Euro upside risk remains

FUNDYS (Early Edition)

Another day, another round of broad based USD depreciation with the Greenback getting hit hard again and extending declines against most major currencies. Much of the price action is attributed to elevated expectations for a second round of quantitative easing from the Fed, after a softer US consumer confidence print on Tuesday. Fed Lockhart has however recently been on the wires saying that QE2 is by no means a done deal, and it will be interesting to see how the markets respond in Wednesday trade.

Relative Performance Versus USD Wednesday (As of 8:20GMT)

  1. YEN+0.30%
  2. AUSSIE +0.21%
  3. EURO+0.07%
  4. STERLING+0.04%
  5. CAD-0.01%
  6. SWISSIE-0.06%
  7. KIWI-0.15%

For now, the prospects for the buck are looking quite gloomy, with data so far in Asia exceeding expectations after the Japanese Tankan came out quite solid, while the New Zealand trade balance was also better than forecast. This should further bolster risk sentiment and appetite for higher yielding and seemingly better positioned currencies. The topic of reserve diversification away from the USD has also been resurrected, with the slide in the buck rehashing concerns that the single currency is undergoing a major secular decline. Nevertheless, the greenback is showing oversold on a short-term technical basis, and we would caution investors from adding to USD shorts at current levels.

Looking ahead to North American trade, US mortgage applications are due at 11:00GMT, followed by Canada industrial product and raw materials prices at 12:30GMT. Oil and gas inventory data in the US caps things off at 14:30GMT. On the official circuit, Fed Kocherlakota speaks at 14:15GMT, while Fed Plosser is slated to speak shortly after on the topic of the economy at 16:30GMT. Fed Rosengren is the final central banker scheduled to speak, with an appearance scheduled in New York for 17:15GMT. US equity futures are tracking marginally lower, while commodities are mildly bid with gold trading just under its recently set record highs.

TECHS

EUR/USD: (See Below)

USD/JPY: Rallies have stalled out for now by the 50-Day SMA and just ahead of the Ichimoku cloud bottom to warn that the downtrend is still very much intact. It now looks as though a medium-term lower top is attempting to carve out by 85.95 ahead of the next major downside extension back below 82.85 and towards the record lows at 80.00. A break back above 86.00 would be required to negate outlook.

GBP/USD: The latest break back above 1.5700 threatens the integrity of the downtrend and potentially exposes a move back towards 1.6000 over the coming sessions. However, the 78.6% fib retrace off of the 1.6000-1.5295 move comes in by 1.5845, and inability to close above this fib on Monday and Tuesday could keep alive the possibility for a lower top below 1.6000 ahead of the next major downside extension. Look for a close back below 1.5720 to confirm outlook and likely accelerate declines back towards 1.5500.

USD/CHF: The market continues to extend declines to fresh yearly lows despite oversold short-term and medium-term studies. From here, the risks are for some more weakness, with a retest of the record lows by 0.9645 seen as the likely target. However, any additional declines below 0.9645 are seen limited and we like the idea of establishing a significant long position on a retest of this level. Back above 0.9880 would be required to officially relieve downside pressures.

TRADE OF THE DAY

CHART 1

EUR/USD: Daily studies are overbought but the market has now easily cleared the 50% fib retrace by 1.3500, and fresh upside towards next key resistance by 1.3695 cannot be ruled out over the coming sessions. The 1.3695 resistance area represents the April highs, and this now seems as a very realistic next target. However, from there we would expect to see a major corrective pullback, with daily studies already stretched and the market starting to look exhausted. Back below 1.3385 would be required to officially relieve topside pressures but we like the idea of establishing a very playable counter-trend short on a test of 1.3695 today. STRATEGY: SELL @1.3690 FOR AN OPEN OBJECTIVE; STOP 1.3810. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON WEDNESDAY.
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