FX - ECB LTRO Key Event Risk for Wednesday Trade; Euro Finding Bids

• Risk correlated assets very well bid into Wednesday
• ECB TRLO program will be key focus today
• US equities leading the charge
• EUR/AUD drops to fresh +20 year lows
• Bank of Japan concludes two day policy meeting

Risk correlated assets have been very well bid over the past few sessions, with currencies rallying against the US Dollar on a confluence of market drivers including a solid Spanish auction, stronger Eurozone and US economic data, and upbeat expectations for today’s ECB long term refinancing operations (LTRO) program. The rally in these markets has been led by gains in US equities which were on fire on Tuesday, closing higher by some 3%. However, we remain somewhat skeptical with the price action as moves in the current lightened holiday market environment should always be taken with a grain of salt. As such, while we do not rule out the potential for additional risk correlated bids, we also would not be quick to try and jump on to this rally.

One currency cross which stands out has been EUR/AUD, with this market breaking down into the 1.2900 area to trade to fresh +20 year lows. But this market has been very well supported on dips in recent months below 1.3000 and we will expect to see the same type of price action once again, with longer-term technical studies looking exhausted following an 80 big figure drop off since 2008. For the time being however, it is best to take to the sidelines and wait to see how things play out over the coming sessions. A clear drop below 1.2900 could very well expose record lows down in the 1.2500 area from 1.1989. Still, we continue to look for the establishment of some form of a longer-term bottom down below 1.3000 given the technical picture and fundamentals which warn of an intensification of the global crisis in China which should negatively influence the higher yielding Australian Dollar.

Elsewhere, the Bank of Japan concludes its two day policy meeting on Wednesday. Although no change is expected to policy, it will be interesting to see what Mr. Shirakawa has to say with regard to the impact of the Eurozone debt crisis on the local economy and the impact of the broad risk liquidation flows on the Yen. The strength of the Yen has certainly been an issue for the central bank and Japanese government and with the currency by record highs against US Dollar, it is always worth keeping a close on eye on these developments. Trade data out of Japan has also not been good and we believe that this will put pressure on officials to step up with some sort of official response which could influence the direction in the Yen. Some of the Yen crosses have been recovering from depressed levels over the past few sessions, and news that a local Japanese rating agency has cut the country’s sovereign rating may be inspiring additional cross related Yen weakness.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The market has finally taken out the key October lows at 1.3145 to confirm a lower top by 1.3550 and open the next downside extension towards the 2011 lows from January at 1.2870. Daily studies are however looking a little stretched and at this point we could see some corrective action before the market resumes its downward trajectory. Look for any rallies to be well capped in the 1.3300 area from where the next lower top will be sought out.

USD/JPY:The market has managed to successfully hold above the bottom of the daily Ichimoku cloud to further strengthen our constructive outlook and we look for the formation of a inter-day higher low by 76.55 ahead of the next major upside extension back towards and eventually through the recent multi-day highs by 79.55. Ultimately, only a close back below the bottom of the Ichimoku cloud would negate outlook and give reason for pause, while a daily close back above 78.30 accelerates.

GBP/USD: Rallies have been very well capped ahead of 1.5800 and it looks as though a lower top has now been carved out by 1.5780 ahead of the next major downside extension back towards the October lows at 1.5270. Key support comes in by 1.5400 and a daily close below this level will be required to confirm bias and accelerate declines. Ultimately, only back above 1.5780 would negate bearish outlook and give reason for pause.

USD/CHF: The recent break above the critical October highs at 0.9315 is significant and now opens the door for the next major upside extension over the coming weeks back towards parity. A confirmed higher low is now in place by 0.9065 following the recent break over 0.9330, and next key resistance comes in by 0.9785. Ultimately, only back under 0.9065 would delay constructive outlook.

--- Written by Joel Kruger, Technical Currency Strategist

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