FX - Currencies Well Bid But is the Price Action Warranted?

• Markets consolidate following intense Wednesday move
• EUR/USD expected to hold below 1.3500 on a daily close basis
• Coordinated central bank action while welcome, should not be taken as risk positive
• Australian Dollar reverses course and underperforms

Markets have mostly been locked in some consolidation following the massive surge in risk appetite on the back of Wednesday’s coordinated central bank action, and it now remains to be seen whether this recovery rally can be sustained. We contend that the rally will not be sustainable, and ultimately, we should once again see a resumption of risk liquidation, with currencies and equities under pressure and the US Dollar as the primary beneficiary. Look for EUR/USD to hold below 1.3500 on a daily close basis.

The central bank actions on Wednesday only reinforce the severity of the global crisis and while necessary, should certainly not be taken as a risk positive. It is true that the actions of the central banks will make money cheaper and attempt to stimulate the global economy, but let us not forget that cheap money means nothing if it is still not accessible. This has been a major critique of these alternative forms of monetary policy measures, and at the end of the day, there are still serious risks of a liquidity trap.

The Australian Dollar which outperformed on the Wednesday risk correlated flows is a gross underperformer on Thursday thus far with some softer retail sales, atrocious building approvals, and disappointing China manufacturing PMIs all factoring into the price action. This all but solidifies an additional 25bp rate cut at next week’s RBA meeting, and we continue to project relative underperformance in the Australian Dollar over the coming weeks and months. Unfortunately, our short position from this week was stopped yesterday at 1.0280, but we still hold onto our core short position from 1.0550.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: Overall, the market is still locked in a downtrend and we expect a retest and break of the key October lows at 1.3145 over the coming days. Rallies are classed as corrective and look for these moves to be well capped below 1.3500 on a daily close basis, while only back above 1.3750 would ultimately delay. 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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