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Currencies Finally Showing Signs of Weakness; Will it Continue?
Written by article default Monday, 04 October 2010 04:59
FUNDYSAlthough we have seen some minor pullbacks in Monday trade, overall, currencies continue to rally against the USD, and the race to see who can devalue their currency the quickest is in full swing. It seems as though almost every economy is not happy about a strong currency at present, with most of the Asian governments, a good deal of European governments, and South American’s as well, all seriously concerned with the potential impact of a stronger local currency on the respective economies. Clearly the threat of a stronger currency compromises some very solid export markets, and with the USD losing value, these economies are at risk of losing business from a mighty big customer.
Relative Performance Versus USD Monday (As of 10:30GMT)
1. SWISSIE+0.11%
2. YEN -0.11%
3. STERLING-0.16%
4. CAD-0.23%
5. KIWI-0.44%
6. EURO-0.49%
7. AUSSIE-0.71%
It is quite evident that the very real prospects of QE2 in the US has killed the Greenback over the past several days, and there is very little in the way to stop the buck from sliding further in light of the outlook for Fed monetary policy. However, we do see the potential for a ramping up of official talk on the weak Dollar to start making the rounds (similar to the campaign we saw when the Euro was rallying to 1.6000 a few years back), which could be the very catalyst to start to inspire some profit taking on USD shorts and possibly ignite a much needed and healthy corrective rally for the Dollar.
Inter-day technical readings certainly show the need for some USD appreciation, with the Euro well overbought on the daily charts. The latest rally in the major has been most impressive, with the single currency putting in 18 consecutive closes higher than the previous daily low. As such, in our opinion, in order to see a technical reversal start to play out, we would need to see the Euro close below the previous daily low to break this sequence and open the door for deeper setbacks. Right now, that key level to watch is a good ways away by 1.3620, and at this point, a close below this level seems like a remote possibility. But when we finally do see a close below the previous daily low, we expect to see the onset of a material correction in favor of the USD which should extend into other markets.
On the data front, Eurozone Sentix investor confidence came in better than expected, while UK construction PMI also managed to exceed consensus estimates. In Asia, The economic calendar was anemic; with China and Australia closed for holiday, and the only notable release coming in the form of flat August wage growth in Japan, which hardly factored into price action. The USD is broadly bid across the board, with many attributing the price action to necessary corrective price action within an otherwise intense downtrend. We have also been hearing talk of China offers in Eur/Usd above 1.3700 which could also be weighing on the currency markets, while downgraded growth forecasts from the Irish central bank have not helped matters.
Looking ahead, US factory orders and pending home sales are due at 14:00GMT, and while the data could certainly factor into price action, more attention will undoubtedly be paid to Fed Chair Bernanke who speaks at 19:00GMT and 23:30GMT. Also on the official circuit is Fed Sack, who speaks on the topic of fixed income management at 15:30GMT. US equity futures and commodity prices are tracking moderately lower into the North American open.
GRAPHIC REWIND
TECHS
EUR/USD: The pace and intensity of this latest Euro rally that began in early September, has been most impressive, with the currency pushing higher on a daily basis to now close in on next major psychological barriers by 1.4000. However, daily studies are well overbought at this point, and the risk from here is for some form of a corrective pullback before considering a bullish resumption. The key to a reversal is now entirely contingent on the daily close in the major.Although we have seen previous daily higher lows broken to the downside on numerous occasions throughout the rally, we have yet to see a daily close below the previous daily low. The market has now put in a dramatic 18 consecutive closes higher than the previous daily low, and we would therefore need to see a close below the previous daily low to officially trigger the start to a legitimate corrective decline. Until we can see a close below the previous daily low, the prevailing uptrend remains firmly intact, and a near test of 1.4000 can not be ruled out.
USD/YEN: Rallies have stalled out for now by the 50-Day SMA and just ahead of the Ichimoku cloud bottom to warn that the downtrend is still very much intact. It now looks as though a medium-term lower top is attempting to carve out by 85.95 ahead of the next major downside extension back below 82.85 and towards the record lows at 80.00. A break back above 86.00 would ultimately be required to negate outlook.
GBP/USD: The latest break back above 1.5700 threatens the integrity of the downtrend and potentially exposes a move back towards 1.6000 over the coming sessions. However, the 78.6% fib retrace off of the 1.6000-1.5295 move comes in by 1.5845, and inability to close above this fib could keep alive the possibility for a lower top below 1.6000 ahead of the next major downside extension. Look for a close back below 1.5670 to confirm outlook and likely accelerate declines back towards 1.5500.
USD/CHF: The market continues to extend declines to fresh yearly lows despite oversold short-term and medium-term studies. From here, the risks are for some more weakness, with a retest of the record lows by 0.9645 seen as the likely target. However, any additional declines below 0.9645 are seen limited and we like the idea of establishing a significant long position on a retest of this level. Back above the 20-Day SMA would be required to officially relieve downside pressures.
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