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Risk Correlated Assets Well Supported Despite Negative Headlines
Written by article default Thursday, 07 July 2011 08:21
- Risk correlated markets remain well supported despite downbeat news
- Setbacks to Greece and Portugal bring other peripherals back into the spotlight
- Aussie races higher intraday on better than expected employment data
- US debt ceiling uncertainty inspires talk of contingency planning from Treasury
- ECB event risk in focus with central bank set to reverse policy
The breakdown of familiar correlations between equity prices and risk sentiment continues to be an interesting story, with equity markets remaining well supported despite a slew of negative risk headlines that have emerged across the globe over the past few days. Whether it be concerns over the banking sector in China and the latest rate hike from the same country, ongoing Eurozone debt concerns that have once again fueled fears of contagion, propelling Portugal, Ireland and Italy back in the spotlight, softer global economic data, or a concerning US debt ceiling situation, market participants have seemingly held their ground for now and remain committed to supporting risk correlated assets.
Although some risk correlated currency crosses have done a better job of reacting to the negative developments with Eur/Chf tracking lower and Eur/Jpy also coming back under pressure, currencies like the Australian and New Zealand Dollars are remarkably resilient and remain only fractionally off of their recent highs despite the less promising global macro environment.
The Australian Dollar has managed to only consolidate when Aussie negative news emerges, while at the same time rallying impressively whenever any good news hits the wires. This week’s price action reinforces this pattern, with some softer data earlier in the week, a less upbeat RBA, and China rate hike only resulting in some mild selling, while the latest better than expected employment data has triggered some intense intraday buying with the market racing back above 1.0750. In truth, we are confounded with this price action and do not feel comfortable supporting a currency which sits by record highs and shows no real strong fundamental justification to be trading at these elevated levels anymore.
Even this latest employment data which on the surface was better than expected was not all that impressive and somewhat deceptive, with a sharp downward revision to the previous print nearly offsetting any of the positive result from the current reading. This in conjunction with an earlier release of some construction industry data well below the boom-bust 50 level, which showed a contraction for the 13th consecutive month, leaves us well in the bearish camp and looking for another opportunity to fade the Aussie strength. Other data released on the day thus far includes some as expected Japanese machinery orders which have failed to have any meaningful influence on price action.
Moving on, the topic of the US debt ceiling continues to garner a good deal of attention, and the latest news on this story is that Treasury officials are secretly considering options to avoid a default in the event that Congress fails to raise the debt ceiling by the August deadline. Apparently, although the Fed is not officially a part of this process, they have been instructed to sell Treasuries should the debt limit not be raised.
Looking ahead, Swiss inflation data and UK and German industrial production are the key economic releases in European trade, while things are expected to heat up into the North American open as event risk takes center stage in the form of the European Central Bank, and to a lesser degree, Bank of England rate decisions. While no change to policy is expected from the Bank of England, market participants will be looking to a European Central Bank that is now expected to officially reverse monetary policy and raise interest rates by 25bps to 1.50% on Thursday.
This will be a contentious decision, with the ECB still in a good deal of trouble as the local economy remains in crisis. As always, the accompanying language from Mr. Trichet will be watched closely for any additional insights into monetary policy going forward and to see whether the “strongly vigilant” language will still be incorporated. Market participants will also be looking to see if the ECB will keep accepting Greek bonds as collateral with rating agencies recently warning that a Greek debt rollover would be the equivalent to default. We are of the opinion that a rate hike from the ECB at this juncture is premature and will only add further strain to a troubled Eurozone economy. US equity futures and commodities prices continue to find bids into the European open.
ECONOMIC CALENDAR
TECHNICAL OUTLOOK
EUR/USD: Overall, medium-term price action remains quite choppy and we continue to like the idea of selling into rallies in anticipation of a more sizeable pullback below 1.4000. From here, look for the formation of a fresh lower top somewhere below 1.4700, with Monday’s topside failure by 1.4580 potentially representing this next lower high. Tuesday’s break back below Monday’s low has ended a sequence of consecutive daily higher lows and Wednesday’s establishment back under the converging 10/20 and 50-Day SMAs further confirms bearish bias. Ultimately, only a close back above 1.4700 would negate outlook and give reason for rethink, while intraday rallies should be well capped ahead of 1.4500.
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.
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 0.8350.
Written by Joel Kruger, Technical Currency Strategist
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