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US Dollar Looking More Contructive Across the Board into Tuesday
Written by article default Tuesday, 02 August 2011 08:21
- US Dollar Index bounces by yearly lows; more upside potential
- RBA leaves rates on hold as was widely expected at 4.75%
- Yen and Swissie find offers after trading to record highs
- US debt ceiling developments still being digested
- Eurozone structural concerns resurface
- Aussie and Kiwi finally showing weakness
The US Dollar has been well bid overall in the early week, with the price action resulting in a favorable close off of the yearly lows in the US Dollar Index. The only other currencies that have shown better bid in recent trade have been the other safe haven currencies in the Swiss Franc and Yen, which both trade just off recently established record highs against the Greenback. Still, even the Yen and Swissie showed some relative weakness in the latter portion of Monday trade, and with both of these markets looking extremely stretched, the risks from here seem to favor USD appreciation going forward.
Markets had initially been well bid on Monday on the news of a resolution to the US debt ceiling talks, with risk correlated assets rallying impressively, before finally reversing quite sharply into North American trade. A combination of concern over the type of resolution achieved by the US government, softer US ISM data, and widening Eurozone peripheral bond spreads, all contributed to the risk off trade, with US equities getting hit rather hard. We also started to finally see some relative weakness in the antipodean currencies, with both Aussie and Kiwi rolling over from post-float record high levels and putting in bearish closes against the Greenback.
The RBA has now come out early Tuesday leaving rates on hold at 4.75% as was widely expected, with the accompanying central bank statement maintaining its newly adopted less hawkish outlook. The central bank continues to express concern over broader global macro threats and some worrying deteriorative local fundamentals, and as such, even with the attractive yield differentials, we would continue to look to be fading any strength in the currency as we contend that the best is now behind the currency down under.
On the data front, the key release in Asian trade was a weaker than expected Aussie building approvals print. Looking ahead, economic releases in the European session are few, but at the same time should not go unnoticed with Swiss retails sales, UK construction PMI, and Eurozone producer prices all very capable of moving markets. US equity futures and oil prices are consolidating their latest declines, while gold is once again looking toppish by record highs following Monday’s bearish close.
ECONOMIC CALENDAR
TECHNICAL OUTLOOK
EUR/USD: The market continues to adhere to a bearish sequence of lower tops since May, with a fresh lower top now likely in place by 1.4535 ahead of the next downside extension back towards and eventually below 1.4000. In the interim, look for any intraday rallies to be well capped ahead of 1.4400, with a break and close back below 1.4200 on Tuesday to accelerate declines. Ultimately, only back above 1.4535 would negate outlook and give reason for pause.
USD/JPY: Setbacks have stalled out for now just ahead of the 76.25 record lows from March, with the market dropping to 76.30 ahead of the latest minor bounce. However, the bounce is somewhat significant on a short-term basis, with the market putting in a bullish outside day formation on Monday to suggest that the price could once again be very well supported in favor of a major upside reversal over the coming days. Look for a break and close back above 78.05 to confirm bullish reversal prospects and accelerate gains towards 80.00, while back below 86.25 negates and opens the door for fresh record lows.
GBP/USD: Despite the latest rally back above 1.6400, the market still remains locked in a broader downtrend off of the April highs, and a fresh lower top is now sought out somewhere ahead of 1.6550 in favor of the next downside extension back towards the recent range lows at 1.5780. Monday’s strong bearish outside formation could very well set up the next lower top by 1.6475, and we look for a break and close back below 1.6200 to confirm and accelerate declines. Ultimately, only a break back above 1.6550 would delay bearish outlook and give reason for pause.
USD/CHF: Despite the intense downtrend resulting in recently established fresh record lows below 0.7800, 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. Monday’s fresh record lows by 0.7730 seem to have been very well supported, and we would be on the lookout for a break and close back above 0.7950 on Tuesday to encourage short-term reversal prospects and accelerate gains. Back below 0.7730 negates.
Written by Joel Kruger, Technical Currency Strategist
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