FX - Euro Setbacks Accelerate As Spain Enters the Picture; Look to Sell

• Spain in the spotlight with widening bond spreads and political uncertainty
• China continues to show signs of cooling; should weigh on broader sentiment
• IMF warnings on China do not help matters
• Fed Fisher provides some upbeat comments on US economy
• Technical selling in currencies remains intense as evidenced by recent price action

Currencies are expected to remain under pressure this week, with all markets seen trading lower against the buck. The primary driver of the price action will continue to be risk liquidation, with fears of contagion from the Eurozone periphery not only threatening a spread to the Eurozone core, but also showing signs of a more dramatic spread outside of the Eurozone. China is one country that we feel is still at risk of an accelerated slowdown, and this in our opinion will be the center of the third phase of the global economic recession, which began in the Unites States, spread to the Eurozone and will soon touch down in China. The latest IMF warnings that China’s financial system is facing a steady build up in vulnerabilities, only help to reaffirm our bearish outlook on the economy. For now, however, the key focus is still in the Eurozone, and the negative attention has now shifted to Spain, with the country’s bond spreads hitting record levels and elections on the horizon. The US Dollar should therefore continue to benefit from safe-haven flows, and could also find some additional relative strength on hawkish comments from Fed Fisher who sees the US economy growing in 2012.

Technically, price action over the past few weeks has been quite telling, with any rallies in the Euro (and currencies in general), being easily absorbed and aggressively offset in an accelerated time-frame. A closer look at the sell-offs in the Euro on October 31st, November 9th, and November 14th are a testament to this fact. The implication is that markets are more inclined to see the Euro lower and are very quick to look to sell on any form of a rally. This strengthens our core USD bullish outlook and solidifies our strategy of continuing to look to sell currencies on any form of a rally against the buck. While we expect to see a deeper depreciation in the higher yielding currencies as the Euro weakens, we also continue to expect to see the Euro leading the way and setting the tone for the overall direction in the markets. As such, 1.3480 is the key level to watch in EUR/USD, and a break below will likely open the door for a more rapid broad based appreciation in the Greenback back towards its key highs (EUR/USD lows) from early October.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: Despite the bounce over the past few sessions, we still retain a bearish outlook, with the market in the process of a bearish consolidation ahead of the next major drop. The recent topside failure above 1.3800 strengthens our core bearish bias and should now open the door for a resumption of declines back towards critical support from early October at 1.3145. Daily studies still show plenty of room for weakness and we look for a break back below 1.3480 to confirm and accelerate. Ultimately, only back above 1.3870 would delay outlook and give reason for pause.

USD/JPY:The latest intervention efforts have resulted in an end to a very tight multi-week trade largely confined to the 76.00’s and a likely shift in the overall construct, with the pair carving out a major bottom by 75.50. The price has now broken back above the daily Ichimoku cloud for the first time in several months to confirm a potential shift in the trend, and ability to hold above the cloud reaffirms. Next key topside resistance comes in by 80.25 and a break above this level will likely accelerate gains and expose the 82.00-85.00 area further up. Look for any intraday setbacks to be well supported above 77.00 with only a close back below the figure to delay. As such, buying dips to 77.00 is the preferred strategy. Back above 79.55 accelerates gains.

GBP/USD: After stalling by the 200-Day SMA and a major double bottom objective over 1.6100, scope exists for a resumption of what we believe to be a broader downtrend. Look for a daily close back under 1.5875 to confirm and accelerate towards next key support at 1.5650, while ultimately, only a close back above the 200-Day SMA negates. Intraday rallies should be well capped below 1.6100 on a daily close basis.

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. Look for the latest round of setbacks to be well supported in the 0.8500’s, where a fresh medium-term higher low is sought out ahead of a bullish resumption back towards and eventually through 0.9315. Ultimately, only a weekly close below 0.8500 would concern. A daily close back above 0.9155 accelerates.

--- Written by Joel Kruger, Technical Currency Strategist

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