ASIA/EUROPE FOREX NEWS WRAP
The Euro, alongside the two North American currencies, is leading the majors this morning after the return of liquidity during European trading hours (Australia and China were on holiday today) brought to the table fresh buyers and sellers to start the second week of June. While the US Dollar had quickly asserted itself in thin Asian trading, the big focuses today were on the continued selling of the Australian Dollar and the renewed selling pressure in the Japanese Yen.
On the Australian Dollar: Chinese data over the weekend couldn’t have possibly been more disappointing, with the Consumer Price Index (MAY) (+2.1% versus +2.5% expected y/y), Producer Price Index (MAY) (-2.9% versus -2.5% expected y/y), and Industrial Production (MAY) (+9.2% versus +9.4% expected y/y) all disappointing. Considered alongside last Friday’s Chinese Trade Balance (MAY) release (Exports: +1.0% versus +7.4% expected y/y; Imports: -0.3% versus +6.6% expected y/y), it’s clear that the concerns over the Australian Dollar are warranted, and that we may be at the beginning of a larger selloff that will take place over the rest of 2013.
On the Japanese Yen: the Japanese Government Pension Investment Fund, the world’s largest with assets greater than $1.1T, announced over the weekend that it would reallocate capital away from bonds and towards equities, in what Japanese PM Abe hopes will be a way to revitalize the nation’s future welfare. Further, 1Q’13 GDP figures were revised higher last night (+4.1% versus +3.5% expected annualized), and while this typically would be an endorsement for tighter monetary policy, I view it differently. Instead, the stronger growth figures serve as an endorsement of ‘Abenomics’ – the policy that has lifted Japanese equities, sunk the Yen, and provoked excessive volatility in JGBs. Tonight’s BoJ Rate Decision is key.
Taking a look at European credit, bonds are up across the entire region, but for slightly higher yields in Italy and Portugal. The Italian 2-year note yield has increased to 1.505% (+0.1-bps) while the Spanish 2-year note yield has decreased to 1.959% (-6.0-bps). Similarly, the Italian 10-year note yield has increased to 4.186% (+0.1-bps) while the Spanish 10-year note yield has decreased to 4.493% (-3.2-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:20 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.42% (+0.02%past 5-days)
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: With daily RSI divergence presenting itself dating back to the yearly high set in February, the EURUSD is facing resistance at 1.3300/20 (late-February swing high post-Italian election, 23.6% Fibonacci retracement on Jul’12 low to Feb’13 high). At this point in time, I still favor a bullish bias, but there is evidence of overextension in the near-term given 1H and 4H RSI divergence. Now, the bigger pattern (Head & Shoulders) is in conflict with momentum (8-EMA>21-EMA>200-SMA); I prefer to stay neutral.
USDJPY: On Friday I said: “The previously-thought critical support of ¥98.60 proved to be just that: traders held massive stops below this level, and the break provoked the largest USDJPY selloff in three years…A poor showing by NFPs today dictates a move lower towards 94.40/75 and 92.60/80. A strong print could see the pair back to 97.40 and 98.60.” 98.60 was indeed reclaimed today, and basing on 15-min charts above this area suggests that a move further towards the 50% decline (May 22 high at 103.73 to the June 7 low at 94.98) at 99.35 is possible. Fundamental risk: the BoJ meets tonight and it is unlikely they announce major new measures or implement some type of support structure to anchor JGB volatility. I favor weakness after the US session close today.
GBPUSD: No change from Friday: “Indeed, the pair has rallied to the 200-SMA at 1.5700 before reversing, and finds itself holding near early-May highs, as well as the 50% Fibonacci retracement of the January high to March low, at 1.5585. Similarly, the pair found resistance at the top rail of the ascending channel off of the March and May lows (drawn to the early-May high); and in context of the daily RSI failing at 66 again. A near-term top may be forming, but it’s best to be neutral in my opinion.”
AUDUSD: Rebounds have been shallow below the ascending trendline off of the October 2011 and June 2012 lows, suggesting that a top in the pair is in place, going back to the July 2011 high at $1.1071. Although there was some upside in the middle of last week, the AUDUSD once again finds itself down at new lows after a bounce, and price has fallen back to the 50% Fibonacci retracement from the May 2010 low to the July 2011 high, at 0.9572, and searching for a base near the October 2011 low at 0.9385/90. Despite excessive downside weakness, retail traders remain long, suggesting that a break below 0.9385/90 – in what would also be a break below major lows set a year ago this past week – could see 0.9380/90 and 0.9210/20 eyed lower.
S&P 500: The S&P 500 found support ahead of the 61.8% Fibonacci retracement of the April swing low to May swing high (1593.6) on Thursday, and following the better NFP print, and closed the week above the conflux of the 8-/21-EMA at 1630/33. Now price faces a new challenge: the 61.8% Fibonacci retracement of the decline from the May high to the low on Thursday at 1653. A daily close here opens the door for a run back at the yearly high of 1687.4.
GOLD: No change: “If the US Dollar turns around, however (as many of the techs are starting to point to), then Gold will have a difficult gaining momentum higher. Indeed this has been the case, with Gold failing to reclaim the 61.8% Fibonacci retracement of the April meltdown at $1487.65, only peaking above it by 35 cents for a moment a few weeks ago.”
--- Written by Christopher Vecchio, Currency Analyst
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