By David Song, Currency Analyst for DailyFX.com
- Euro: Spain Sells EUR 2.58B In Bills, OECD Calls For More Easing
- British Pound: BoE’s Miles Lays Out Exit Strategy, Range-Bound Prices Ahead
- U.S. Dollar: Fed Rhetoric, Consumer Confidence On Tap
March 27, 2012
Euro Heavy As Spain Bond Auction Disappoints, OECD Sees More Easing
March 23, 2012
Risk Correlated Assets Showing Signs of Additional Weakness Ahead
By Joel Kruger, Technical Strategist for DailyFX.com
- Currencies set to consolidate into weekly close
- Overall price action suggests more risk liquidation ahead
- Eurozone Q1 recession probabilities increase
- ECB to likely leave policy accommodative
- Hawkish Fed minority outlook gaining traction
We are in the final sessions of the week and currencies seem content to close out in consolidative fashion, deferring to a busier economic calendar on Monday. However, there is a hint of risk off sentiment in the air, and we could very well see an accelerated liquidation of risk correlated assets over the coming days. Softer PMI data out of China and Europe has certainly contributed to this risk off trade, while signs of additional stress in the Eurozone have also come back to the forefront. The probability that the Eurozone has entered into an official recession in the first quarter has increased substantially, and this will likely keep the ECB in a very relaxed state with its monetary policy.
Meanwhile, the US Dollar remains very well bid on any form of a dip, and the notable shift in Fed policy speak has helped to prop the Greenback. While a majority of Fed officials are still committed to keeping rates ultra low for an extended period of time, there is a growing minority that feels the central bank should start to consider the possibility of reversing policy sooner rather than later. Fed Kocherlakota, Fisher and Bullard have all expressed such views in recent days, and the more hawkish commentary has been influencing price action.
We would recommend keeping a close watch on US equity markets into next week, with stocks showing a clear sign of an interim top in 2012 and warning of a more pronounced decline. On the currency side, the EUR/AUD cross rate has correlated very well with risk, and is now showing signs of the formation of a material base. Technically, the market looks like it could really take off over the coming days and fundamentally this provides added confirmation for our risk negative outlook. Friday should be a very quiet day of trade with very little on the economic calendar, but it will be worth paying attention to some of the key speakers on the day which include Fed Bernanke, Fed Lockhart, ECB Nowotny and EU Barrosso.
March 22, 2012
Softer China HSBC Manufacturing PMIs Open Fresh Wave of Risk Liquidation
By Joel Kruger, Technical Strategist for DailyFX.com
- China PMI results open risk liquidation
- Commodity bloc and emerging market FX exposed
- Global equities also at risk for more sizable pullbacks
- ECB Draghi leaves door open for additional accommodation
Risk correlated currencies have come under intensified pressure into Thursday, with these markets responding to the disappointing China HSBC flash manufacturing PMIs which were well below the 50 boom/bust level. The data sends a message to investors that one of the world’s fastest growing economies is cooling off at a more rapid rate than had been anticipated and could result in another phase of the global recession. We have been projecting this third phase of the global crisis for some time now and have been recommending a liquidation of some of the more correlated markets to the Chinese economy. From here, we forecast relative underperformance in the commodity bloc and emerging market FX, and see cross rates like EUR/AUD benefiting tremendously from the latest deterioration in China.
Global equities are also exposed to these latest developments and we are already seeing signs of some topping in 2012 across all of the major equity markets. Elsewhere, although the Euro has pulled back only a little from near 1.3300 levels, the market should remain well offered on rallies, particularly in light of the latest ECB Draghi comments in which the central banker said that ECB loans will not lead to inflation. These comments suggest that there still could be room for additional accommodation from the ECB going forward. Fed Chairman Ben Bernanke’s remarks from yesterday could also inspire some fresh offers in the Euro. Bernanke said that “further strengthening of the European banking system” would be required as the region faces the risks of a prolonged recession.
March 21, 2012
Technical Outlook of Key Markets to Watch Over Coming Sessions
By Joel Kruger, Technical Strategist for DailyFX.com
- EUR/USD could stall out above 1.3300; look to sell
- Yen crosses well overbought on daily charts; look to sell
- EUR/CHF could be poised for major upside break; look to buy
- EUR/AUD in the process of completing major base; look to buy
- US equities look like they may be topping out in 2012
March 20, 2012
March 13, 2012
March 12, 2012
China Trade Data Acts As Catalyst for Early Week Risk Off Price Action
By Joel Kruger, Technical Strategist for DailyFX.com
- China trade deficit widens on much softer exports
- Third phase of global crisis to impact China, commodity and emerging FX
- Aussie most exposed and already showing signs of weakness
- Yen continues to show signs of major top and structural shift
- Investors start to focus on key event risk in form of FOMC rate decision
A wider trade deficit and disturbingly weak export numbers from China over the weekend have done a good job of weighing on sentiment into Monday, with currencies coming under some added pressure against the US Dollar. We have been warning for some time of a third phase of the global recession which should originate in China and spread to the commodity correlated economies and other emerging markets. Many of these economies have managed to outperform throughout the crisis thus far, with investors seeing these regions as attractive alternatives to a very troubled US and European economy.
However, we have always had a hard time digesting the safe haven flows into these traditionally risk correlated markets, and we finally think that things are catching up and we could soon see an aggressive liquidation of investment in these regions as the global recession enters its final phase. As far as the more major currencies are concerned, we are projecting underperformance in currencies like the Australian Dollar, New Zealand Dollar and Canadian Dollar going forward, and even see these currencies suffering against a recently beaten down Euro currency. Australian should be the most exposed given the wider yield differential and with recent economic data out of the country also disappointing (see latest employment and GDP results), we are getting added confirmation for a bearish outlook on the commodity currency.
Elsewhere, another major shift in the FX markets is underway with the Yen, as the currency continues to show evidence of a major structural shift which points to a significant top and material weakness going forward. The most compelling evidence for this structural shift comes from the weekly USD/JPY chart which shows the market closing back above the Ichimoku cloud for the first time since the summer of 2007. While short-term studies are looking a little stretched and could warn of some pullbacks, we expect any pullbacks to now be very well supported above 78.00 in favor of fresh upside into the 85.00-90.00 area over the coming months. As a reminder, the nice thing about shorting the Yen is that is doesn’t cost anything to hold the position on a daily basis.
Looking ahead, the key event risk for the week will come in the form of the FOMC rate decision. The central bank meeting will take on added significance with US economic data showing more consistent signs of recovery and increasing speculation that the Fed may need to reconsider their ultra accommodative stance. While we do not expect the Fed to reverse policy just yet, Mr. Bernanke and company could look to firm things up just a bit by removing the keeping rates ultra low through 2014 language. Should the Fed move in this direction, then we could see added pressure on US equities as market participants become less comfortable with the idea of higher interest rates. We would also see a stronger US Dollar on a narrowing of yield differentials.
March 9, 2012
Monthly US Employment Data to Take on Added Significance
By Joel Kruger, Technical Strategist for DailyFX.com
- Greek PSI to go through; helps bolster risk appetite
- US NFPs due later; could impact Fed policy
- EU final decision on Greece second bailout ahead
Presumably, the renewed bid tone in the markets over the past 24 hours has been primarily driven off the fact that Greece has secured a 95% take up rate for the debt swap deal. Market participants have found comfort in this fact and the successful passage of the deal will help eliminate any added unwelcome uncertainty in a still shaky global macro environment. However, from here, we are not all that confident in the prospects for additional risk buying on Friday and things are expected to pick up into the latter half of the day with the all important monthly US NFP data, immediately followed by the EU’s final decision on Greece’s second bailout.
Today’s NFP report will take on added meaning, with the numbers likely to fuel more intense speculation over what the Fed will do at next week’s policy meeting. In recent weeks, it has become more apparent that the signs of pickup in the US economy are starting to impact the Fed and any additional confirmation of steady recovery could very well inspire an earlier reversal of monetary policy than expected. Interestingly enough, we therefore see the risks from today’s data tilted to the downside no matter what the number. Should the NFP number come in better than expected, this will scare markets into thinking that the Fed will indeed look to adopt a less dovish tone at next week’s meeting. Less dovish to investors translates into higher funding costs for equity investments and a reduction in stimulus incentives. As such, better NFP could very well mean lower equities and stronger US Dollar on narrowing yield differentials.
On the other hand, should the NFP data come out weaker than expected, risk markets will likely come under pressure on concern for the weaker data, and although this will do more to keep the Fed from shifting its policy stance, we feel it will still be too hard for investors to feel good about buying risk on a bleaker US employment picture. Overall, our outlook for today’s NFP data jives well with our bearish view of US equities and risk. We continue to have a hard time accepting that US equities are so close to the record 2007 highs with the global economy having gone through a major recession over the past few years. While we understand the incentive of buying equities at ultra attractive valuations given the historically low rate environment, we still feel that the more realistic scenario from here is for a renewed bout of weakness in US and global equities.
ECONOMIC CALENDAR
TECHNICAL OUTLOOK
EUR/USD: Setbacks have been supported for now by the 50-day SMA and top of the Ichimoku cloud and the market seems to be content on some sideways consolidation before making any clear directional move. The key levels to watch above and below come in by 1.3325 and 1.3095 respectively, and we will need to see a break and close above or below either for an indication of where this market could be headed over the short-term. A close above 1.3325 will reintroduce the possibility for additional gains towards 1.3500, while a close back under 1.3095 will open deeper setbacks towards next key support at 1.2975 further down.
USD/JPY: The market is doing a good job of showing the potential for the formation of a major cyclical bottom after taking out the 200-Day SMA and now clearing psychological barriers by 80.00 for the first time in 6 months. This further solidifies basing prospects and we could be in the process of seeing a major bullish structural shift that exposes a move towards 85.00-90.00 over the coming months. At this point, only back under 77.00 would delay outlook and give reason for concern. However, in the interim, it is worth noting that gains beyond 82.00 over the coming sessions could prove hard to come by with technical studies needing to unwind from their most overbought levels in over 10 years before a bullish continuation. As such, we would caution buying breaks above 82.00 for the time being and instead recommend looking for opportunities to buy on dips into the 78.00-80.00 area.
GBP/USD: Overall, this market is going nowhere right now and remains confined to a choppy multi-day range. This range has been loosely defined between the 100/200-day SMAs, and at this point, it will take a clear and sustained break above the 200-Day SMA or back below the 100-Day SMA for additional clarity into the broader direction.
USD/CHF: Setbacks have stalled for now just ahead of 0.8900 and the market could finally be looking to carve the next medium-term higher low ahead of a bullish resumption and eventual break back above 0.9660. Look for additional gains over the coming sessions back towards 0.9300, with a break above to confirm and accelerate. Ultimately, only a drop below 0.8930 negates and gives reason for pause.
— Written by Joel Kruger, Technical Currency Strategist
To contact Joel Kruger, email jskruger@dailyfx.com. Follow me on Twitter @JoelKruger
To be added to Joel Kruger’s distribution list, send an email with subject line “Distribution List” to jskruger@dailyfx.com
March 8, 2012
March 6, 2012
RBA Leaves Rates on Hold As Expected; Risk Off Trade Carries into Tuesday
By Joel Kruger, Technical Strategist for DailyFX.com
- RBA leaves rates on hold at 4.25% as expected
- Accompanying language slightly more downbeat than expected
- China growth forecast downgrade and Greek PSI outcome weighing
- Kiwi is the hardest currency on the day thus far
- Investors looking ahead to RBNZ, BOE, ECB and NFPs
The first big event risk of the week is now out of the way, with the RBA leaving rates on hold at 4.25% as was widely expected. The accompanying central bank statement offered nothing surprising but did show a slightly more downbeat slant than perhaps expected, after citing concerns over global growth and maintaining an easing bias. The Australian Dollar has been sold since the rate decision and the less upbeat tone along with broader risk off themes have been driving the relative weakness. China’s lowered growth forecasts have not helped matters and this already follows some softer local PMI readings.
The New Zealand Dollar however has been the standout underperformer on the day thus far, with the market accelerating to the downside following a break of some key support by 0.8250 in the previous day. Elsewhere, ongoing concerns over the outcome of the Greek PSI talks will likely provide an added layer of uncertainty in the markets and developments on this front should be watched closely. Investors will also continue to look ahead to the risk in the latter half of the week associated with the RBNZ, BOE, and ECB rate decisions, along with US NFPs.