FX - Euro Holding Up Quite Well Considering, But Still Very Bearish

• Eurozone peripheral bond preads remain in focus
• Spanish bonds looking to establish above 7%
• Merkel unwilling to accept idea of ECB being lender of last resort
• Roubini on the wires with usual doom and gloom comments
• Merkel and Cameron set to meet for heated debate on crisis
• EUR/USD monthly chart used as primary reference point for bias

With all of the negative attention in the Eurozone, it is actually somewhat surprising to see the Euro holding up as well as it has over the past few weeks. In our opinion, this is a currency that should be trading a good deal lower and we continue to project additional declines into the lower 1.2000’s over the coming weeks. At the moment, Eurozone peripheral bond spreads continue to widen to alarmingly high record levels, and with Italian yields next targeting the 8% mark and Spanish yields now on the verge of crossing over the 7% threshold, we do not see any light at the end of the tunnel. While Eurozone officials have been doing what they can to address the crisis, investors should be reminded that this is a big mess that involves the consent of a number of countries under one unified union before anything can ever get done.

Of course, some countries are better off than others, and there is a sentiment within these stronger countries that they should not be burdened with the heavy responsibility of rescuing the other less fortunate countries. While on the surface, there exists a mask of diplomacy and desire to find a unified solution, the disjointed nature of the situation, clearly makes this an extremely challenging crisis to overcome. Recently, Dr. Doom, Nuriel Roubini was on the wires saying that it would only be a matter of time before a Greek exit, and to make matters worse, Germany’s Merkel is still adamantly opposed to the idea of the European Central Bank becoming the lender of last resort to bail out the beleaguered, debt ridden peripheral nations. This only adds to the incredible pressure on the region, with a very limited amount of funds currently available in the EFSF. Merkel will be meeting with UK Prime Minister Cameron today, and we would expect to see some tension at the meeting with the two countries holding different views on the crisis.

Technically, we continue to defer to the EUR/USD monthly chart, which has been extremely useful this year. The market looks like it has been in a steady downtrend since positing record highs in 2008, and is now in the process of a carving out the next major lower top below 1.5000 ahead of a retest of some multi-month range lows in the lower 1.2000’s. Once the lower 1.2000’s are tested, it is entirely possible that we see further acceleration towards parity, but at this point, it is way too premature to make such calls and we will have to step back an reassess when the market gets down to our lower 1.2000 area objective.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The latest break below 1.3480 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 daily Ichimoku cloud on a daily close basis. 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 on a daily close basis, 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 1.5870 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 1.5630, while any intraday rallies are expected to be very well capped below 1.6000.

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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