Sentiment is becoming increasingly negative on China. Numerous weak data releases over the past several weeks, compounded by concerns over a hasty leadership transition, has stoked a sell-off in any and all assets associated with the emerging Asia growth story: the Australian Dollar (currencies); the Shanghai stock index (equities); copper and iron ore (commodities).
Price action overnight was more of this theme, with a significantly weaker Australian Trade Balance for August alongside a declining September Chinese Services PMI stoking the next leg lower. It’s of little surprise, then, that the Australian and New Zealand Dollars (both countries have China as a top two or three trading partner) are heading lower, with the Japanese Yen (as a regional safe haven) and the US Dollar moving higher.
Despite the news, we find that because sentiment is becoming so stretched bearishly, and that the AUDUSD is coming into major support (mid-July and early-September swing lows), we could see a countertrend move in the next few days to see some technical relief. Accordingly, taking a look at the NZDUSD, the pair has held up quite well in the risk-off phase of the market the past few weeks, and appears to be flagging in an uptrend. Adding in the EURUSD’s and the S&P 500’s resilience recently (trading sideways after overbought readings), the market could be coiling for the next move higher.
Taking a look at credit, peripheral European bond yields are holding lower, which is helping keep the Euro elevated. The Italian 2-year note yield has increased to 2.136% (+1.4-bps) while the Spanish 2-year note yield has decreased to 3.000% (-2.7-bps). Similarly, the Italian 10-year note yield has decreased to 4.977% (-3.1-bps) while the Spanish 10-year note yield has decreased to 5.676% (-1.7-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:54 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.17% (+0.54% past 5-days)
The economic docket is fairly light today though there are two releases that have caught our eye. At 08:15 EDT / 12:15 GMT, the USD ADP Employment Change(SEP) report will be released, and modest jobs growth – albeit slower than last month – is forecasted. At 10:00 EDT / 14:00 GMT, the USD Non-Manufacturing Composite (SEP) is due, which should show a small correction, but the index will remain in modest growth territory.
EURUSD: Little has changed the past few days: “The pair…found support near the 200-DMA, which remains the first major level of downside support. If this level holds, we look towards the 61.8% Fibo retracement (February 2012 high to the July 2012 low) at 1.2934 again, though a subsequent rejection would signal a third test of the mid- to low-1.2800s again. Interim support comes in at 1.2820/55 (20-EMA, 200-DMA, late-April swing high). Resistance lies at 1.2930/35, 1.3000, 1.3145, and 1.3165/75 (September high).”
USDJPY: On Monday I said “With price holding above 77.65/70 by close on Friday, scope for gains into 77.90 and 78.10/20 are well-within reason.” Today we’re back to 78.10/20, and a daily close above eyes resistance at 78.40/60 (50-EMA), 78.80/90 (100-DMA, descending trendline off of the April 20 and June 25 highs), and 79.20/30 (200-DMA, September high). Should price close at or below 78.10/20, support comes in at 77.90, 77.40/45 (September 28 low), 77.65/70 (June 1 low) 77.45/50, and 77.10/15 (September low).
GBPUSD: The GBPUSD fell into major support today, again, at 1.6100/20 (20-EMA, descending trendline off of April 2011 and August 2011 highs, ascending trendline off of August 2 and August 31 lows). A break below suggests a move to 1.5970/75 (former channel resistance off of June 20 and August 23 highs), and 1.5770/85 (late-August swing lows. Resistance comes in at 1.6165/80 (late-September and early-October intraday swing levels), 1.6260 (the former April swing highs by close) and 1.6300 (by high).
AUDUSD: Indeed the Falling Wedge was a false breakout, with the pair breaking through major support yesterday. Resistance comes in at 1.0275, 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.
--- Written by Christopher Vecchio, Currency Analyst
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