Price action in Wednesday trade was certainly very interesting, with the session deferring to some consolidation and taking a break from the recent trend of broad based USD and safe-haven currency buying.
Price action in Wednesday trade was certainly very interesting, with the session deferring to some consolidation and taking a break from the recent trend of broad based USD and safe-haven currency buying. The Euro, Sterling, Aussie, Kiwi and Cad all managed to post some marginal gains, while the Franc traded flat and the Yen sold off a bit. Technically, all seemed to be quite normal, but fundamentally, some traders were left scratching their heads after the latest round of U.S. data produced results that would have normally forced a much greater deal of volatility and panic reaction than we had seen. Given the way things had been going over the past several days since the latest escalation in risk aversion, it was quite surprising to see a North American close which resulted in higher equities and currencies following a disastrous round of durable goods and new home sales which were the worst on record.
Relative Performance Versus USD Thursday (As of 10:20GMT)
1. KIWI+0.57%
2. STERLING+0.54%
3. EURO+0.42%
4. SWISSIE+0.38%
5. AUSSIE+0.34%
6. CAD+0.32%
7. YEN+0.02%
Technically, the picture has not changed, and despite the latest market moves back into risk, we believe this reaction will only be short-lived, with the greater risk for a resumption of U.S. equity selling and USD buying on fears of a double dip global recession. Perhaps risk takers were looking for an opportunity to buy into dips with the equity markets pulling back to attractive intraday levels, but we would attribute the latest round of risk buying to the expectation that US officials will now look to implement yet another wave of accommodative policies to help alleviate any strains felt from the slowing economy.
In our opinion this is a backwards and misguided way of looking at the overall picture, with bulls seeing opportunity because investor hands will be held even tighter during these trying times. Instead, we are concerned that the severity of this latest economic crisis is not being taken as seriously as it should be, and today’s data is a clear reflection of this fact. As such, we believe that cooler heads will ultimately prevail, and the risks from here are for renewed equity selling and a resumption of broad based USD buying even against the Yen and Swissie. Despite their recent appeal, both the Yen and Swissie are highly overbought and officials in Japan and Switzerland are growing increasingly concerned with the negative impact of the stronger currencies on their local economies.
On the data front, European releases were mostly in line with consensus estimates, with the only real surprise coming from a much better than expected UK CBI retail sales print. Looking ahead, U.S. initial jobless claims (485k expected) and continuing claims (4500k expected) are due at 12:30GMT, followed by the RPX composite at 13:00GMT. U.S. equity futures point to a slightly higher open, while oil stands out and trades over 1% higher. Meanwhile gold prices have done a good job of going nowhere.
CHART 1
TECHS
EUR/USD: Setbacks have stalled out for now by 1.2585, ahead of the latest minor bounce. Wednesday’s close should however be somewhat concerning for bears, with the market putting in the first bullish close in 6 trading days and also taking out the previous daily high to set up a potential bullish reversal. Nevertheless, we retain a bearish outlook while the market trades below 1.2925, and look for any rallies into Thursday to be well capped on a close basis below 1.2800. Back below 1.2585 renews downside pressure and exposes direct retest of 1.2480-1.2520 further down.
USD/JPY: The market has not been able to hold onto to its fresh multi-year lows set in Tuesday trade below 84.00, with the price rallying since and threatening a break back above initial resistance by the 10-Day SMA just over 85.00. However, while the market trades below the 10 and 20-Day SMAs on a close basis, the downtrend remains intact and deeper setbacks below 83.60 cannot be ruled out. A close above the 20-Day SMA will be required at a minimum to offer some form of relief to downside pressures. The market has not closed above the 20-Day SMA since mid-June when the pair was trading over 90.00.
GBP/USD: Although the inter-day structure looks quite bearish at present following the latest break below 1.5500, there is a shorter-term risk for some form of a bounce into Thursday trade to allow for recently oversold technical studies to unwind. However, we expect any rallies to be well capped ahead of 1.5700 in favor of the next downside extension towards the 100-Day SMA by 1.5100. Setbacks have been supported for now by the 50-Day SMA. Ultimately, only a break back above 1.5700 would negate outlook and give reason for pause.
USD/CHF: Has managed to break to yet another multi-week low below 1.0300 to now potentially open a fresh downside extension towards the yearly lows from January by 1.0130 over the coming sessions. However, at this point, it is still too difficult to call, and with medium-term studies looking stretched, we would be more inclined to be looking for opportunities to buy rather than sell. The market has still managed to hold above 1.0300 on a close basis and the recent multi-week range is more or less intact with the market just as easily seen bouncing sharply back towards 1.0600.
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