Risk Appetite Remains Quite Healthy Ahead of Long Holiday Weekend | Learn Forex | GoLearnForex.com

• Markets welcome passage of Greek austerity implementation bill
• Stronger Chicago PMI also contributes to risk buying
• Canadian Dollar outperforming on more hawkish outlook for central bank
• Swiss Franc finally showing relative weakness from record high levels
• US debt ceiling talks remain in focus
• Softer manufacturing PMIs out of China; Aussie and Japan data mixed
• Volume to lighten up significantly into long holiday weekend

Although we remain rather skeptical with the recent resurgence in risk appetite, risk correlated currencies continue to benefit from the broader shift in global sentiment. This time, it was the passage of the second Greek bill to implement its austerity plan which opened the door for some fresh risk buying, while a much better than expected Chicago PMI reading out of the US on Thursday also contributed to the currency, equity and commodity gains. Initial jobless claims data failed to materially influence price action, with the softer result being ignored by market participants.

One of the relative outperformers in recent trade has certainly been the Canadian Dollar which has managed to find strength not only on the broad based USD weakness but also on its own merits, with Wednesday’s much higher than expected inflation data and Thursday’s slightly better than expected GDP result helping to increase speculation of a potential monetary policy tightening from the Bank of Canada over the near-term.

Elsewhere, we have also been seeing a good deal of selling in the Swiss Franc which appears to be a welcome development given the overextended nature of this market and recent surge in the currency to fresh record highs against both the US Dollar and Euro. The healthier and more upbeat outlook over the past week has been attributed to the sell-off in the Franc which is very much tied to risk related themes.

Moving on, ongoing talks in the US over the raising of the debt ceiling continue to garner attention, with the topic one of deep concern and potentially seen weighing on the US Dollar going forward should an acceptable resolution fail to materialize over the near-term. It is clear that the strain of the recent global economic crisis coupled with the need to find a resolution to the US debt problems has taken its toll on the Treasury Secretary, with reports that Mr Geithner will consider stepping down from his post after the debt limit increase is passed. Th Treasury Secretary has however come out to quiet these rumors after saying that he is committed to his work and will be staying on for the foreseeable future.

On the data front, data out of Japan was mixed, with the unemployment rate unexpectedly dropping, while household spending dropped off and the Tankan showed sentiment amongst firms turning even more negative than had been anticipated. In Australia, any positive momentum from some improved manufacturing PMIs were offset by weaker new home sales and a concerning manufacturing PMI out of China which showed deterioration. On the official circuit, Fed Bullard was out with some balanced comments saying that the best course of action for the Fed right now is to remain in pause mode and to continue to evaluate whether the economy is in fact in on a path to recovery.

Looking ahead, market conditions are expected to lighten up significantly as the day progresses, with North Americans off celebrating their respective long holiday weekends. Canada is closed for Canada Day on Friday, while the US market will officially be closed on Monday for the July 4th celebration. US traders have already been leaving the desks late Thursday to maximize vacation time, while investors overseas have been lightening up in anticipation of the long weekend.

As such, we would not recommend taking any positions in the market until normal market conditions resume next Tuesday, although there still is some risk on the economic calendar for Friday which should be watched. In European trade it is a series of manufacturing PMIs which are featured, while the Eurozone unemployment rate will also be in focus. Later on, all of the remaining attention will shift to the US where ISM manufacturing, Michigan confidence and construction spending are slated for release. US equity futures and commodities prices are seen consolidating recent gains into the European open.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The market remains well bid on dips towards 1.4000 for now with the latest price action resulting in some choppy consolidation. However, look for any additional rallies from here to be well capped below 1.4550 on a daily close basis ahead of the next downside extension back towards and eventually below 1.4000. A coiling of the 10/20/50/100-Day SMAs also suggests that a near-term break of the range is due, and given the more medium-term structure, we anticipate the break will be to the downside. Ultimately, only a daily close back above 1.4550 gives reason for concern.

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 the latest break and close back above 81.00 helps to confirm. Look for a test of next key short-term resistance by 82.20 over the coming sessions.

GBP/USD: Although the short-term structure remains bearish, setbacks seem to be well supported in the 1.5900’s for now. However, we classify the latest price action as some bearish consolidation ahead of the next major downside extension with the market now looking to establish back below the 200-Day SMA and extend declines below next key support at 1.5750 further down. In the interim, look for any rallies to be well capped ahead below 1.6250 on a daily close basis. Rallies towards 1.6200 should therefore be sold into.

USD/CHF: Despite the intense downtrend resulting in recently established fresh record lows below 0.8300, 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. The latest break back above the 20-Day SMA is encouraging while a push beyond 0.8550 will ultimately be required to officially relieve immediate downside pressures and accelerate gains. In the interim, look for intraday setbacks to be well supported ahead of 0.8300.

Written by Joel Kruger, Technical Currency Strategist

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