FX - Risk Correlated Currencies Continue to Do A Good Job of Staying Bid

• ECB raises rates to 1.50% and maintains hawkish outlook
• Solid ADP report sets the stage for a positive NFP print
• Risk correlated currencies remain very well supported
• US Dollar still pressured on solid local data
• Kiwi to fresh post-float record highs beyond 0.8300

Risk correlated currencies and other assets continue to do a good job of absorbing bad news, while at the same time rallying impressively on any sign of light. The rebound in these markets on Thursday have been primarily driven by two developments, the first of which, an uncompromising and unwavering ECB which remains intent on continuing with its newly adopted tightening bias, even in the face of ongoing peripheral debt concerns. The second driver of the risk rally has come from some solid ADP employment data which now encourages optimism for a healthy number out from tomorrow’s more highly anticipated US NFP report.

Our colleague, the chief strategist at a major US bank sent out a very interesting chart that illustrates this anomaly in which risk correlated currencies continue to benefit despite some broader negative news. While European bank stocks have come under some solid pressure over the past few sessions as uncertainty on the Eurozone peripheral escalates, the Eur/Chf cross which normally would also trade lower on this news, has in fact rallied, to reflect a carefree (ore less concerned) attitude towards Eurozone debt risks (see below). Our colleague suggests that whatever is being discussed in terms of a resolution in the Eurozone could be overall peripheral friendly but not necessarily European bank friendly.

Moving on, earlier in the week we discussed the possibility that solid US economic data could start to translate into a stronger US Dollar, with the Fed having nowhere to go with monetary policy but up. But at this point, it seems as though market participants are not yet ready to buy into that correlation shift, with the preference still to move away from the Greenback and into higher yielding currencies on any positive US economic data.

While it is true that Fed policy can only go up from here, it seems as though investors feel that failure to move at all still offers more attractive yield differentials abroad. We certainly can’t argue with this view, but also at the same time would be looking for that correlation shift over the near-term. For now however, the USD bears are winning out on this argument and the latest less than hawkish official speak from the always hawkish Fed’s Fisher and Fed Hoenig is not helping the buck’s cause.

Looking ahead, Swiss unemployment, German current account and trade, and UK producer prices will be the key economic releases in the European session, while into North America, US and Canada employment reports will take center stage. US equity futures and commodities prices consolidate their latest moves and track relatively unchanged into the European open. As a side note, it will be worth tracking performance in the New Zealand Dollar on Friday, with Nzd/Usd back above 0.8300 and breaking to fresh post-float record highs. We continue to view the market as stretched and do not see gains sustaining above the figure. As such, selling on any rallies above 0.8300 cold rove to be a rewarding strategy.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: Overall, medium-term price action remains quite choppy and we continue to like the idea of selling into rallies in anticipation of a more sizeable pullback below 1.4000. From here, look for the formation of a fresh lower top by 1.4580 ahead of the next downside extension to be confirmed on a break back below 1.3970 over the coming days. In the interim, look for intraday rallies to be well offered ahead of 1.4500. Back under 1.4220 accelerates declines.

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 in the 80.00 area and could be in the process of carving out some form of a base. Look for setbacks to continue to be well supported around 80.00 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 and the latest break and close back above 81.00 helps to confirm. Look for a test of next key short-term resistance by 82.20 over the coming sessions.

GBP/USD: Although the short-term structure remains bearish, setbacks seem to be well supported in the 1.5900’s for now. However, we classify the latest price action as some bearish consolidation ahead of the next major downside extension with the market now looking to establish back below the 200-Day SMA and extend declines below next key support at 1.5750 further down. In the interim, look for any rallies to be well capped ahead below 1.6150 on a daily close basis.

USD/CHF: Despite the intense downtrend resulting in recently established fresh record lows below 0.8300, short/medium/longer-term technical studies are looking quite stretched to us, and we continue to like the idea of taking shots at buying in anticipation of a major base. The latest break back above the 20-Day SMA is encouraging while a push beyond 0.8550 will ultimately be required to officially relieve immediate downside pressures and accelerate gains. In the interim, look for intraday setbacks to be well supported ahead of 0.8350.

Written by Joel Kruger, Technical Currency Strategist

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