Currencies Consolidating Ahead of US Trade (Morning Slices)

Published October 5th, 2009 - 09:07 GMT


Fundys – The USD selling in the Asian session of trade stalled out into Europe, with the buck once again finding some bids, and the markets left consolidating. Data on the whole overnight was better than expected, with UK and Eurozone services PMI stronger, while Eurozone sentix sentiment and retail sales also exceeded expectations. However, the data all failed to materially factor into price action, with the buck remaining bid on any form of a dip against the Euro and Pound. Despite the rumors that the G7 would produce a different and more aggressive line on currencies, the Group once again failed to make any new headway on the topic, after repeating the familiar language that “excessive volatility and disorderly movements were unwelcome….” Japan’s Fuji did however say after the meeting that intervention was a possibility if currencies shoed excessive movement. The Australian Dollar has gained the most ground on the day thus far, and is tracking higher by some 1%. Some better second tier data results in the form of job ads and service sector activity have certainly not hurt the single currency, with many also buying the recent dips ahead of Tuesday’s much anticipated RBA event risk. Many market participants have been pricing in a rate hike, which would be significant, with the RBA being the first central bank to revert back to a tightening cycle. However, we contend that this would be a mistake and the RBA should still remain on hold. While Kiwi has also performed admirably on the session, the higher yielding antipodean has been weighed down somewhat on the back of earlier comments from FinMin English who said that the economy was at risk for another down-leg. Elsewhere, in the EU, Ireland voted “Yes” in an overwhelming 2:1 margin to approve the Lisbon Treaty. Doom & gloomer Roubini was on the wires warning that the recovery in global equities and commodities was too much. Bini Smaghi was out saying that China should start to depeg from the USD, while Oman said that as long as oil was priced in USDs, the country would keeps its peg. Finally, George Soros was in the news with not so chocking comments for him, after saying that the ECB could exit more quickly than the Fed. Looking ahead, US ISM non-manufacturing (50 expected) is the only key release in the North American session, due at 14:00GMT. On the official circuit, Fed Dudley is slated to speak in New York at 22:30GMT. US equities point to a higher open, while gold is flat and oil tracks lower.

Techs - EUR/USD The break to a fresh weekly lower low now helps to confirm our outlook for a top by 1.4845, with deeper setbacks projected back into the 1.4100-1.4200 area over the coming days/weeks. Look for a lower top by 1.4720, with a test of initial critical support by the 50-Day SMA in the 1.4400 area which has been supporting over the past several months.  A close below the 50-Day should accelerate declines.  Any rallies on Monday are expected to be well capped ahead of 1.4700. USD/JPY While the overall structure remains intensely bearish, the recent weakness leaves daily studies in need of a healthy corrective bounce. Look for the 88.25 weekly low to hold for now ahead of some corrective upside over the coming days back towards the 93.00-94.00 area. However, any rallies are classed as corrective with a retest of the critical matched trend lows from 2008/2009 at 87.15 expected. GBP/USD The much talked about neckline of the major h&s topping pattern has finally been triggered with the result to likely open a measured move decline towards the 1.5000 area over the coming weeks. Look for a lower top by 1.6130, to be confirmed on a break below 1.5770 over the coming days. Below 1.5770 opens a fresh downside extension to initial support by 1.5430 in the form of the 200-Day SMA. USD/CHF Has ended a sequence of consecutive weekly lower tops, with some good upside follow through seen following the previous week’s bullish doji-like reversal. We contend that a major base is now in place by 1.0185 and look for an acceleration of gains over the coming days back above 1.0500 and towards the 1.0700 area. Any setbacks on Monday are expected to be well propped ahead of 1.0250.

Flows – Asian central bank and UK clearer sales in Cable. Option expiries in Eur/Usd at 1.4600.

Trade of the Day – Gbp/Aud: Daily studies have finally turned up, but weekly studies are still very oversold and with only 2 of the past 12 weeks putting in positive closes, and very marginal ones at best, we contend that the market is on the verge of a major bullish divergence. The previous weekly close is very bullish on its own with the formation of a dragonfly doji pattern. Ultimately, any setbacks in the early week should be well supported ahead of 1.8060, in favor of the onset of a material recovery rally. Look for a break back above 1.8475 to confirm and accelerate.


Written by Joel Kruger, Technical Currency Strategist for
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