Mixed news out of Asia and Europe in the overnight has kept risky assets from moving higher, keeping the US Dollar supported thus far in the second week of October. On the second day back from Golden Week, the People’s Bank of China announced over ¥250 billion in reverse repos to inject liquidity into financial markets, boosting demand for the commodity currencies, the Australian, Canadian, and New Zealand Dollars.
With all three currencies at critical levels of support against the US Dollar, we’ll see over the coming days if this markets a near-term bottom in sentiment regarding China, allowing the commodity currencies to move higher; I think it is possible.
Whatever knock-on effect high beta currencies and risk-correlated assets may have gotten from the PBoC’s measures, the European currencies were completely absent from the move: the British Pound remains under pressure amid increasing QE chatter – the economy remains weak, the fiscal picture is tightening, and the Bank of England’s current package is set to expire; the Euro has been hamstrung by commentary from European Central Bank President Mario Draghi and the International Monetary Fund, warning on European growth prospects; and the Swiss Franc’s fate has been and will be determined by the Euro for the foreseeable future (the Euro and the Swiss Franc have maintained a +0.94 daily correlation since September 6, 2011).
Taking a look at credit, peripheral European bond yields are mostly lower. The Italian 2-year note yield has increased to 2.250% (+5.0-bps) while the Spanish 2-year note yield has increased to 3.145% (+7.9-bps). Likewise, the Italian 10-year note yield has increased to 5.058% (+0.5-bps) while the Spanish 10-year note yield has increased to 5.718% (+4.1-bps); higher yields imply lower prices.
RELATIVE PERFORMANCE (versus USD): 10:44 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.17% (+0.36% past 5-days)
The economic docket is very light today, with only two data releases of interest, neither of which are out of the United States. At 08:15 EDT / 12:15 GMT, the CAD Housing Starts (SEP) report will be released, which is forecasted to show the tenth consecutive month of starts at a pace of +200.0K or greater. At 10:00 EDT / 14:00 GMT, the GBP NIESR Gross Domestic Product Estimate (SEP) will be released, which should show that anemic growth remains in Britain.
EURUSD: I remain neutral on the EURUSD as prices remain within our key levels. Resistance comes in at 1.2930/35 (61.8% Fibo on February 2012 high to July 2012 low), 1.3000, 1.3070/75 (October high), 1.3145, and 1.3165/75 (September high). Support comes in at 1.2895/1.2900 (20-EMA), 1.2820/30 (200-DMA, late-April swing high), and 1.2750/65 (ascending trendline off of July 24 and August 2 lows, 50-EMA).
USDJPY: No change from yesterday: “Although price breached the 78.40/60 zone [on Friday], overhead resistance at 78.80/90 (100-DMA, descending trendline off of the April 20 and June 25 highs) proved too great to overcome. Thus, the downtrend from April remains. With the USDJPY holding near 78.10/20, this is the bull/bear line: a hold above gives scope for a rebound to 78.40/60, whereas a close below opens up room for a move towards 77.90, 77.65/70 (June 1 low), 77.40/45 (September 28 low), and 77.10/15 (September low).”
GBPUSD: Further anticipated selling continues, though the first test of the strength of the downtrend is coming soon at 1.5975/95 (former channel resistance off of June 20 and August 23 highs, 50-EMA). Accordingly, price remains below the 20-EMA and the descending trendline off of April 2011 and August 2011 highs (confluence at 1.6100/20). Until the GBPUSD gets back above this trendline, we are neutral for the coming days. Support comes in at 1.5975/95 and 1.5770/85 (late-August swing lows). Resistance comes in at 1.6100/20, 1.6135, 1.6260 (the former April swing highs by close) and 1.6300 /10 (September high).
AUDUSD: The rebound at 1.0150/75 (swing lows in mid-July and early-September) yesterday has led to another failed retest of 1.0240/55 today, the descending trendline off of the September 12, September 20, and September 26 lows. Price has remained within our key levels so our outlook is unchanged. Resistance comes in at 1.0245/50 (100-DMA), 1.0255/75, 1.0330, 1.0405/25 (mid-August swing lows), and 1.0470/85 (former intraday swing levels). Support comes in at 1.0160/75 (mid-July and early-September swing levels), 1.0100/10, and 1.0000.
SPX500: No change: “Since early-August, the 20-EMA has been strong support, with no two consecutive closes below occurring. We also note that over this time frame the daily RSI has not moved below 50. Resistance comes in at 1458/60, 1475, and 1498/1504. Support comes in at 1445/47(20-EMA), 1425 (the 61.8% Fibo retracement on June 2012 low to September 2012 high), and 1423/25 (50-EMA).”
GOLD: The steep ascending trendline off of the August 15 and August 31 lows, at 1770, is in play today, reinforced the 20-EMA, and former intraday swing lows throughout mid-September, at 1760. If this support breaks, 1750/55 is the next swing level lower to watch for. Resistance comes in at 1785/1805 and 1840.
--- Written by Christopher Vecchio, Currency Analyst
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