Euro down on bank test and German factory orders

Currencies have come back under pressure in Tuesday trade, with the Euro leading the declines on the back of news that some of the European banks may have under-reported on their exposures to sovereign debt and then accelerating on the shockingly bad German factory orders. Comments from EU Rehn have also not helped matters after saying that the Eurozone was not out of the woods yet. The Euro had rallied up just shy of some key short-term resistance by 1.2925 on Monday, but was unable to take out the level to keep the pressure on the downside.

Relative Performance Versus USD Monday (As of 11:05GMT)

1. YEN+0.41%

2. SWISSIE-0.03%

3. STERLING-0.19%

4. KIWI-0.35%

5. CAD-0.58%

6. AUSSIE-0.69%

7. EURO-0.99%

Broader price action does not look to be risk favorable, with the Swiss Franc and Yen also remaining well bid and just off some recent key highs. This suggests that we could be in store for yet another round of declines in both USD/JPY and USD/CHF and it will be worth keeping a close eye on these markets. Our in-house speculative sentiment index shows that retail traders are still overwhelmingly long USD/CHF and USD/JPY to further support the case for another wave lower in these pairs. Meanwhile, warnings from Japanese Fin Min Noda on excessive moves in the yen have been shrugged aside with market participants still comfortable with their long yen positions, particularly after Bank of Japan Governor Shirakawa said that monetary policy is not determined by short-term FX moves and that authorities cannot control forex rates.

The big event risk for the day is now behind us, with both the Bank of Japan and Reserve Bank of Australia making decisions on rates. As was widely expected, there was no change on the rate end from either bank, with the main market reaction seen in the Australian dollar after the accompanying RBA statement was more on the dovish side. The key take away from the RBA statement was that the global outlook was “somewhat uncertain.” This immediately weighed on the higher yielding currency and also forced another selloff in risk related currencies intraday. On the Australian political front, we are closer to gaining clarity with the Labour party securing the necessary pieces for a stable government.

Looking ahead, the economic calendar is empty for North American trade and as such, market participants will be looking to take their cues from overall price action in the US equity markets. Surprisingly, US equity futures are only moderately lower following the latest wave of risk negative news, while oil has been slammed, down well over 2% on the day thus far. Gold is also lower but only by some 0.30%.

TECHS

EUR/USD: The latest rally has been well capped ahead of key short-term resistance by 1.2925, with the market now looking like it is poised for a bearish resumption back towards 1.2585 over the coming sessions. Coiling 10/20/50/100-Day SMAs warn of a major move ahead and given broader price action, it looks as though this move could be to the downside. In the interim, key levels to watch above and below come in by 1.2925 and 1.2700 respectively.

USD/JPY: While the market trades below the 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. A break below 83.60 will open a test of next key psychological barriers by 83.00.

GBP/USD: The market looks poised for a fresh drop following the latest bout of consolidation, with a lower top now confirmed by 1.5600, following the break back below 1.5370. Below 1.5370 now exposes a more meaningful drop to test next key medium-term support by the 100-Day SMA in the 1.5100 area. Ultimately, only back above 1.5700 would negate bearish bias and give reason for pause.

USD/CHF: Has finally managed to take out the yearly lows from January by 1.0130, with the market easily dropping below this level to 1.0065 thus far. However, any additional declines below 1.0065 are seen limited, with medium-term studies looking stretched. As such, we would be more inclined to be looking for opportunities to buy at current levels. For now, a break and close back above 1.0240 will be required to relieve immediate downside pressures.

FLOWS

Japanese exporters still are looking to sell USD/JPY. CTAs and short-term accounts on the offer in EUR/USD; various buy-side shops and real money names on the bid. Model funds selling Aussie. Decent two-way price action in EUR/CHF and EUR/JPY.

TRADE(S) OF THE DAY

EUR/JPY: If the cross is going to stall out, our entry point is ideal, with the level coinciding with some key hourly rising trend-line support off of the 24Aug yearly lows. This, in conjunction with the daily average true range having already been exceeded and a severely oversold hourly RSI, helps to reaffirm our short-term bullish bias, and we look for a decent corrective bounce over the coming hours. Stop has been placed below the previous hourly higher low at 106.15, as well as the 106 figure to provide some defense from a potential overshoot. POSITION: LONG @106.89 FOR AN OPEN OBJECTIVE; STOP 105.89.

CHART 1

EUR/CHF: While we realize that this cross is closely correlated to EUR/JPY, we cannot ignore what we believe to be a highly attractive buy opportunity below 1.2900. Technical studies continue to warn that the market is highly overextended on a medium-term and longer-term basis, and fresh record lows from here are limited. As such, our strategy continues to be to look for oversold intraday moves where the daily average true range has been exceeded to attempt to establish a counter-trend long. If this trade does trigger, we see a scenario playing out where the market stalls out once again below 1.2900 in favor of the formation of a major double bottom on the daily chart with the neckline by 1.3165. STRATEGY: BUY @1.2880 FOR AN OPEN OBJECTIVE; STOP 1.2780. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON MONDAY.
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