ASIA/EUROPE FOREX NEWS WRAP
High beta currencies and risk-correlated assets are consolidating on the day (AUDUSD: -0.06%; NZDUSD: +0.19%; USDCAD: -0.02%) ahead of major headline event risk scheduled before the start of the US trading session on Friday. Of note, the Japanese Yen is the top performer, which isn’t really a surprise considering that the Bank of Japan didn’t make any material changes to its current policies; instead, it promised to continue to expand its monetary base without issuing any specific details.
With the USDJPY declining away from ¥100.00 for the time being, the big question now is: what can provoke the pair to turnaround now that traders are cutting down on their short Yen positioning? The US 1Q’13 GDP print is the perfect catalyst that could produce a major reaction and finally produce a break of the elusive ¥100.00 level.
The US economy is expected to have grown by +3.0% annualized in the 1Q’13, from +0.4% in the 4Q’12, which comes as a bit of a surprise considering that US politicians produced ill-timed and poorly thought out policies in order to unnecessarily trim the country’s budget deficit (research has increasingly shown that austerity before “booms” or “peaks” in the business cycle can be counterproductive). Accordingly, in light of the payroll tax increase and the budget sequestration in March, I find the expectation for a print above +3.0% unlikely. Nevertheless, should it materialize, we should see the first print in USDJPY above ¥100.00 since April 2009.
Taking a look at European credit, sovereign debt in Europe is mixed overall with little deviation from the open, which fits neatly in with the narrative of the Euro being unchanged on Friday. The Italian 2-year note yield has decreased to 1.274% (-1.3-bps) while the Spanish 2-year note yield is unchanged at 1.884%. Likewise, the Italian 10-year note yield has increased to 4.067% (+1.9-bps) while the Spanish 10-year note yield has decreased to 4.241% (-2.8-bps); lower yields imply higher prices.
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RELATIVE PERFORMANCE (versus USD): 10:40 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.14% (-0.49% past 5-days)
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: No change: “After stalling for several days at the 38.2% Fibonacci retracement from the Jul’12 low to the Feb’13 high at 1.3075, the EURUSD has fallen back below its 8-EMA and 21-EMA amid a breakdown in the daily RSI uptrend. Although retail sentiment remains short (thus the contrarian SSI indicator is bullish), we’ve seen positioning narrow, a sign that the breakdown transpiring may be legitimate. With a rate cut being tentatively priced in (see: Italian and Spanish bond yields), soft support at 1.3000 has broken. Losses could extend to 1.2930/50 (200-DMA) in the short-term. Rallies should be capped by 1.3130 and 1.3200/10.” The breakdown call may have been premature, now that the EURUSD is working on a Bullish Reversal Morning Star candle cluster; the key will be the US 1Q’13 GDP report tomorrow.
USDJPY: No change: “There are two possible outcomes here: a Bearish Double Top below 100.00; or a Bullish Ascending Triangle. With the daily RSI uptrend intact, I am partial to the bullish outcome, which is reinforced by price remaining supported by the 8-EMA, now at 98.85/90. The Hammer yesterday at the 8-EMA bolsters the bullish case as well. Deeper pullbacks eye 97.60/65 (21-EMA) and 96.60.”
GBPUSD: After price consolidated just above its lowest levels since early-April, the breakdown in RSI has steadied as well, holding near 50 and leaving ample room for a rebound given the proper catalyst. Enter the UK’s 1Q’13 GDP report, which crushed expectations and lit a fire under the British Pound. Now, the GBPUSD has displayed a very clean rebound off of the lower rail of the ascending channel off of the March 12 and April 4 lows, touched on Tuesday at 1.5175/200. Now that the minor downtrend from the April 12 high has reversed, so too has investor sentiment, with retail bias flipping short yesterday, the day before the strong reversal higher. Accordingly, with the fundamental, technical, and positioning pictures lining up, there is room for the GBPUSD to run higher towards topside channel resistance at 1.5535.
AUDUSD:Mid last week the 8-/21-EMA structure flipped bearish amid the breakdown in the RSI uptrend, coinciding with the rally off of the March 4 and April 8 lows. Fundamentally speaking, amid declining base metals’ prices and poor data out of China, it is our preference to sell the commodity currencies. Technically speaking, it is worth noting that the AUDUSD failed to find follow through on the potential basing pattern, a three day cluster of “Doji-Hammer-Doji.” Now, with back-to-back Inverted Hammers (bearish reversal candles) forming on the daily chart, alongside bullish retail sentiment, we find that it is possible that AUDUSD makes a run towards the yearly lows just above 1.0100.
S&P 500: No change: “Is the top in? A dramatic sell-off yesterday dropped the S&P 500 below the crucial 1570/75 area, former swing highs as well as the ascending trendline support off of the late-December and late-February swings lows – coincidentally the pre-fiscal cliff deal low and the post-Italian election low. We’re in a bit of “no man’s land” here, with either a close back above 1570/75 necessary for a retest of the highs, or a close below 1530/35 to signal weakness towards and below 1500.”
GOLD: No change: “The major support zone from the past 18-months from 1520 to 1575 gave way with fervor last week, as the combination of weak fundamentals (financial institutions scrambling for cash in Europe after Cyprus) and broken technicals produced the ideal selling climate. Precious metals in general have gotten hammered, and Gold has fallen back to the mid-March swing lows near 1380/85. A weekly close below 1430 this week leaves the possibility of a bigger dip towards 1305.”
--- Written by Christopher Vecchio, Currency Analyst
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