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China and Former Fed Chair Drive Negative Sentiment in Early Friday Trade
Written by article default Friday, 17 June 2011 08:30
The minor recovery in currencies on Thursday seems to be nothing more than some short-term bearish consolidation at this point, with the markets more likely pausing for a breather ahead of the next wave of risk selling. Friday’s early price action looks to be confirming, with the US Dollar up across the board and eying additional gains. The Greenback has been the primary beneficiary is the flight to safety environment with the currency even more attractive than other flight to safety candidates like the Franc and Yen.
The Yen as a safe-haven currency is hardly a reality given the intense problems in the Japanese economy in recent months following the disastrous earthquake, while the Franc is looking less and less attractive as the currency’s performance looks like it could be overdone after the market broke to fresh record highs against both the US Dollar and Euro in recent trade. The threat of yet another dip in the global economy is becoming more real, and perhaps market participants are seeing the value in a Federal Reserve that has remained ultra accommodative since the onset of the global meltdown. The lure of the US Dollar in a safe-haven environment is still highly attractive, and this coupled with the fact that US yields can only eventually go higher, makes buying the US Dollar quite compelling over the medium-term.
Friday’s risk off trade has thus far been driven by speculation of yet another Yuan appreciation after a local paper reported that China’s authority may announce an important Yuan policy on June 19. China has also said that it is vitally important that Europe overcomes its debt crisis, and this is not too surprising with the country recently buying up Eurozone debt. Also seen contributing to the unsettled market dynamics and negative sentiment have been comments from former Fed Chair Greenspan who says that he sees a high probability of Greek default and that the US may fall into recession due to the Greek problems.
All eyes will now be on today’s meeting between Germany’s Merkel and France’s Sarkozy to see whether any resolution can be achieved with regard to Germany’s reluctance to a private sector involvement in a second Greek bailout. Meanwhile, Greece’s PM continues to struggle to receive parliamentary backing on austerity measures and with the cabinet being reshuffled today, a vote of confidence will not be completed until Tuesday which will undoubtedly leave uncertainty at elevated levels.
Looking ahead, the economic calendar on Friday is fairly mild, with Eurozone trade data and construction output the key standouts in European trade, while Canada wholesale sales, University of Michigan confidence and US leading indicators are featured in North American trade. US equity futures and commodities are tracking moderately lower into the European open.
ECONOMIC CALENDAR
TECHNICAL OUTLOOK
EUR/USD: Setbacks have accelerated over the past few days and the market looks poised for a deeper drop back towards the recent trend lows from Mid-May by 1.3970. From here, any intraday rallies are expected to be well capped ahead of 1.4350, with a break back below 1.3970 to likely open a fresh downside extension exposing a move towards 1.3500 further down.
USD/JPY: After undergoing a fairly intense drop off from the 85.50 area several days back, the market looks to have finally found some support in the 80.00 area and could be in the process of carving out some form of a base. Look for setbacks to continue to be well supported around 80.00 with only a close back below 79.50 to give reason for concern. From here we see the risks for a fresh upside extension back towards the recent range highs at 85.50 over the coming weeks and a break and close back above 81.00 will help to confirm.
GBP/USD: Rallies have been very well capped in the 1.6500’s with the market looking like it wants to carve out a fresh lower top by 1.6550 ahead of the next downside extension below 1.6060. From here, look for intraday rallies to be well capped ahead of 1.6300, with a break back below 1.6060 to confirm bearish bias and accelerate declines towards next major support by 1.5750.
USD/CHF: Despite the intense downtrend resulting in recently established fresh record lows by 0.8325, short/medium/longer-term technical studies are looking quite stretched to us, and we continue to like the idea of taking shots at buying in anticipation of a major base. Wednesday’s close back above 0.8470 officially encourage bullish reversal prospects and opens the door for a fresh recovery extension back towards 0.9000. Intraday setbacks should be well supported ahead of 0.8400, while only back below 0.8300 negates.
Written by Joel Kruger, Technical Currency Strategist
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