FX - S&P and RBA Weigh on Sentiment Early Tuesday

• RBA cuts rates as expected; still weighs on higher yielder
• S&P places 15 Eurozone countries on watch for potential downgrade
• Republicans talking about a repatriation package
• Bank of Canada rate decision due later

Currencies have been under pressure early Tuesday with the Australian Dollar leading declines following the RBA’s as expected decision to cut rates by 25bps to 4.25%. The Australian central bank cited slower global economic growth, easing inflation and the European debt crisis as the primary drivers behind the policy decision and the announcement led to a drop in AUD/USD back below 1.0200 before the pair finally managed to find some intraday bids.

Also seen weighing on sentiment on Tuesday has been the news that S&P has placed 15 Eurozone countries on negative watch for a potential downgrade. This only adds to pressure on the EU leaders to come up with a substantial resolution to the crisis this week, and at this point, whatever the officials come up with, does not appear like it will be enough. The resulting price action should therefore continue to be broadly risk negative, which ultimately favors a resumption of across the board USD demand.

One other theme that has been generating attention this week come from the House Republicans, with talk of a potential inclusion of repatriation in a tax package at the end of the year. While there is nothing official just yet, the idea of repatriation could have currency implications with a good amount of US Dollars coming back into the United States. Looking ahead, Eurozone GDP and German factory orders are the key releases in the European session, while in North America, the key focus will be on the Bank of Canada rate decision where no change to policy is expected. US equity futures and commodities prices are tracking moderately lower.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: Remains locked in some consolidation following the bounce out from 1.3200. The key levels to watch above and below come in at 1.3550 and 1.3360 respectively and a daily close above or below will be required for a clearer short-term directional bias. A break and close back above 1.3550 will suggest that the market is still in the process of correcting and could head back into the 1.3800 area, while a close back below 1.3360 will open the door for a bearish resumption and retest of the key October lows at 1.3145.

USD/JPY:The market has managed to successfully hold above the bottom of the daily Ichimoku cloud to further strengthen our constructive outlook and we look for the formation of a inter-day higher low by 76.55 ahead of the next major upside extension back towards and eventually through the recent multi-day highs by 79.55. Ultimately, only a close back below the bottom of the Ichimoku cloud would negate outlook and give reason for pause, while a daily close back above 78.30 accelerates.

GBP/USD: The market correction out from the recent lows at 1.5420 appears to have finally stalled out and we will be looking for a daily close back under 1.5575 to confirm bias and accelerate declines. A close below 1.5575 should accelerate declines towards 1.5420, below which will open an even deeper setback to retest critical support by the October lows at 1.5270. Ultimately, only back above 1.5800 would delay and give reason for concern.

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. Daily studies are looking slightly stretched at current levels, so we would not rule out the potential for some corrective selling, but ultimately, look for any setbacks to be well supported in the 0.9000 area, where a fresh higher low is sought out.

--- Written by Joel Kruger, Technical Currency Strategist

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