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Currencies Extend Gains in Early Week; Yen Inches Closer to Record Highs
Written by article default Monday, 01 November 2010 10:38
FUNDYSThe US Dollar starts off the new week and new month under pressure, after the market had been well offered in the final trading day of October. Our bias over the past couple of weeks has been net USD bullish and the latest moves are certainly threatening this outlook. Still, despite the latest USD slide, we retain our bias into Wednesday and ahead of the highly anticipated Fed rate decision, with the very basis for our outlook stemming from the expectation that the Fed will be much less aggressive with its approach to a second round of quantitative easing than the markets have been anticipating.
Relative Performance Versus USD Monday (As of 10:15GMT)
1. AUSSIE+0.48%
2. STERLING +0.19%
3. EURO+0.08%
4. KIWI+0.08%
5. CAD+0.03%
6. YEN+0.04%
7. SWISSIE+0.39%
Technically, despite the Greenback selling over the past few sessions, it is worth noting that the Euro still closed lower against the buck on the week and is only just in the process of consolidating ahead of the next major move. While any gains above 1.4000 should be well offered on Monday, ultimately, only a clear break back above 1.4160 would negate our outlook and open the door for additional Euro gains towards some critical falling trend-line resistance in the 1.4500 area.
As we highlighted in our analysis in the previous week, the theme in the FX market has been very much driven off of broad based sentiment towards the US Dollar. Although most of the major currencies have already taken out some critical levels over the course of the multi-week USD slide, there is still one currency which has been holding out, that could be preventing the Greenback from really being able to mount a meaningful recovery. The Yen is eyeing a retest and break of its 1995 record highs against the USD, and we suggest that once this level is finally taken out, it may offer a good excuse for the markets to finally say that there is effectively no good reason left to sell USDs over the short-term and thereby trigger a significant short-term USD rally. The level in Usd/Jpy comes in by 79.75 and it looks as though we could see the barrier taken out over the coming sessions.
Price action on Monday thus far has seen some more USD selling, with the Yen the key standout currency from a price action standpoint. Any time we see a sharp Yen sell-off that is not confirmed by any official action, we can expect to see the single currency rally quite sharply back to initial levels and beyond, and this is precisely what we have seen in early Monday, with Usd/Jpy spiking before sharply reversing course to trade to fresh multi-year lows below 80.40. Risk sentiment has also been quite healthy in the early week, with some much better than expected China PMI data helping to fuel additional currency buying. This has undoubtedly helped to propel Kiwi to fresh yearly and multi-month highs against the buck just shy of 0.7700. On the data front, the UK hometrack house survey deteriorated from the previous print, while UK manufacturing PMI more than offset with a better than expected result. Meanwhile, Swiss SVME PMI was more or less in line, while earlier in the day, the Aussie house price index was slightly better.
Looking ahead, all of the North American data comes from the US, with personal income (0.2% expected) and personal spending (0.4% expected) due at 12:30GMT, followed by ISM manufacturing (54.0 expected) and construction spending (-0.5% expected) at 14:00GMT. US equityfutures and commodities prices are well bid into the North American open.
GRAPHIC REWIND
TECHS
EUR/USD: The prospects for a head & shoulders top are fading following the latest break back above 1.4000, and the market is once again contemplating a fresh upside extension beyond 1.4160 and towards some major longer-term falling trend-line resistance by 1.4500 off of the record highs from 2008. For now, we will retain our bearish outlook and look for any rallies to be very well capped ahead of 1.4080, in favor of some renewed weakness. Key short-term support comes in by 1.3735 and a break below will be required to reaffirm outlook and accelerate declines.
USD/JPY: While we like the idea of the market establishing a major base by current levels over the medium and longer-term, short-term price action has still not confirmed any signs of a bottom, with the price action over the past few days more characteristic of a bearish consolidation ahead of the next drop towards the record lows. Ultimately, a close back above 82.00 will now be required to relieve downside pressures. However, we will be on the lookout for an opportunity to buy on dips below the 79.75 record lows.
GBP/USD: Friday’s close back above 1.6000 is concerning for bears, with the market contemplating a fresh upside extension beyond 1.6100. Still, the market has been very well capped on rallies above 1.6000 in recent weeks, and will look for another topside failure in favor of a some renewed weakness and a continuation of a broader multi-week range trade. However, should the market manage a close above the 1.6100 figure for more than 2 days, it will force a shift in the outlook and expose fresh upside towards 1.6500 further up. For now we remain sidelined and await a clearer signal.
USD/CHF: With daily studies finally crossing up from oversold and the market managing to close back above the 20-Day SMA for the first time since August, we are encouraged with the prospects for the formation of a major base by the recently established record lows at 0.9460. From here, look for any intraday setbacks to be well supported on dips towards 0.9700, with the market now eying a move towards next key resistance by 1.0000 over the coming sessions. Last week’s inability to extend declines to yet another record low below 0.9460, set up a strong bullish reversal week to end a sequence of 9 consecutive weekly lower highs. This further strengthens our constructive outlook and over the medium and longer-term we see significant upside risk. The market is now looking to establish back above the 50-Day SMA for the first time since mid-June.
FLOWS
Retail accounts, Middle Eastern names and UK corporate all selling off the highs in Cable. Swiss banks sales seen in Eur/Nok, a Canadian corporate account on the bid in Usd/Cad with real money on the offer.