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Greenback Finds Mild Bids on Renewed Safe Haven Buying
Written by article default Wednesday, 17 August 2011 11:23
- Merkel-Sarkozy meeting fails to inspire any confidence
- Fitch reaffirms US triple-A ratings
- US industrial production much stronger
- Bank of England Minutes on Tap
- More Fed speak out later in the day
The USD managed a mild recovery on the whole in Tuesday trade, with some much better than expected industrial production data and a Fitch affirmation of the US’s triple-A rating helping to keep the Greenback somewhat supported. Also seen helping to prop the buck a bit were external safe haven factors, with investors opting for a flight to quality trade after US equities were hit on some much softer than expected German growth data and the Merkel-Sarkozy meeting on the European debt crisis produced a disappointing result.
Both Merkel and Sarkozy rejected the immediate idea of a Euro-bond while also nixing the need for a larger EFSF bailout fund. While this was the expectation from many, the hard reality of this fact seemed to still weigh on sentiment with markets looking for their pressure to have had more of an influence on these officials. To add insult to injury, market participants were also unnerved with the Maerkel-Sarkozy plan for a new financial transaction tax.
Looking ahead, UK employment data, the Bank of England Minutes and Eurozone inflation data all take center stage in the European session. Later on in the day, the North American calendar is highlighted with US producer prices. On the official circuit, we will continue to get more color from Fed members with the hawkish and dissenting Fed Fisher scheduled to speak.
We would also like to highlight our commentary from the previous day which we feel is important and worth consideration as we consider out investment decisions in these trying and volatile market conditions:
TUESDAY’S COMMENTARY – “We would continue to caution investors who feel that the worst is behind us as a good deal of this rally has come from artificial forces that might ultimately not be able to support the move. If we just review actions in recent days, we have seen a fresh bailout package in Europe that is far from perfect, a US debt ceiling resolution that seems more like a band aid than any long-term structural fix, more bond buying out from the European Central Bank in an effort to prop the local economy, a Fed monetary policy that is committed to remaining ultra accommodative if necessary until 2013, talk of QE3, central bank currency interventions from the SNB and BOJ, and banned short sales in European equities to prevent excessive and rapid equity declines, amongst other things.
We therefore wonder if you removed all of these actions from the equation where in fact we might actually be today and how different the world would really be. Our point is not that these actions are unnecessary, but that they are in fact artificial and extreme measures that have been implemented in an effort to produce a softer landing for the global economy. Ironically, these actions that are used to prevent additional fear and uncertainty have had the enhanced effect of stimulating risk appetite and opening market rallies in which the global community feels as though they should continue to buy risk on dips as governments will always be there to support the pullbacks.
But with global stimulus and central bank accommodative measures nearly exhausted, there doesn’t appear to be much more ammunition left to throw at the recovery, and we would expect that when fresh concerns arise over the coming days and weeks, there will be less of an official response to support these concerns. US economic data and growth prospects are still quite gloomy, while the eurozone economy is far from out of the woods. Meanwhile, we still have the potential for a major cooling down in the Chinese economy which we contend will be the third phase of the global market recession which began in 2008.
After all is said and done, the actions taken by central banks and governments are indeed necessary, but we feel that the way the markets have interpreted these measures has been far too optimistic, particularly with respect to global equity market performance. We still believe that we will see yet another downturn in global equities over the near-term and that the prospects for a material recovery in these markets over the coming months are less than favorable. Instead we see choppy market conditions that are more consolidative with any recoveries coming much slower than we have seen in the past. If quantitative easing and other stimulus measures implemented by Japan in the 90’s have yet to still fully realize a recovery in Japan all these years later, then does it not stand to reason that a global effort of ultra accommodation and stimulus will produce an even longer period before the global economy can really recover?”
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 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 1.4500, while only back above 1.4535 negates. Short-term support now comes in by 1.4240 and a break back below should accelerate declines.
USD/JPY:Setbacks have stalled out just ahead of the 76.25 record lows from March, with the market dropping to 76.30 ahead of the latest reversal. Given that we are seeing the rate by record lows, we would not at all be surprised to see the formation of a material base in favor of significant upside back towards the 82.00 area over the coming sessions. However, the overall structure still remains bearish and it will take a break back above 80.00 to officially alleviate downside pressures and confirm reversal prospects. Short-term resistance comes in by 77.30 and a daily close above will encourage bullish reversal prospects. Below 76.25 negates.
GBP/USD: The market 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. Ultimately, only a break back and close above 1.6550 would delay bearish outlook and give reason for pause, while back under the 200-Day SMA at 1.6090 should accelerate declines.
USD/CHF: The latest sharp reversal off of record lows just shy of 0.7000 is encouraging and could finally be starting to signal the formation for a major base. Weekly studies are also confirming with the formation of a very bullish bottom close. From here, look for an acceleration of gains back towards the 0.8500 area over the coming days with setbacks expected to be well supported above 0.7500 on a daily close basis.
Written by Joel Kruger, Technical Currency Strategist
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