FX - Risk Correlated Assets to Find Short-Term Relief Over Coming Sessions

• Short-term technical studies warn of risk positive catalyst over coming sessions
• Sterling/Yen cross rate could be attractive counter-trend play
• G20 communiqué fails to provide any substantive response
• Eurozone default talk back in the news on ECB comments
• S&P reaffirms Australia’s solid ratings

While medium-term technical studies continue to warn of an ongoing deterioration within the global macro economy, we are now issuing a warning that traders should be on the lookout for a short-term corrective rally after most risk correlated currencies have been beaten badly over the past several days. The “Relative Strength Index” (RSI) which determines whether markets are overbought or oversold, is now showing most of these risk correlated currencies as oversold, and as such, we would not at all be surprised to see some form of a fundamental catalyst on Friday or into Monday which opens the door for a positive risk reversal. This would imply that the commodity bloc currencies could find renewed bids over the short-term, while the Yen crosses might also find some bargain hunters at current levels.

Sterling/Yen has been hit really hard to fresh record lows, and with a weekly RSI below 30 and daily RSI near 20, we see strong potential for some decent corrective upside ahead. Still, we stress that any rallies in risk correlated assets that we project over the coming sessions will only last for a matter of days before most of these markets are once again fall on hard times and track to fresh multi-day lows. Of course, the one exception is the Yen and related crosses, with the currency at risk for a major depreciation even in the event of further global stress, as the central bank and government officials begin to ramp up threats for a massive intervention to weaken the Yen. This is precisely why we like the idea of looking o fade the GBP/JPY weakness and taking a shot at a very playable counter-trend long position by record lows.

Moving on, the G20 failed to inspire any confidence, so it is quite clear that any renewed optimism in the markets on Friday will not be coming from this communiqué. While the Group pledged a strong coordinated response to support financial stability and growth, the message was lacking in any real detail and once again proved to be a let down for those who may have been looking for something more substantive. This would have certainly been a welcome development with global tension and fear running so high and risk of default in the eurozone still a very real threat. ECB Knot was on the wires early Friday reviving speculation of a Greek default after commenting that this possibility could not be excluded from consideration. Elsewhere, while the Australian Dollar has been hit rather hard over the past few sessions, the currency has been finding some bids on Friday and is attempting to outperform on the day after S&P came out to reaffirm the country’s ratings and the RBA financial stability review assured that the local banking system would be in a much better position to handle market stress compared to 2008.

Still, once the dust settles and risk correlated markets potentially rally a bit over the coming days, we expect that the broader risk negatives themes will once again resurface and force an even greater depreciation in these assets. Global equities are still a good ways off their post-crisis lows and from a technical standpoint, we see plenty of room here for more significant declines over the medium-term before the markets once again try to regain composure. As we have written on Thursday, the major threat to the markets right now is the fact that with all of the global intervention efforts and monetary policy accommodative measures exhausted, there is really nothing left to prop the beleaguered global economy, and we may need to go through another round of intense pain without the benefit of medication this time, before ultimately returning to a path of sustainable economic recovery and eventual prosperity.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The sharp pullback below the July lows and establishment below the 200-Day SMA solidifies the prospects for the carving of a major lower top on the monthly chart which now ultimately projects additional declines down towards the 1.2000 area over the coming weeks and months. The latest inter-day rally off of the 1.3500 area lows has stalled out within our projected lower top region between 1.3835 and 1.4055 and Thursday’s break back below 1.3500 confirms the lower top at 1.3940 and should accelerate declines down towards 1.3000 over the coming days. Still, with daily studies looking slightly stretched, look to sell into a rally towards 1.3700 rather than attempting fresh shorts on downside breaks. Ultimately, only a close back above 1.3940 delays outlook and gives reason for pause.

USD/JPY:This is a market that looks like it trying very hard to establish some form of a base after recently setting fresh record lows just under 76.00. Although the downtrend remains intact and has been fairly intense, longer-term studies welcome the prospects of the formation of a material base and shift in the overall structure. Price action over the past several days has been confirming, with the market very well supported in the 76.00’s and unable to extend the downtrend to fresh record lows. From here, we look for the establishment back above the 50-Day SMA to reaffirm our recovery outlook and accelerate gains towards next key resistance by 80.25 further up. Ultimately, only a daily close back under 76.00 delays.

GBP/USD: The market has now extended declines to our objective by 1.5350, with the setbacks matching the December 2010 lows. While we continue to project additional weakness over the medium-term, short-term technical studies are quite stretched and as such, we see risks for a potential corrective rally before the underlying downtrend resumes. Look for a bounce over the coming sessions back towards previous support now turned resistance by 1.5780 where a fresh lower top will then be sought ahead of the bearish resumption.

USD/CHF: Although daily studies are showing overbought and warn of the potential for a short-term corrective pullback, the recent daily close back above the 200-Day SMA is significant and now opens the door for the next upside extension towards 0.9500 further up. Medium-term and longer-term studies still show plenty of room for upside ahead, while the short-term outlook also remains constructive above 0.8645. Ultimately, only back under 0.8645 delays short-term outlook and would open the door for a more sizeable corrective decline. Still, even at that point, buying into dips would be the preferred strategy. Any intraday dips back towards the 0.8900 handle are viewed as solid short-term buy opportunities.

Written by Joel Kruger, Technical Currency Strategist

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