FX - Dutch Come Out in Support of ECB as Lender of Last Resort

• Currencies looking to retest October lows against Buck
• German stance on crisis not helping the Euro
• FT article on Dutch stance could provide lift for risk
• Thanksgiving holiday makes Friday trade less relevant

Currencies continued with their downward trajectory against the US Dollar into the final day of the week, and it appears that many of the major currencies are now fated to retest their key October lows against the Greenback. The latest bout of risk liquidation has been brought on by a number of factors including Germany Merkel’s ruling out prospects for jointly issued Eurobonds and her firm opposition to the idea of the ECB being a lender of last resort, along with Fitch’s downgrade of Portugal to junk status. Throw in some dovish comments from BOE Miles in reaction to the global slowdown and the Eurozone crisis, and some concerning comments relating to the Japanese economy, and the overall picture is not looking good for risk.

However, there has been one development over the past several hours which perhaps has slipped under the radar of many market participants who have been distracted with Thanksgiving holidays or the Merkel/Sarkozy/Monti mini summit. The FT has released an article reporting that the Dutch have endorsed the idea of the ECB being a lender of last resort. This could provide some welcome support for the downtrodden Euro, with the Dutch endorsement coming as a surprise given their staunch opposition to this idea (perhaps more aggressive opposition than even Germany) up until this point. While Germany’s acceptance of the idea is certainly more important, this gesture could start to put more pressure on the Germans to finally accept the ECB as a lender of last resort.

The Euro remains in trouble and we expect to see any rallies well capped ahead an eventual retest of the 1.3145 October lows. Looking ahead, the economic calendar is extremely light and there is only some secondary data due out of France and Italy which shouldn’t factor into price action. Markets should be quiet for the remainder of the day, with trade expected to lighten significantly into the holiday US trade. US equity futures are tracking lower, while commodities are mixed with oil higher and gold lower.

TECHNICAL OUTLOOK

EUR/USD: The latest break below 1.3420 should now open a fresh downside extension which ultimately exposes a retest of the key lows from October at 1.3145. Look for any rallies to be well capped below 1.3700, 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:Although the market has come back under pressure following the recent surge to 79.55, we retain a constructive outlook with the price still holding above the bottom of the daily Ichimoku cloud. The bottom of the cloud currently comes in just under 77.00 and so long as the market continues to hold above the bottom of the cloud, we recommend looking to be long this market in anticipation of a more significant bullish trend shift from record lows. A close back below 76.80 would however give reason for concern.

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.

USD/CHF: The pair looks like it is in the process of carving a major base ahead of some significant upside over the coming weeks and months. The latest rally seems to be gaining momentum, and we anticipate that the market will soon clear the key October highs at 0.9315. Above 0.9315 should then accelerate gains and open the next major upside extension towards parity. Any setbacks from here should be very well supported above 0.8900.

--- Written by Joel Kruger, Technical Currency Strategist

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