Markets remain in a state of consolidation on Monday, a necessity from a technical perspective if the immense rally that has taken place over the past week and a half is the real deal. Ideally, when markets move as quickly as they have since the European Central Bank Rate Decision on September 6, a pullback if not a slight pause is to be desired, as that is a sign of a technically healthy market (traders taking profits and letting overstretched conditions dissipate).
There are two main drivers for price action in the overnight with the newswires relatively quiet and the economic docket relatively barren to start the trading week. First, aiding to the weakening sentiment about the Chinese growth story, Singaporean exports plummeted in August, with Electronic Exports contracting by -11.0% on a yearly-basis and Non-oil Domestic Exports contracting by -10.6% y/y. The huge drop appears to have been a product of regional growth issues in the summer, with Non-oil Domestic Exports falling by -9.1% on a monthly-basis. Certainly, this adds fuel to the ‘Chinese “hard landing” camp’ fire (for which we are happily a part of).
The other concern we’ve observed is that that protests on the Iberian peninsula over the weekend (in both Portugal and Spain) have aroused anti-austerity sentiment in the region once more, negating whatever positive bias there may have been about the unpopular measures following the Dutch elections. Coupled with Spain’s refusal to seek a full-blown sovereign bailout that would in turn grant it access to the ECB’s bond-buying program, investors may have started to become jittery about the game of chicken that’s starting to ensue (a point we discussed in this column last week).
Taking a look at credit, peripheral European bond yields are back up, holding back the Euro thus far today. The Italian 2-year note yield has increased to 2.288% (+8.9-bps) while the Spanish 2-year note yield has increased to 3.132% (+13.7-bps). Likewise, the Italian 10-year note yield has increased to 5.042% (+4.8-bps) while the Spanish 10-year note yield has increased to 5.814% (+8.7-bps); higher yields imply lower prices.
RELATIVE PERFORMANCE (versus USD): 10:48 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.02% (-1.50% past 5-days)
A slow to start to the week on the economic docket with only one important data release due during North American trading hours today. At 09:00 EDT / 13:00 GMT, CAD Existing Home Sales (AUG) will be released, which could provide further ammunition of Canadian Dollar strength on the back of last week’s tremendous CAD Housing Starts (AUG).
EURUSD: The EURUSD has steadied at its 76.4% Fibonacci retracement on the February 2012 high to the July 2012 low at 1.3145, closing below the key ratio on Friday. The pullback today has been shallow, with potential US Dollar strength muted by the Fed. Near-term resistance lies at 1.3145, 1.3165/70, 1.3240, 1.3265/85, and 1.3360. It is possible that a long-term bottom is now in at the 1.2040/45 low set in late-July. Interim support comes in at 1.2995/1.3005 (5-EMA, mid-April swing low), 1.2930/35, and 1.2820/30 (200-DMA, late-April swing high).
BB represents Bollinger Bands ®
USDJPY: The USDJPY has steadied today as it remains supported by a rising US 10-year Treasury Note (widening 2s10s spread). The June 1 swing low at 77.65/70 was broken on Thursday leading to a washout in new lows below 77.30, something repeatedly noted over the past weeks as a potential occurrence. A close above 78.10/20 leaves open the possibility for 78.60 and 79.10/30 (100-DMA, 200-DMA, descending trendline off of the April 20 and June 25 highs). A close below 78.10/20 has interim support at 77.90, 77.65/70 (June 1 low), 77.45/50, and 77.10/15 (September low).
GBPUSD: The key 1.6120/40 level cracked with ease on Friday and our bias looks longer for the foreseeable future. The weekly close above said level opens the door for a move towards 1.6400 in the coming days. The former April swing highs at 1.6260 (by close), 1.6300 (by high) are in focus, now that the descending trendline off of the April 2011 and August 2011 highs broke last week. Below 1.5930/40, near-term support comes in at 1.5860/75 (ascending trendline off of August 2 and August 31 lows), 1.5770/85 (late-August swing lows), and 1.5700.
AUDUSD: The AUDUSD appears to have failed for its breakout on Friday, with an Inverse Hammer/Shooting Star forming on the daily chart at the descending trendline off of the February 2012 and August 2012 highs coming in at 1.0550/60 today. Near-term resistance comes in at 1.0550/60, 1.0600/15 (August high) and 1.0630. Should we see a rally up towards 1.0600 again, another failure would mark a Double Top and signal a push for a test of 1.0250/70 (ascending trendline off of the June 1 and September 6 lows) then 1.0200/05 (100-DMA).
--- Written by Christopher Vecchio, Currency Analyst
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