Indeed the Greek parliament has gone ahead and passed the austerity package by a 155-138 margin which has now eliminated any immediate possibility for Greek default. While we have not at all been surprised to see the Euro rally over the past few days on the expectation of the passage of this package, we are however a little taken aback with the pace of the Euro rally which has also resulted in a suspicious resurgence (at least to us) in global risk appetite. The fact that the Euro and other risk correlated asset classes have continued to remain well bid on this news is somewhat unsettling, with a good deal of uncertainty still surrounding the fate of the region and the ability for the local economy to overcome additional peripheral debt constraints.
Moreover, with the positive news now behind us and additional Euro supportive factors which include a hawkish central bank also being priced in, we feel that there is little additional from for upside from current levels. We are also deeply concerned with the potential impact of any tightenings from the ECB on an economy that could very well be ill positioned to deal with the strain of higher interest rates going forward. On a shorter-term time horizon, market participants should not forget that the Greek parliament still has yet to vote on the privatization and tax reforms plans, which could be a source of added concern. Support from the Greek nation has been seriously lacking throughout the crisis and things only look to be getting worse as protests intensify.
With all of this in mind, we would be wary of the latest rally in the antipodean currencies, which has resulted in an Aussie push back above 1.0700 and Kiwi surge back to record high levels. The flow of funds into these currencies seemingly continues to be driven less on the respective local fundamentals and more so on a desire to diversify away from debt ridden currencies like the Euro and US Dollar. As such, we warn that commodity currency bulls proceed with caution at current levels and actually would recommend looking to fade the current relative outperformance.
The latest data out of New Zealand has produced only some mixed results with building permits struggling and business confidence showing signs of mild improvement. Meanwhile in Australia, economic data has been much less supportive, with the latest releases showing continued softness in credit growth, housing and employment. All of this indicates that any relative strength could very well be temporary.
Looking ahead, the ongoing saga in Greece is expected to continue to dictate direction in price action, with market participants set to continue to digest the results of the Greek austerity vote and Thursday’s pending Greek parliament vote. The key economic releases due in the European session on Thursday include UK Nationwide house prices, German retail sales, German employment and a Eurozone CPI estimate. End of month flows and pre July 4th holiday trade will also likely have an influence on direction throughout the remainder of the day. On the official circuit Fed Bullard is slated to speak on the topic of the asset purchase program, while Fed Hoenig takes the stage in Iowa. US equity futures and commodities prices consolidate their latest gains into the European open.
ECONOMIC CALENDAR
TECHNICAL OUTLOOK
EUR/USD: The market remains well bid on dips towards 1.4000 for now with the latest price action resulting in some consolidation. However, look for any additional rallies from here to be well capped below 1.4500 on a daily close basis ahead of the next downside extension back towards and eventually below 1.4000. A coiling of the 10/20/50/100-Day SMAs also suggests that a near-term break of the range is due, and given the more medium-term structure, we anticipate the break will be to the downside. Ultimately, only a daily close back above 1.4500 gives reason for concern.
USD/JPY: After undergoing a fairly intense drop off from the 85.50 area several days back, the market looks to have finally found some support in the 80.00 area and could be in the process of carving out some form of a base. Look for setbacks to continue to be well supported around 80.00 with only a close back below 79.50 to give reason for concern. From here we see the risks for a fresh upside extension back towards the recent range highs at 85.50 over the coming weeks and the latest break and close back above 81.00 helps to confirm. Look for a test of next key short-term resistance by 82.20 over the coming sessions.
GBP/USD: Although the short-term structure remains bearish, setbacks seem to be well supported in the 1.5900’s for now. However, we classify the latest price action as some bearish consolidation ahead of the next major downside extension with the market now looking to establish back below the 200-Day SMA and extend declines below next key support at 1.5750 further down. In the interim, look for any rallies to be well capped ahead below 1.6250 on a daily close basis. Rallies towards 1.6200 should therefore be sold into.
USD/CHF: Despite the intense downtrend resulting in recently established fresh record lows below 0.8300, short/medium/longer-term technical studies are looking quite stretched to us, and we continue to like the idea of taking shots at buying in anticipation of a major base. Aggressive players may want to consider a counter-trend long on a break to fresh record lows below 0.8275, while conservative contrarians should wait for confirmation on a daily close back above the 20-Day SMA by 0.8400. Back above 0.8550 however will be required to officially relieve immediate downside pressures and accelerate gains.
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