Wednesday February 22, 2012

Euro Trading Heavy, Upside Risks Remain

The euro is on its back foot this morning as equities are set for a slightly negative open.  High beta FX is bearing the brunt of the sell-off as yield differentials continue to narrow ahead of next week's highly anticipated LTRO.  This week's positive euro catalyst (Greek bailout) coupled with expectations that the ECB may "close liquidity floodgates" have allowed the euro to play catchup relative to its higher yielding counterparts.  That said, the euro is beginning to lose upside momentum against safehaven currencies, namely the dollar.

From a technical perspective, EUR/USD is beginning to look bearish, though traders should employ due caution before attempting call the inflection point given the recent bull trend.  A move above 1.3325 could catch many big money investors by surprise, while a break below 1.3170 temporarily puts the bears back in control.  While the market has become somewhat immune to sovereign downgrades, Fitch's action on Greece has provided further impetus for renewed weakness.  The euro's bearish response has so far proved temporary and shouldn't act as too much of a catalyst.

The first line of defense for EUR/USD bears is 1.33, which coincides with the 100-day moving average.  The euro hasn't traded above this level since late October.  The 20-week SMA is located just 15 pips above, while the February 9 pivot high will serve as the final 'protection zone' for shorts.  Should bearish momentum gather steam, the highly liquid pair may look to fill the weekend gap at 1.3138.  Lack of bearish confluence warns that price action may be continue to be choppy.  A sustained break below 1.2970 is required for a continuation of the long-term bearish trend.  Said level is home to both the 50% Fibonacci retracement and February 16 pivot low.  Traders should adopt a wait and see approach as little to no edge exists within the current trading environment.  High beta pairs like AUD/USD provide much better setups to the downside.  NZD/USD .8240/50 and AUD/USD 1.06 are worth keeping an eye on should risk sentiment begin to wane.

 

Tuesday February 21, 2012

AUD/USD Under Pressure, Support Eyed At 1.0628

The Australian Dollar is off its best levels after eurozone finance ministers sealed a Greek bailout package worth 130 billion euros early Tuesday.  While Greece was able to avert a default, strict austerity measures coupled with the heightened possibility of further debt concessions tell us that contagion effects are likely to loom large.  While sovereign yields (namely Spanish and Italian) have narrowed in recent weeks, this is largely attributed to the ECB's massive expansion of credit.  Whether current yields are sustainable remains to be seen as demand for the late February LTRO could be more meager than previously anticipated.

FX price action tells us that we could be setting up for a "buy the rumor, sell the news" scenario as risk-based currencies trade heavy following an initial gap higher over the weekend.  China's decision to cut the reserve requirement ratio by an additional 50 basis points helped revive demand for high yielding currencies, namely the Australian Dollar.  The "Aussie" quickly filled the weekend gap, before receiving another modest lift following a more upbeat Minutes and the announcement of a second Greek bailout.  Such optimism has so far proved temporary as the high beta pair trades near its lows of the day.

Technically speaking, AUD/USD looks increasingly vulnerable on a dip below last week's low of 1.0628.  The high yielding pair looks poised to close below its 20-day moving average for the first time since late December.  A weekly close below 1.0688 will serve to confirm a [weekly] bearish engulfing pattern, following last week's doji candlestick, both of which support a bearish thesis.  RBA rate cut expectations remain at their lowest level since July 2011, but fear of a more meaningful slowdown in China coupled with narrowing rate differentials (relative to its lower yielding peers) have helped subdue the Aussie's bullish run.  While it's imprudent to call the inflection point, a sustained break below AUD/USD 1.0628 could set the stage for additional losses in the days ahead.  Traders should keep an eye on other asset classes (namely equities), as intraday decoupling hints that either currencies are lagging or stocks are at risk of rolling over.  The current environment remains very choppy, so momentum traders should wait for bearish confirmation before selling into such a strong bull rally.

 

Monday February 20, 2012

EUR/USD

"A break above 1.3325 will pave the way for a test of the 38.2% fib and 200-day EMA at 1.3515/20.  A Greek debt deal could serve as the catalyst for a move higher as big banks remain short against 1.3325.  A breach of said level may result in a precipitous melt-up should an accumulation of stop losses get triggered.  A break below 1.2972 is required to put the bears back in control.  This area coincides with the 50% fib and 2/16 pivot low."

 

Friday February 17, 2012

Technical Analysis: EUR/AUD

The euro continues to consolidate against its higher yielding Australian counterpart, though a double bottom pattern warns that we could see a correction ahead of next week's debt deal.  The correlation between EUR/AUD and risky assets, namely U.S. equities, has evolved into something especially noteworthy in recent months.  Inter-market dynamics have become increasingly complex/jaded ever since the euro credit crisis took stage a couple years ago.  Traders have been forced to dissect day to day catalysts as FX volatility runs rampant.

While the long-term trend remains convincingly bearish, the fundamental landscape coupled with technical divergence hints that a correction may be on the way.  While a Greek debt deal would be seen by participants as "risk-positive," this may serve to push the euro cross higher as euro-specific catalyst would temporarily adjust rate differentials as euro denominated assets rise at a quicker pace than its Australian peer.  More traditional correlations would suggest that bullish risk sentiment is EUR/AUD positive, but such is not the case as late-2011 decoupling tore apart this relationship.  The question then becomes: how much longer will this last?

The Australian economy remains resilient, as exemplified by this week's blowout jobs data.  In fact, twelve month rate expectations are at their lowest level in six months as the economy has so far been able to ward off prospects for a China hard landing.  At the same time, the ECB is expected to cut rates by another 25 basis points next month.  As yield differentials widen, this favors renewed EUR/AUD weakness.  That said, there is much in the way of fundamental catalysts prior to that meeting, namely the Greek rescue package, and the LTRO scheduled for later this month.  Monday's debt deal is the most formidable short term catalyst, a positive resolution of which may push EUR/AUD towards the upper range of its recent channel.  Failure to unveil concrete terms of the bailout will be viewed as risk negative, in which case, we could see EUR/AUD make run towards 1.20.

From a technical perspective, EUR/AUD looks poised to rebound towards the psychologically important 1.25 level.  A convincing break will open the door for a more meaningful test of technical confluence at 1.2975.  Charts are constantly evolving, so it will be important to revisit the pair next week to see where all the squiggly lines reside.  We expect any impending technical retrace to be brief as euro contagion coupled with intermittent risk on is the perfect recipe for a continuation of the longer term bearish trend.

Larger than expected demand at the February 29th LTRO should weigh on the euro in the month ahead, but a larger correction in the more immediate term cannot be ruled out.  The latter scenario appears more than viable (if not likely) ahead of next week.  Void of any meaningful news out of Europe, the FX market may look to consolidate ahead of the weekend as traders take money off the table going into Monday's highly anticipated meeting of eurozone finance ministers.  Traders should be cautious in testing the resolve of the recent bull rally, as dip buyers (on basis of fundamental improvement in U.S. economic data) and recurring short squeezes (players attempting to call the inflection point) keep a firm bid under the market.

Thursday February 16, 2012

Technical Analysis: NZD/USD

Risky assets are on their back foot this morning as lingering concerns regarding Greece continue to cast a dark cloud over the market.  Strong economic data out of the Antipodes coupled with renewed optimism that the bull rally may still be intact have prevented any sort of precipitous meltdown in risk correlated currencies.  The question is for how long?

High beta FX is at risk of rolling over ahead of Monday's meeting of eurozone finance ministers, where a deal for a second bailout package is expected to be reached.  While failure to produce a meaningful resolution has the propensity to weigh on high yielding currencies like AUD and NZD, such an outcome is likely to have a more profound effect on the euro pairs.  This may in fact serve to stabilize the Aussie and Kiwi as said currencies piggyback off of euro-denominated outflows.  Yield differentials continue to widen in favor of high beta FX, which has helped keep bearish sentiment in check.

NZD/USD's inability to clear .8250 with any sort of gusto is worrisome for bears as the current trading environment is anti-momentum.  We expect this to change should support levels become more 'confluency.'  The longer the New Zealand Dollar remains confined at the lower end of its trading range, the more likely it is to succumb to selling pressure as stops get triggered below key support.

Kiwi/dollar is trading dangerously close to the all important .8240/50 support level.  A convincing break of .8244 needs to be achieved in order to keep pressure on the downside.  The high beta pair boasts a formidable technical formation, which hints of a more robust sell-off in the days ahead.  It recently broke below rising trend line support dating back to mid-December and is trading below its 20-day moving average for the first time since December 29.  A clear break of .8240 is required for bears to regain control.  This area coincides with the October pivot high as well as today's intraday low.

A slew of economic data out of the U.S. may provide enough impetus to enable the high yielding pair to find direction should we see a big enough miss in either direction.  All eyes continue to be on the euro as headline risk seems to be getting "more risky" by the day.  Yesterday's warning by Moody's that it may downgrade 17 global banks and 114 European financial institutions is an ominous sign for the financial system as a whole.  While calling the inflection point is strongly advised against, a bearish breakout in high yielding currencies appears imminent.  Traders should be increasingly nimble as any sort of late-week demand for safehaven assets could easily be negated should Monday's eurozone meeting prove favorable for Greece.

Wednesday February 15, 2012

"AUDJPY is trading heavy this morning as risk appetite begins to wane following news that a Greek bailout may be delayed.  The high yielding pair broke above key trend line resistance late yesterday amid renewed yen weakness coupled with an increased willingness by investors to take on risk.  The near to medium term trend remains convincingly bullish, void of a more meaningful sell-off in risky assets.  High beta yen pairs will likely to take their cue primarily from USD/JPY, rather than their base currency counterparts.  Bullish price action may get sticky ahead of 85.61, a level that coincides with the 61.8% fib retracement and descending trend line resistance dating back to late 2007.  A clear break of 85.61 will pave the way for a run towards 90.00 in the coming months."

Tuesday February 14, 2012

Yen Pushes Lower As BOJ Expands Asset Purchases

The Japanese currency extended declines against its major peers after the Bank of Japan boosted its asset purchase program by ¥10 trillion.  The BOJ surprised markets late Monday night by easing monetary policy in an effort to stem deflationary headwinds as a strong yen continues to dampen prospects for an export led recovery.

The central bank expanded its asset purchase fund to ¥65 trillion and set an inflation goal of 1 percent.  The BOJ will continue to pursue powerful monetary easing in the months ahead as it cites uncertainties related to the European debt crisis, energy constraints and a strong local currency.  The yen declined sharply following the announcement and continues to trek lower as U.S. equities are set for a slightly higher open.

It should come as no surprise to traders that the yen continues its methodical descent lower.  The low yielding currency has three things going for it.  The first is that it's used as a carry currency during risk-on days.  The second (probably the most important) is that Japan's fundamental backdrop lends itself to continued efforts by local authorities to curb excessive yen gains as Japan recently posted its first trade deficit 30 years.  Lastly, the yen pairs have piggybacked largely off of USD/JPY flows during periods of risk aversion.  Said dynamics have created the perfect storm for renewed yen weakness, a theme that is likely to persist in the days ahead.

USD/JPY is trading above its 200-day moving average for the first time since April, while high beta pairs like AUD/JPY look poised to test their upper limits.  Even more noteworthy is the fact that dollar/yen is within 50 pips of descending trendline resistance dating back to 2008.  A daily close above 78.65 will open the door for more sustainable gains in the coming months.  AUD/JPY is currently flirting with key resistance ahead of 84.00.  A break of this level may result in a precipitous melt-up as shorts continue to get squeezed.  Risk trends will likely set the tone for trading today as the currency market takes its cue from any surprises in U.S. Retail Sales data, which is due out at 8:30 ET.  Traders should also pay close attention to any new developments out of Europe.  Headline risk out of Greece has the ability to whipsaw the market at a moment's notice.  Yesterday's mass downgrade of European sovereigns by Moody's has had little effect on markets thus far, a sign that CRA's are slowly losing their luster.

 

Monday February 13, 2012

Technical Analysis: GBP/USD

GBP/USD is trading modestly higher this morning as traders remain optimistic that Greece will secure its second bailout following last night's positive austerity vote.  Risky assets remain well bid, though lack of immediate follow through is a warning to bulls that an interim top may be in place.  This week holds significant event risk for the pound sterling as UK CPI is set to record its weakest reading in 14 months, while Claimant Count is expected to rise to its highest level since mid-1997. Traders should pay close attention to the BoE's quarterly inflation report due out on Wednesday as dovish overtones could provide further impetus for renewed GBP weakness.

While most of the BoE's negative outlook is already priced into the market following its latest £50 billion injection of QE, reinforced dovish rhetoric could weigh on GBP/USD in the days ahead.  Void of any meaningful shift in risk appetite, the high yielding pair will likely take its cue from TA flows resulting from this week's key economic data.  With GBP/USD at risk of rolling over, further indication that the economy is headed deeper into recession could hurt the pound. The UK is at risk of undershooting its medium term inflation target, which warns that additional easing may be on the way (past the recently announced £50 billion).

From a technical perspective, GBP/USD continues to consolidate within a tight band of confluence.  The pair formed a double bottom pattern ahead of 1.5725, which hints that heavy stops may be lurking below should bears regain the upper hand.  A clear break of 1.5725 will pave the way for a test of 1.5660/75 which is home to the 38.2% fib retracement, 100-day SMA, and January 3/4 pivot high.  On the upside, strong confluence resides between 1.5920 and 1.5930.  This area coincides with the 200-day moving average, February 9 pivot high, and 50% fib.  The MACD indicator points to an imminent bearish crossover, while negative divergence looks to further prove the bear case.

With the pair trading towards the middle of such a formidable trading band, it's prudent to leave any and all suppositions at the door.  While it's important to have trade conviction, directional biases tend to hurt more than they help.  With this mind, traders should await a break below 1.5725 or above 1.5925 to establish fresh positions.  The longer the pair remains confined within said parameters, the more 'confluency' these support/resistance levels become.  We will continue to watch the chart, as price action evolves into new patterns, and more robust confluence.

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