FX - Franc And Kiwi On Fire Despite Opposing Risk Profiles; We Question the Move

For the second day in a row, Asian markets have slipped outside of their comfort zone and pushed markets aggressively in a net USD bearish direction. Friday’s early price action has been even more aggressive than Thursday’s, with the US Dollar getting clobbered across the board on the back of some softer US economic data and whispers of the need for QE3. While the rebound in the Euro is less dramatic, with the single currency seemingly in the process of correcting from a strong down-move against the buck, most of the other major currencies have been pushing their way back towards some key levels.

The SNB won’t be too pleased with this latest price action in the Franc, with the currency rallying to fresh record highs against both the Euro and US Dollar on Friday. We have been hearing a good deal official concern over the strength in the Franc in recent days, and this latest acceleration in Franc buying could very well bring intervention back on the table. Meanwhile, on the other end of the risk spectrum, the New Zealand Dollar has been on fire, with the antipodean racing back towards its near 30-year highs just over 0.8200, even after Moody’s came out today and downgraded the ratings of major NZ banks by one notch to AA3 from AA2. It seems as though any fallout from the earthquake in Christchurch is no longer of concern, and a well received budget, and news of fresh investment from China, have been enough to keep the commodity currency very well bid.

Other currencies on the move include the Yen which is finding renewed bids as Usd/Jpy drops back below 81.00, and the Pound which contemplates a retest of psychological barriers by 1.6500, aided by some better than expected consumer confidence data. Still comments from ultra-dove Posen, who continues to insist on ultra-accommodative monetary policy, should temper gains somewhat. If there is one currency that has been acting peculiarly, it is definitely the Canadian Dollar, which has barely managed to mount any form of a rally against the buck despite this latest wave of USD selling.

The price action in the Loonie can only help to reaffirm fears of another slowdown in the US economy, with Canada seen suffering on it close proximity and US dependent economy. As wild as things have been over the past several hours, liquidity could start to dry up rather quickly towards the latter half of the day, with US traders looking to break from their desks early in an effort to get a jump on the long weekend. US markets will be closed on Monday, and any price action between now and Tuesday could lose some of its legitimacy.

Overall, we look to the price action in Eur/Usd for an appropriate gauge of the currency market, and with that in mind, from a technical perspective, the US Dollar is still in the driver’s seat and only just now undergoing a minor corrective sell-off following a 10 big figure rally against the Euro that began earlier this month. The fact that currencies with totally opposing risk profiles like the Swiss Franc and New Zealand Dollar are trading at record and multi-year highs against the US Dollar is somewhat strange to us, and it seems as though both currencies are due for a heavy dose of liquidation given how far we believe they have deviated from their respective fundamentals.

Price action in the Swiss Franc which trades by record highs, even after seeing healthy risk appetite and rallying equity prices for the past several months, and price action in a New Zealand Dollar that trades by 30 year highs despite some concerning local fundamentals and an unstable global macro environment is reminiscent of the mindless parabolic drive in markets pre-crisis in 2007, and as such, we would be very aggressively looking to fade the strength in these currencies going forward. Once again, we will defer to price action in Eur/Usd which seems to be making more sense, and given that in this market we are still USD bullish, we would expect to see these other overdone currencies undergo some major selling once the Euro manages to put in a lower top against the buck.

Looking ahead, the Swiss trade balance, German import prices, and UK Nationwide house prices highlight data in the European session, while US GDP and initial jobless claims stand out on the North American calendar. On the official circuit, ECB’s Trichet, Nowotny and Bini-Smaghi are all scheduled to speak. US equity futures and commodities prices are tracking moderately higher.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: In the process of a corrective bounce following a 10 big figure drop in May with the market rallying from below 1.4000 and I search of a fresh lower top ahead of the next major downside extension below 1.3970. From here, look for any rallies to be well capped in the 1.4300-1.4400 area, with only a break back above 1.4500 negating negative outlook and giving reason for concern.

USD/JPY: After undergoing a fairly intense drop off from the 85.50 area several days back, the market looks to have finally found some support by the bottom of the daily Ichimoku cloud and could be in the process of carving out some form of a base. Look for setbacks to continue to be well supported in the 80.00’s with only a close back below 79.50 to give reason for concern. From here we see the risks for a fresh upside extension back towards the recent range highs at 85.50 over the coming weeks.

GBP/USD: The 100-Day SMA has proven to be formidable support for the pair, with the price rallying substantially out from the 1.6060 lows to trade back towards 1.6500. However, we would expect rallies to now be well capped below 1.6550 on a daily close basis, with gains even potentially holding below 1.6480 on a close basis which represents the 61.8% fib retrace off of the 1.6740-1.6060 move. Look for a lower top in the 1.6500 area ahead of the next major downside extension below 1.6000 over the coming days. Ultimately, only a daily close back above 1.6550 would negate outlook.

USD/CHF: The latest minor recovery has proved to be just that, with the market finding a fresh lower top ahead of 0.9000 in favor of this latest sharp drop to yet another record low in the 0.8500 area. Daily studies are however still looking quite stretched to us, and we continue to like the idea of taking shots at buying on dips in anticipation of a major base. Look for current declines to hold around the 0.8500 area and a break back above 0.8740 to encourage basing prospects and open the door for the potential formation of a major interday double bottom (neckline by 0.8950) projecting gains back towards 0.9500. A daily close below 0.8400 would negate.

Written by Joel Kruger, Technical Currency Strategist

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