ASIA/EUROPE FOREX NEWS WRAP
Despite pleas from policymakers that growth would return to the Euro-zone “later in the year,” there are very few signs to support that notion. More recently, we’ve seen unemployment rates in peripheral countries like Spain hit fresh record highs, while government estimates across the continent for deficit reduction and growth amid austerity conditions continue to erode. Today, we received another batch of soft European data that paints an even gloomier picture of the region: a deepening recession that will easily take the rest of 2013 to see some of its effects reversed.
The Euro-zone estimate for inflation in April rate fell to +1.2% y/y today, its lowest such rate since February 2010, as consumer demand has been absolutely demolished in the world’s largest economic region. Why does inflation matter so much to policymakers? Changes in prices are viewed as a proxy for demand: when demand increases, a stable supply sees higher prices first, before production is boosted to bring the market back to a state of equilibrium. Thus, if price pressures remain positive but are falling – disinflation – then that must mean that aggregate demand is weakening as well.
When we consider the softer price environment resulting from demand in context of the broader picture, it’s evident that the European consumer is going to be embroiled in weakness for some time. The Euro-zone unemployment rate hit 12.1% in March, the highest such rate ever, drawing a poignant contrast to the much more stable labor markets in the United Kingdom (which actually has been a positive for several months now) and in the United States. Needless to say, with a European Central Bank meeting in just two days, the scales are certainly tipping towards at least a 25-bps rate cut.
Taking a look at European credit, a rally in sovereign debt has done little to help the Euro as it appears market participants are pricing in further dovish policy by the ECB. The Italian 2-year note yield has decreased to 1.080% (-5.0-bps) while the Spanish 2-year note yield has decreased to 1.645% (-7.2-bps). Likewise, the Italian 10-year note yield has decreased to 3.886% (-1.5-bps) while the Spanish 10-year note yield has decreased to 4.100% (-3.5-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:45 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.03% (-1.08% past 5-days)
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: The data this morning has kept the pair lower, and once again holding near the magnetic 38.2% Fibonacci retracement on the July 2012 low at 1.2041 to the February 2013 high at 1.3710. The reaction seen today off the data was unique: aggregately, it points to a rate cut by the ECB; yet the EURUSD set its daily low the minute the inflation and labor market data was released. Perhaps this means the market is interpreting a rate cut as a positive (just as the July 2011 ECB rate hike under then-president Jean-Claude Trichet caused the EURUSD to fall). In either case, I’m neutral until the meeting, but will be looking to sell.
USDJPY: No change as price leaks below the 21-EMA: “The Bullish Ascending Triangle pattern was negated late last week and now price has traded below both the 8- and the 21-EMAs, amid a break in the daily RSI uptrend. On Friday I noted “the USDJPY appears ripe for a pullback, which could be provoked by a weaker than expected US 1Q’13 GDP reading.” With this transpiring, a break of the 21-EMA at 97.80/85 could see price extend its losses to former resistance now support at 96.60.”
GBPUSD: No change: “The GBPUSD is finding modest follow through (no doubt tempered ahead of the US 1Q’13 GDP print), pushing closer towards 1.5500 now that mid-April resistance at 1.5410/15 cracked yesterday. If the ascending channel range is to continue to play out, a run towards 1.5550 shouldn’t be ruled out. Declines should be supported in the near-term by 1.5340 (8-EMA) and 1.5285/90 (21-EMA).” The move towards the topside channel rail at 1.5540/60 should bring about some relief; and if the range is to hold, the next leg lower should begin in early-May.
AUDUSD: No change as daily price forms a small Inverted Hammer: “Last week I said: “Mid last week the 8-/21-EMA structure flipped bearish amid the breakdown in the RSI uptrend, coinciding with the rally off of the March 4 and April 8 lows. Fundamentally speaking, amid declining base metals’ prices and poor data out of China, it is our preference to sell the commodity currencies. Technically speaking, it is worth noting that the AUDUSD failed to find follow through on the potential basing pattern, a three day cluster of “Doji-Hammer-Doji.””The back-to-back Inverted Hammers haven’t seen any follow through and now the 8-/21-EMA structure is compressing to the upside, perhaps negating the bearish signal. I’m neutral but looking to sell a rally.”
S&P 500: No change: “Is the top in? A dramatic sell-off yesterday dropped the S&P 500 below the crucial 1570/75 area, former swing highs as well as the ascending trendline support off of the late-December and late-February swings lows – coincidentally the pre-fiscal cliff deal low and the post-Italian election low. We’re in a bit of “no man’s land” here, with either a close back above 1570/75 necessary for a retest of the highs, or a close below 1530/35 to signal weakness towards and below 1500.”
GOLD: No change: “The major support zone from the past 18-months from 1520 to 1575 gave way with fervor last week, as the combination of weak fundamentals (financial institutions scrambling for cash in Europe after Cyprus) and broken technicals produced the ideal selling climate. Precious metals in general have gotten hammered, and Gold has fallen back to the mid-March swing lows near 1380/85. A weekly close below 1430 this week leaves the possibility of a bigger dip towards 1305.”
--- Written by Christopher Vecchio, Currency Analyst
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