FX - Short-Term Fundamentals Once Again Attempting to Fuel Risk Aversion Flows

In the early stages of Monday trade, price action seems to be favoring the US Dollar and risk aversion flows, with markets perhaps getting spooked by some comments from the IMF that the global economy is “one shock away from a crisis.” The situation on the Eurozone periphery has certainly escalated, and Greece’s restructuring of its massive debt could be one of those very things that the IMF is referring to when talking about being a shock away from a crisis. Investors who were told that they would not lose any money on the Greece restructuring are now hearing talk of haircuts of between 50-70%, and this in conjunction with a Finnish government that has vowed to stop the Portugal bailout, has forced some relative weakness in the Euro on Monday thus far. Meanwhile, China has once again stepped in to tighten policy through yet another raising of the reserve requirement ratio by 50bps. Elsewhere, another potentially risk negative theme weighing on sentiment this week is the situation in the MENA region which could lead to a further rise in oil prices and severely hamper global recovery prospects.

Moving on, we continue to focus on the short-term developments in the antipodean currencies which remain very well bid and trade by multi-week, and multi-year highs against the US Dollar. However, while these currencies have been very well bid, we contend that they are on the verge of a major corrective pullback in favor of the US Dollar. A combination of cyclical studies and worrisome fundamentals (some highlighted above) could start to weigh more heavily going forward. Moreover, on top of the broader risk averse themes in the global macro markets, both New Zealand and Australia have been forced to respond to some serious natural disasters which inevitably will negatively impact growth forecasts over the medium-term. Most recently, the Ernst & Young Capital Confidence Barometer highlights this fact, showing the Australian manufacturers are predicting a gloomy future. In New Zealand, data has also not been Kiwi supportive, with the latest inflation readings coming in softer than forecast.

The New Zealand Dollar has actually been one of the most technically overbought currencies on the daily charts, and we have been quite taken with price action in NZD/USD which has put in a remarkable 21 consecutive days of daily closes higher than the previous daily low. This is a trend that should be very close to an end, and after moving some 10 big figures over the course of a month, showing a severely overextended RSI, and finally taking out psychological barriers by 0.8000, the risks for a major pullback seem to be good. We are actually short from 0.7945, and will look for a daily close below 0.7925 on Monday to confirm bias and accelerate declines.

On the data front, things have been extremely quiet, and outside of the softer New Zealand CPI, the only other notable release came in the form of UK Rightmove house prices which nudged a little higher. Looking ahead, the economic calendar is completely empty in the European session, with thing sonly picking up a bit into North American trade. US NAHB housing data and Eurozone consumer confidence are the stand out releases. On the official circuit, Fed Fisher is slated to speak on two separate occasions while Fed Bullard is also on the docket for Monday. US equity futures and commodities prices are trading flat to lower on the day thus far.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: Although the market has been looking quite stretched on the daily chart and potentially due for some form of a more intense corrective pullback, any intraday dips continue to be very well supported and the market adheres to a very well defined and intense uptrend off of the 2011 lows. We have the trend-line currently coming in just over 1.4300, and at this point, we would need to see a daily close below 1.4300 to officially shift the structure and signal a reversal in the trend. Monday’s early break below the previous weekly lows encourages prospects for said reversal, but again, we will need to see a close back below 1.4300 to really confirm trend shift and accelerate declines.

USD/JPY: Although the market is currently in the process of correcting from the latest surge to 85.50, the recent break back above 84.50 is significant and could pave the way for additional medium-term and longer-term gains ahead. Therefore, we like the idea of buying on dips back towards previous resistance now turned support in the form of the daily Ichimoku cloud top by 82.50. Ultimately, only a daily close back below 82.00 would concern.

GBP/USD: The market appears to be comfortable trading in a loosely defined range between 1.6000 and 1.6400. Any dips below 1.6000 have been very well supported in recent days, while rallies above 1.6400 remain very well offered. For now therefore, the best strategy is to play the range and look to sell on rallies towards 1.6400 and buy on dips below 1.6000. Meanwhile, a weekly close above 1.6400 or below 1.6000 will potentially warn of a break of the range. Next key topside resistance comes in by 1.6430 although as per our analysis, we expect the latest push above 1.6400 to once again be well capped over the coming sessions, in favor of yet another bearish reversal towards 1.6000.

USD/CHF: The latest break to fresh record lows below 0.8900 is certainly concerning and threatens our longer-term recovery outlook. Still, we do not see setbacks extending much further and continue to favor the formation of some form of a material base over the coming weeks for an eventual break back above parity. Look for the market to hold above 0.8900 on a daily close basis, while back above 0.9000 will officially relieve immediate downside pressures and accelerate gains. Only a break and weekly close below 0.8900 ultimately delays outlook.

Written by Joel Kruger, Technical Currency Strategist

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