• ECB rate cut welcome by markets and keeps currency supported for now
• Still plenty of problems in region and need to see EFSF expanded
• G20 not expected to respond with anything more than talk
• Continue to project relative Aussie underperformance going forward
• Canada employment and US NFPs on tap

A busy day on Thursday and in the end, currencies managed to post a bit of a rally with the resulting price action looking more like some minor consolidation ahead of the next major move. We continue to project this move to be to the downside (currencies lower and USD higher), and while there was some room for optimism following a surprise ECB rate cut which showed the markets that the central bank was willing to move out of its comfort zone in order to help stimulate the local economy, even at the risk of rising inflation, the net result is a lower yielding Euro with many obstacles to overcome, including a plan to increase the firepower of the EFSF.

The G20 is one of the big events for the day, but we see no reason why this meeting will be any different than any other of this kind which ends up being all talk and no action. But in this case, we agree with the all talk approach. After all, why should there be any action taken by the international community to help a Eurozone region that appears to be riddled with an endless amount of problems and has shown no real ability to competently deal with its own deterioration?

Overall, the risk seems to still be tilted to the downside, and we will be looking for more opportunities to buying the US Dollar and selling some of the higher yielding currencies. The Australian Dollar is one currency which we are very bearish on, and although the economy has held up quite well throughout the crisis, there are now some real signs that things are starting to slow at a more accelerated pace than anticipated. The latest downbeat RBA policy statement confirms our outlook and this coupled with a downturn in the Chinese economy and potential spread of contagion into this region of the world, should in our opinion expose the Australian Dollar to some relative underperformance going forward.

Looking ahead, Eurozone PMIs, inflation data and Germany factory orders are highlighted in the European session, while things pick up significantly into North America with the release of Canada employment data and the all important monthly NFP numbers out of the US. In Canada, the unemployment rate is expected to hold steady at 7.1%, with a 15.0k net change in employment, while in the US, markets are looking for an unchanged 9.1% unemployment rate and 95.0k change in Non-farm payrolls. US equity futures and commodities trade flat into European trade.

TECHNICAL OUTLOOK

EUR/USD: Last Thursday’s intense rally has now been completely offset and the market finally looks like it has carved out a fresh lower top by 1.4250 ahead of the next major downside extension. From here, we look for a daily close back below 1.3650 to confirm bias and accelerate declines towards critical support at 1.3145. Below 1.3145 will then open the next major drop towards our longer-term objective into the lower 1.2000’s. Any intraday rallies should now be very well capped below 1.3900 on a daily close basis, while only back above 1.4250 would negate outlook and give reason for pause.

USD/JPY:Monday’s surge has resulted in an end to a very tight multi-week trade largely confined to the 76.00’s and a likely shift in the overall construct, with the pair carving out a major bottom by 75.50. The price has now broken back above the daily Ichimoku cloud for the first time in several months to confirm a potential shift in the trend, and Monday’s close above the cloud reaffirms. Next key topside resistance comes in by 80.25 and a break above this level will likely accelerate gains and expose the 82.00-85.00 area further up. Look for any intraday setbacks to be well supported above 77.50 with only a close back below this level to delay. Back above 79.55 accelerates gains.

GBP/USD: After stalling by the 200-Day SMA and a major double bottom objective over 1.6100, scope exists for a resumption of what we believe to be a broader downtrend. Look for a daily close back below 1.5890 to confirm and accelerate towards next key support at 1.5650, while ultimately, only a close back above the 200-Day SMA negates.

USD/CHF: The market has been in the process of a major correction since peaking out at 0.9315 on October 6. However, the overall outlook remains constructive, with the pair looking like it is in the process of carving a major base ahead of some significant upside over the coming weeks and months. Look for the latest round of setbacks to be well supported in the 0.8500’s, where a fresh medium-term higher low is sought out ahead of a bullish resumption back towards and eventually through 0.9315. Ultimately, only a weekly close below 0.8500 would concern. A daily close back above 0.8900 will confirm bias and accelerate gains.

--- Written by Joel Kruger, Technical Currency Strategist

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