Forex

Euro Dollar

The Euro came very close to the 4-hour channel on Friday, after breaking the support specified in the report, and the drop stopped only 2 pips before the first suggested target 1.3852. With this move taking us close to the channel bottom, and then a fast bounce reaching 1.3666, the odds of an upside correction remains present, but we need a break of 1.3666 before we can say the odds favor that. Short-term resistance is at 1.3666, and breaking it would indicate that the price is already moving higher after the drop we witnessed last week, even if that was only for a short term correction. The targets for such a correction would be 1.3752 & 1.3805. While the support is at 1.3620, and breaking it would bring back Friday’s target under the spotlight: 1.3582 & 1.3516.

Support:
• 1.3620: the falling trend line drawn from Jan 21st bottom (1.4027) on the hourly chart.
• 1.3582: Apr 6th high.
• 1.3516: Apr 2nd high.

Resistance:
• 1.3666: short term resistance.
• 1.3752: Fibonacci 38.2% for the last drop from 1.4025.
• 1.3805: Fibonacci 50% for the last drop from 1.4025.

—

USD/JPY

The Pound dropped in a free fall after breaking the support specified in Friday’s report 1.5690, and reached the target 1.5614 successfully. This morning, a new bottom was reached at 1.5532. It seems that this sharp trend is not tired yet, especially after breaking the falling trend channel to the downside, which contributed to this sharp drop. Thus, we will maintain a negative outlook, as long as the price is trading below the bottom of the channel which is at 1.5704 currently. And even though the price is far from this level at the moment, we will consider this to be resistance of the day, and only if it is broken that we will change our long held negative outlook. If this surprise happens, and we break 1.5704 we will target short term Fibonacci retracement levels 1.5800 & 1.5862. As for the support it is at the nearby 1.5543, and breaking it would indicate that this Dollar tornado will not stop soon, targeting 1.5445 & the important 1.5350.

Support:
• 1.5543: intraday support.
• 1.5614: Nov 28th 2008 high.
• 1.5512: May 12th high.

Resistance:
• 1.5704 the bottom of the falling broken trend channel.
• 1.5800: Fibonacci 50% for the last drop from 1.6067.
• 1.3863: Fibonacci 61.8% for the last drop from 1.6067.

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EUR/USD: +1.3660+

Euro’s rebound after the the selloff to a
8-month low of 1.3648 suggests a temp. low is possi
bly made n consolidation with upside bias is seen
for a minor retrace. to 1.3727, however, res at 1.
3747 shud cap upside n yield selloff later.

Buy on dips for gain to 1.3720 or if euro rises
to 1.3725 1st, sell for weakness to 1.3670 n 1.3648

Range Forecast
1.3660 / 1.3710

Resistance/Support
R: 1.3747/1.3772/1.3826
S: 1.3648/1.3584/1.3500

CURRENCY TRADING SUMMARY – 5th February (00:30GMT)

U.S. Dollar Trading (USD) broad based gains on the back of risk aversion and safe haven flows saw the USD trade at fresh 2010 highs. Stocks crashed as the market was spooked by European Debt concerns and rapid falls in commodities. In US stocks DJIA -26 points closing at 10270, S&P -6 points closing at 1097 and NASDAQ +1 points closing at 2190. Looking ahead, January Unemployment Rate forecast at 10.1% vs. 10.0% previously. January NonFarm Payrolls are forecast at 5k vs. -85k previously.

The Euro (EUR) broke through support at 1.3850 as concerns about Portugal and Spain debt added to the Greece saga. The ECB held rates at 1.0% but the President Trichet failed to install confidence at the press conference. Overall the EUR/USD traded with a low of 1.3712 and a high of 1.3905 before closing at 1.3740. Looking ahead, December Industrial Output is forecast at 0.5% vs. 0.7%.

The Japanese Yen (JPY) was the strongest currency as USD/JPY slumped through supports at Y90 and crosses crashed lower. GBP/JPY traded below Y140 and EUR/JPY slumped to below Y122. Yen strength was especially seen after the US Weekly Jobless claims increased to 480k. Overall the USDJPY traded with a low of 88.53 and a high of 91.10 before closing the day around 89.10 in the New York session. Looking ahead, December Leading Indicators Index previously at 1.8.

The Sterling (GBP) managed a brief rally after the BOE held at 0.5% and kept the Asset Purchase Program at 200bn. Heavy GBP/JPY selling in the US session resumed the pressure on the downside and cable fell through 1.5800. Overall the GBP/USD traded with a low of 1.5729 and a high of 1.5921 before closing the day at 1.5760 in the New York session. Looking ahead, January PPI Output forecast at 0.35 vs. 0.55 previously.

The Australian Dollar (AUD) was under heavy pressure with stock/commodity crash and weak December Retail Sales at -0.7% vs. -0.2%m/m previously. AUD/JPY slumped over 3 Yen in the US session as longs capitulated and AUD/USD broke through December lows at 0.8735. Overall the AUD/USD traded with a low of 0.8605 and a high of 0.8828 before closing the US session at 0.8640. Looking ahead, RBA monetary statement released.

Oil & Gold (XAU) Gold broke through recent supports falling over $40 an ounce on the day. Overall trading with a low of USD$1059 and high of USD$1111 before ending the New York session at USD$1168 an ounce. Fell over 5% as investors bailed out of riskier trades. Crude Oil was up $-3.76 ending the New York session at $73.25.

TECHNICAL COMMENTARY

Euro – 1.3730

Initial support at 1.3584 (May 20 low) followed by 1.3485 (61.8% retrace of 1.2459 to 1.5144). Initial resistance is now located at 1.3903 (Feb 4 high) followed by 1.4026 (Feb 3 high)

Yen – 89.25

Initial support is located at 89.00 (big figure) followed by 88.50 (Feb 4 low). Initial resistance is now at 90 (key level) followed by 91.28 (Feb 3 high).

Pound – 1.5760

Initial support at 1.5708 (Oct 13 low) followed by 1.5517 (May 21 low). Initial resistance is now at 1.5918 (Feb 4) followed by 1.6069 (Feb 3 high).

Australian Dollar – 0.8675

Initial support at 0.8647 (Oct 5 low) followed by the 0.8570 (Oct 2 low). Initial resistance is now at 0.8826 (Feb 4 high) followed by 0.8928 (Feb 2 high).

Gold – 1065

Initial support at 1055 (Nov 3 low) followed by 1041 (Nov 2 low). Initial resistance is now at 1100 (Big figure) followed by 1125 (Feb 3 high).

Oil – 73.30

Initial support at 73.00 (Intraday Support) followed by 72.50 (Intraday Support). Initial resistance is now at 75.00 (Intraday Resistance) followed by 77.00 (Intraday Resistance).

The euro continued to dive against the U.S. dollar on Thursday, fast approaching an 8-month low as European stock markets plummeted after worse-than-expected U.S. employment data.

EUR/USD hit 1.3777 toward the end of the European trading session, its lowest rate since June 16.

The pair was likely to find immediate support at 1.3747, the low of June 16, and long-term support at 1.3423, the low of May 18. It was likely to find resistance at 1.4026, Wednesday’s high.

Earlier Thursday, a seasonally adjusted report released by the U.S. Department of Labor showed that the number of U.S. workers filing new claims for unemployment benefits rose unexpectedly last week.

Meanwhile, European Central Bank President Jean-Cladue Trichet said on Thursday he was “confident” that Greece would take the necessary action to cut its spiraling budget deficit, after the ECB kept its interest rate at a record low of 1%.

We pointed out 2 weeks ago that the ongoing decline (weakening) of the once strong inverse correlation between equities and USD would lead to a scenario of prolonged US strength regardless of the evolving trend in equities. As the correlation weakened from a strong -0.94 in November to -0.26 in the 1st week of January, it enabled us to forecast further advances in the greenback irrespective of intraday or daily moves in equities. By taking the other side of the coin and using the daily relation between EURUSD and S&P500, the positive correlation has now fallen from +0.94 in November to a statistically insignificant +0.27 (9-month low).

And as the relationship between FX and equities fades away, the role of yield differentials is strongly back in play, especially for the high profile EURUSD rate. The chart below clearly shows the correlation between German & US 10 year yield spread and EURUSD at an 8-month high of +0.61. Such strong correlation implies that as US yields (now at 3.68%) further gain above their German counterparts (now at 3.22%), the USD dollar strengthens further against EUR, thereby dragging down EURUSD. As markets expect the ECB to maintain rates unchanged (no tightening) and more FOMC members to dissent against the stance of exceptionally low levels of fed funds rate for an extended period, the US yield foundation is expected to further work in favour of the USD against EUR. The $1.38 target issued in January remains intact with a 60% probability of seeing a $1.32 in March.

Deepening the analysis into the sovereign spread situation, it is worth noting a possible recurrence of a double-take, similar to that March 2009. The charts in the lower frame below represent the spreads of 10-year yields of selected Eurozone nations over that of Germany (considered the safest bond in the Eurozone). Greek 10 year yields soared to as high as 400 bps above those of Germany, while Portuguese and Spanish yields hit 129 bps and 0.98 bps respectively.

Although all of the spreads have now stabilized–partly due to EUs approval of Greeces debt plan, the risk for fresh jitters remain ample. The EU Commission said it was launching legal proceedings against Greece for unreliable fiscal statistics. As markets keep a close watch on Greece and its interaction with the Commission, the negative FX bias will remains specially that the EU has asked it to reduce its budget deficit to 3% of GDP by 2012 from above 12% today. The Commission will review Greece’s progress on March 16, then on May 16,

While Greece and Portuguese debt are stealing the headlines, Spain’s fiscal situation also merits focus. 4 months after it projected a 2009 deficit of 5.2% of GDP, Spain issued a new forecast of 11.4% of GDP. Not only data reliability is questionable, but so are any signs of any recovery. This week, Eurozone manufacturing PMI showed its fastest pace in reaching 52.4 in Jan, while Spains own PMI remained adrift in sub-50 territory at 45.3. With unemployment exceeding 4 million, the macroeconomic situation remains an obstacle to any austere fiscal policies.

Incorporating these dynamics with dissenting FOMC members and struggling global indices (have yet to regain their 55-day MAs), the US dollar faces prolonged upside ahead.

Ashraf Laidi

http://www.ashraflaidi.com

The EURUSD has continued to pause at the 1.3900 level (low has stalled at 1.3901 for the last two hourly bars).  Admittedly, the highs have been very modest with the high correction remaining below the 100 hour MA currently at the 1.3934 level (negative bias).  With the narrow range we will continue to watch the  relevant technical levels for support/resistance clues. Breaks above or below should lead to movements in the direction of the move.

The 1.3918 level is the 61.8% retracement level of the move up from the weeks low to the high.  The price below this level gives another negative bias.  Therefore, watch for a move above this level.  If it occurs we will look for a test of the  100 hour MA at the 1.3934 (blue line in the chart above).    On the downside, the 1.3900 remains key.  A break should not be faded and should lead to a continuation of the lower bias with 1.3885 the next level to get through.

With narrow ranges, the steps in either direction become more contained.  The move today down from the 200 hour MA was the big move for the day. The action in the NY afternoon becomes a little more consolidative after the sharp move down.  This  allows for the market to catch its collective breathe as it prepares for the next move (either up or down).

• The dollar drifted lower versus most major currencies on Tuesday. Economic releases were light ahead of Friday’s important US employment data. US December pending home sales increased modestly following November’s record drop. The dollar index fell for a second day, easing deflationary pressures on stocks and commodity prices. The S&P 500 rose 14.13 to 1,103.32, remaining above the 1,100 resistance for 8 days. The yen was up slightly against the greenback while little changed versus the euro. The single currency rose for a second day ahead of the European Commission’s report on the Greek financial plan. Sterling was higher but unable to rise above the 1.60 handle. The Canadian dollar rose on higher commodity prices.
• The AUD/USD fell after the Reserve Bank of Australia unexpectedly kept its key interest rate unchanged at 3.75%. RBA Governor Glenn Stevens said rates will be “adjusted further” to keep inflation within the target range of 2%-3% if the economy “evolves broadly as expected.” The pair has recently been pressured by consolidating commodity prices and fears that China’s tightening will reduce Chinese economic growth. After breaking its strong uptrend late last year, the AUD/USD had made a triple top. The 0.87-0.88 area support held today. There is important support in the 0.86 area. If this support is broken, the AUD/USD will turn more bearish.

Financial and Economic News and Comments

US & Canada

• US pending home sales grew a more-than-expected 1.0% m/m in December after a revised 16.4% m/m November fall that was the largest since records began in 2001, with the US pending home sales index released by the National Association of Realtors increasing to 96.6 from November’s downwardly revised 95.6. December pending home sales rose 10.9% y/y, showing a broad improvement in sales over December 2008’s level.

Europe

• Eurozone producer prices were up 0.1% m/m in December, a third consecutive month-on-month increase, after an upwardly revised 0.2% m/m advance in November, Eurostat reported. December producer prices slid a less-than-expected 2.9% y/y following a 4.4% y/y November decrease, registering the longest 12-month stretch of declines since a 14-month slide in 1998-1999.

• Germany’s retail sales, adjusted for calendar and seasonal variations, increased a slightly less-than-expected 0.8% m/m in December, the third gain in 4 months, after a revised 1.7% m/m decline in November, data from the Federal Statistical Office showed. December retail sales fell as forecast 2.5% y/y, a fifth consecutive year-on-year decline, following November’s revised 2.5% y/y fall.
• The CIPS/Markit UK construction PMI increased to a higher-than-expected 48.6 in January from 47.1 in December, indicating the pace of contraction in the UK construction sector slowed for a third consecutive month, according to data released by Markit Economics and the Chartered Institute of Purchasing and Supply.
• The quarterly SECO Swiss consumer confidence survey index improved to -7 in January from -14 in October 2009, indicating a continued improvement in Switzerland’s consumer confidence, the State Secretariat for Economic Affairs said.

Asia-Pacific

• Japan’s monetary base increased 4.9% y/y in January after rising 5.2% y/y in December, according to a report released by the Bank of Japan.
• Japanese labor cash earnings fell 6.1% y/y to ¥549,259 ($6,051) in December, deepening the pace of declines following a revised 2.4% y/y November decrease, according to figures from the Ministry of Health, Labor and Welfare.
• The NAB Australian business sentiment index fell to 8 in December from 19 in November, indicating Australia’s business confidence declined to the lowest level in six months, according to a survey released by National Australia Bank Ltd. The business conditions index held steady at 10 in December, suggesting conditions on hiring, sales and profits remained unchanged from the prior month.
• The Australian Industry Group/Commonwealth Bank performance of services index declined to 47.4 in January from 50.0 in December, indicating Australia’s services activity contracted for the first time in four months, a report by the AiG and Commonwealth Bank of Australia showed.

FX Strategy Update

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