FX - Risk Correlated Assets At Risk in Wednesday Trade

• Eurozone FinMin meeting fails to produce results
• Risk correlated assets to come back under pressure
• Aussie weakest currency on day thus far
• Look out for Yen underperformance
• Month end flows should factor into price action

The latest risk rally seems to have finally found some offers and as per our “Opening Comment” from Tuesday, we welcome the price action. Lack of any positive headlines or sign of resolution at the Eurozone FinMin meeting have inspired a fresh round of risk liquidation, and we look for more pressure to the downside over the coming sessions. This should weigh on currencies across the board and benefit the US Dollar on its safe-haven appeal. The Australian Dollar is the weakest currency on the day thus far on the risk correlations, with some offsetting economic data out of the region early Wednesday failing to influence.

Looking ahead, we recommend keeping a close watch on the Yen, as we contend that this currency will soon fall victim to relative underperformance even in risk off market environments as pressures mount for official action on the currency’s behalf. We have seen a number of Japanese officials speak out on the subject, with BOJ Nishimura the latest to warn of the possibility for additional intervention. There are stops above 78.30 in USD/JPY, so look for a break above to accelerate gains.

Moving on, month end flows could also be a factor in Wednesday trade, and it is worth taking this into consideration. Markets have a way of moving more aggressively on the final day of the month and given the existing volatility, we could see some big moves. Looking ahead, the economic calendar is quite busy, with German retail sales, German unemployment and Eurozone inflation highlighting European trade. In North America, US ADP employment, Canada GDP, Chicago PMI and US pending home sales are the stand out releases.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The market remains under some intense pressure and is now fixated on a retest of the key October lows at 1.3145. Look for any rallies to be well capped below 1.3500 on a daily close basis, while ultimately, only back above 1.3870 would negate outlook. Once 1.3145 is taken out, it will negate the corrective October price action and should result in a more aggressive bout of selling into the 1.2000’s. We continue to project weakness over the coming weeks into the lower 1.2000’s as per the monthly chart.

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.

GBP/USD: The latest daily close below 1.5625 further confirms our bearish outlook and should now open the door for a bearish resumption back towards the key October lows at 1.5270 over the coming days. Next key support comes in at 1.5400, while any intraday rallies are expected to be very well capped below 1.5800 on a daily close basis.

USD/CHF: The previous weekly 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. Daily studies are looking slightly stretched at current levels, so we would not rule out the potential for some corrective selling, but ultimately, look for any setbacks to be well supported in the 0.9000 area, where a fresh higher low is sought out.

--- Written by Joel Kruger, Technical Currency Strategist

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