FX - Risk Correlated Assets At Risk for Fresh Bout of Liquidation

• Spain looking to recapitalize; Greece working to secure bailout money
• Rumors of additional ECB rate cuts making the rounds
• EUR/AUD cross finally breaks to fresh record lows
• Aussie data comes in weaker than expected
• France bond auction results to be digested by markets

Ongoing concerns over the health of the Eurozone and its impact on the broader global macro economy continue to dominate trade. The latest talk of Spain looking to recapitalize its banking sector and Greece working hard to secure bailout funds, has not inspired any confidence and we are once again seeing a continuation of risk correlated liquidation, led by Euro declines. The key level to watch below in EUR/USD comes in at 1.2860 and a daily close below will open a fresh downside acceleration exposing 1.2500 further down. Rumors of additional rate cuts have also been making the rounds and this could put additional pressure on the beleaguered Euro currency.

Still, we see a point at which the crisis intensifies to the east and puts even more pressure on China, it correlated economies and emerging markets. One such correlated economy is Australia, and with the EUR/AUD cross rate trading over 85 big figures off its 2008 peak, we anticipate relative weakness in the Australian Dollar going forward, even against the Euro. Just as we saw the crisis spread from the US to the Eurozone and the USD start to find relative bids, so too here, we see the crisis spreading to Australia and the Euro finding relative bids. The EUR/AUD cross rate has now traded to fresh +20-year/record lows, and technically, charts are screaming for a much needed healthy corrective bounce at a minimum. Australian data overnight has not been encouraging and perhaps this could provide the initial spark for some form of a bounce in the cross rate.

Looking ahead, German retail sales, Eurozone inflation and UK services PMIs are due for release in the European session, but France’s sale of 10-year and 30-year bonds will likely garner a majority of the attention. Also worth noting is the potential for downgrades from the rating agencies on European countries after S&P hinted at such developments in late 2011. Global equity markets have been rather supported in recent trade, but are starting to show signs of renewed weakness.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: After finally taking out the 2011 lows from January by 1.2870, the market seems poised for the next major downside extension. Overall, we retain a strong bearish outlook for this market and look for setbacks to extend towards the 1.2000 handle over the coming months. While we would not rule out the potential for corrective rallies, any rallies should be very well capped above 1.3500. Meanwhile, a daily close below 1.2850 will accelerate declines.

USD/JPY:Despite the latest pullbacks, we continue to hold onto our constructive outlook while the market holds above 76.55 on a daily close basis. We believe that any setbacks from here should be limited in favor of a fresh upside extension back towards 79.55 over the coming weeks. Look for a break above 78.30 to confirm and accelerate, while only a daily close below 76.55 negates and gives reason for pause.

GBP/USD: Rallies have been very well capped ahead of 1.5800 and it looks as though a lower top has now been carved out by 1.5780 ahead of the next major downside extension back towards the October lows at 1.5270. Key support comes in by 1.5360 and a daily close below this level will be required to confirm bias and accelerate declines. Ultimately, only back above 1.5780 would negate bearish outlook and give reason for pause.

USD/CHF: The recent break above the critical October highs at 0.9315 is significant and now opens the door for the next major upside extension over the coming weeks back towards parity. A confirmed higher low is now in place by 0.9065 following the recent break over 0.9330, and next key resistance comes in by 0.9785. Ultimately, only back under 0.9065 would delay constructive outlook.

--- Written by Joel Kruger, Technical Currency Strategist

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