FX - Razor Thin Holiday Conditions Should Keep Things Quiet on Friday

Friday is not expected to be a volatile day in light of the holiday closure, and the lighter price action is more than welcome into the end of the week with the situation spiraling out of control for the US Dollar. Unfortunately, we were caught on the wrong side of this trade, but have since lightened our exposure dramatically and will now take some time to sit back and reevaluate. The intensity of this latest USD slide has been quite impressive, and for now, there seems to be very little in the way of any real favorable prospects for the Dollar. Any short-term fundamental warnings of uncertainty and risk aversion have been dismissed, while technical studies which have warned of the potential for a USD bullish reversal have also been discounted.

The driving force behind price action seems to be unrelenting flows away from the US Dollar on the back of serious concerns over the US budget, demand for higher yield, and ongoing reserve diversification away from the buck. Meanwhile, market participants have downplayed the threat of contagion in the Eurozone, and this has also helped to propel the Euro to fresh yearly highs. With all of that said however, technical readings remain overextended and the US Dollar does still seems due for a more significant rally over the coming days and weeks. While the medium-term and longer-term prospects for the Greenback have become less clear, any additional weakness in the buck into the coming week would be egregious in our opinion. We often find that when it seems as though market participants have officially given up on a currency and there is no hope left, it is precisely then when the currency manages to mount a serious rally. The jury is still out on the US Dollar at the moment, but we wouldn’t at all be surprised if the markets were to reverse course in the coming week.

Looking ahead, we expect volume to be razor thin on Friday due to the holiday, with many major markets closed for the long weekend, including the US. The calendar is all but empty for the remainder of the day as a result, with only some secondary French and Italian data coming out of the Eurozone. If anything, broader macro themes and developments along with some positioning ahead of the weekend will be the key drivers of Friday price action, while we will also be on the lookout for any comments from various central bankers and other officials. We wish everyone a healthy and meaningful weekend.

TECHNICAL OUTLOOK

EUR/USD: The intense bullish outside week formation after the market had initially looked as though it was prepared for a bearish reversal, keeps the uptrend off of the 2011 lows intact and now opens the door for fresh upside over the coming weeks back towards next critical resistance by the 2009 highs at 1.5145. At this point, daily studies are still showing room to run, while any setbacks are expected to be well supported ahead of 1.4300. Only a break and close back below 1.4155 would negate the bullish momentum and force a shift in the trend. Buying on dips is the preferred strategy.

USD/JPY: Despite the latest slide back below 82.00, we continue to retain a constructive outlook for the market so long as it holds above the daily Ichimoku cloud. Daily studies do however still show room for additional setbacks before the cloud can support, and as such, buying at current levels is not recommended. Use the cloud as a reference point and look to buy dips to the cloud top or on a break back above the 200-Day SMA by 83.30. Ultimately, only a sustained break back below the cloud would negate constructive outlook.

GBP/USD: The latest surge through psychological barriers at 1.6500 has now negated the multi-week range trade and potentially exposes fresh upside ahead. The 200-Day SMA and the 2009 highs come in by next critical resistance in the form of the 1.7000 barrier and we could now se a test of this level over the coming days. Still, this market has proven to be very well offered on any fresh rallies, and we would therefore recommend proceeding with caution. Buying on dips is the preferred strategy. Look for any setbacks to now be well supported by the 50-Day SMA.

USD/CHF: The latest break to fresh record lows below 0.8800 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 0.8800 on a daily close basis, while a daily close back above 0.9010 will officially relieve immediate downside pressures and accelerate gains. Only a break and weekly close below 0.8750 ultimately delays outlook. A bullish hammer-like close on Thursday could offer early warning signs of a bottom.

Written by Joel Kruger, Technical Currency Strategist

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