00 into the 104.00 area after the pair had broken out of a major double bottom at 94.60, in the shorter-term we continue to favor looking for compelling opportunities to fade the current up-move. Yesterday in our “Indicator of the Day" piece we highlighted the importance of psychological barriers as technical indicators and we see no level more critical in the FX market as present as the 100.00 level in Usd/Jpy. As such, we will look for an opportunity to sell on a test of 100.00 today, and only today. There is some formidable resistance just over 100.00 as well, in the form of the 200-Day SMA (100.15) and upper Bollinger (100.10). Strategy: SELL @100.15 FOR A 96.35 OBJECTIVE, STOP @101.15. Stops to be trailed to cost on a break back below 99.00. If trade triggers and 99.00 not broken, position to be closed out at NY close (5pm EST) on Wednesday. Recommendation to be removed if not triggered by NY close on Wednesday.
Fundamental Catalyst - Across the board price action has been quite interesting overnight with familiar correlations falling back out of line. Today, we are seeing heavy buying of the Yen crosses and Dollar/Yen, but a lower Eur/Usd. Meanwhile, global equities are higher. We find it somewhat strange to see a lower Eur/Usd in the face of what otherwise appears to be a market content on buying back into risk. Surely at some point something has got to give. Either the Yen crosses will once again sell back off as the Euro turns lower against an attractive flight to safety USD, or Eur/Usd will begin to rally. In either case we see additional upside to Usd/Jpy as limited. If the Eur/Usd rate starts to plunge, the implication will be that investors are scared and exiting their higher yielding positions which should ultimately weigh on Usd/Jpy somewhat. If Eur/Usd starts to rally however, this will spark some broad based USD selling which at a minimum will stall Usd/Jpy gains. While we recognize that the USD has become the currency of choice in the current market environment, with even the Yen selling off of late, we would not completely abandon the lure of the Yen in risk averse markets.
Written by Joel Kruger, Technical Currency Analyst for DailyFX.com
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