We are seeing a slight pullback in the EUR optimism that took shape last week. The EUR selling in light volume was partially driven by Telegraph & FT articles which reported that Irish lenders are actively calling on the emergency liquidity assistance program since they have run out of collateral used to borrow from the ECB. Support for the story came from data on Friday which stated that Irish banks had borrowed €51bn of emergency funds plus €132bn from the ECB normal facilities. As such, EURUSD traded to 1.3260 from 1.3400. In addition, the lingering effect of Fitch’s downgrade of Greece’s sovereign debt rating to BB+ outlook negative from BBB- (putting all three primary rating agencies sub investment grade), has dampened the EUR’s short squeeze driven positive momentum.
Last week the single currency made big strides in eliminating the “sell any rally” philosophy, as the market woke up to the realization that EU nations would do whatever it takes to support the EUR, and the ECB was still committed to its single mandate inflation-fighting stance. The suggestion of expanding the EFSF, both in size and eligible debt, seems to have temporarily convinced the market of the EU’s commitment. Some doubters do remain though; including German Finance Minister Schaeuble who sounded somewhat weary regarding the practical limitations of the EFSF, and Chancellor Merkel who still sounds hesitant to approve a quick solution, stating the plan must contain a “complete strategy that must absolutely include closer economic coordination”. Even these comments however, which would have otherwise been interpreted as bearish, failed to halt EUR bears from unwinding their short positions.
Today traders will be focused on any headlines out of today’s Eurogroup meeting and ECOFIN tomorrow. In the absence of any erosion of EU members’ commitment to the EFSF we suspect the EUR will hold its ground and ensure pullbacks are temporary and limited. In China, the 50bp RRR hike on Friday (watch for further hikes this year) continues to take its toll on risk appetite. The Shanghai Composite declined a whopping -3.03% pulling Asian regional indexes and risk correlated trades down with it (Nikkei the lone exception). While not directly connected, PBoC officials halted the CNY drop against the USD at 6.5897 vs. 6.596 last fix. Clearly the sudden appreciation of the CNY was due to Presidents Hu’s visit to Washington this week and the puppet-like movement of the CNY was geared towards illustrating China’s economic control. We believe that after China’s hugely successfully European tour the US’s ability to strong arm China has completely evaporated. President Hu declared today that the dominate role of the USD was a “product of the past.”
And in Switzerland, the currency summit last Friday failed to make any sensible or meaningful headway on the question of CHF appreciation (other than CHF strength was bad for business) , especially given the lack of SNB participation. Outside the summit SNB Chairman Hildebrand stated the SNB FX policy was unchanged; regardless of massive losses due to CHF intervention. Sounds like we are in for a BoJ verbal interventionist’s strategy from the SNB as physical intervention will not be seen as a positive by most Swiss public officials.
00:00 EUR Eurogroup meeting in Brussels
00:00 USD Martin Luther King, Jr. Day USA Holiday
09:00 SEK AMV Unemployment rate, % 4.5% exp, 4.3 prior
12:15 USD Philadelphia Fed President Plosser (FOMC non-voter)
The Risk Today: EurUsd Last week EURUSD only seemed capable of heading in one direction, as the pair soared off its 1.2874 lows (seen 9-10 Jan) and finally hit a peak of 1.3457 on Friday. But that was last week; and since hitting those highs, we have pared back lower –just this morning breaking below the 1.3315-20 support (Friday lows and 23.6% fibonacci retracement of the whole rally). Despite this retracement, we do feel that last week’s price action was symptomatic of a change in the market’s core view, and that buying on dips is the way to proceed. In terms of how deep those dips may be, next supports to watch will be 1.3234 (38.2% fibonacci retracement), 1.3165 (50% fibonacci level) and 1.3145 (12 Jan high former resistance).Below there we have a large gap before major support at 1.3085 (the 29 Dec pivot and 13 Jan low). Looking at the topside, Friday’s high of 1.3457 is the first resistance level of note, followed by the hugely important 1.3500 level –significant not only for its psychological effect, but also because it coincides with the 14 Dec high. Going forward the next levels to watch above are seen at 1.3635 (23 Nov high), 1.3785 (22 Nov high) and 1.3825 (10-11 Nov highs).
GbpUsd GBPUSD has managed to hold onto its gains much better than EURUSD going into this week, buoyed possibly by the retracement in EURGBP since Friday. The high so far in this rally has been 1.5890 (touched late on Friday); and should we manage to break above there, next levels are expected at 1.5910 (14 Dec high), 1.5950 (last seen 23 Nov), then the significant psychological level 1.6000. With UK CPI data due tomorrow (and risks naturally skewed to the upside) there is a possibility the rally could continue straight on up through 1.6000, in which case we note next resistance at 1.6095 (19 Nov high) and 1.6185 (9, 10 & 12 Nov triple high). Near-term support comes in at today’s low 1.5815, then 1.5785 (former resistance now turned support), and 1.5718 (13 Jan low). More distant supports noted at 1.5583 (12 Jan low), 1.5513 (11 Jan low), 1.5476 (10 Jan low) 1.5427 (200-day moving average), and 1.5405 (Friday’s low).
UsdJpy Just as we suspected would happen in our last report, USDJPY found support just ahead of its 3-week uptrend channel (around 82.40), and has now managed to rebound back towards 83.00. Nevertheless, the price action is still pretty subdued, and the pair will have to break above 83.25 (upper edge of a 1-2 week downtrend channel) to prove it has shaken off the bears. Until that point, watch for any further re-tests of the 3-week uptrend, whose trendline now comes in below at 82.50. There are quite a few support levels clustered in that area at the moment which may slow downside progress; aside from 82.50 uptrend support we also have Friday’s low 82.40, and the lower edge of the current downtrend at 82.35. Should the momentum be sufficient to clear those levels, further sellers are likely to be attracted and we would expect a return to 81.70 (4 Jan European/US session low); with the possibility of extending to 80.95 (31 Dec low), 80.24 (31 Oct low), and the all-time low from 1995 at 79.75. First resistance is 83.25 (as previously mentioned) followed by 83.50 (11 Jan high), 83.70 (7 Jan high), and the formidable old range ceiling from early December at 84.40. This latter level managed to contain numerous rallies back on 29 Nov, 1 Dec, 2 Dec, 8 Dec, 13 Dec and 16 Dec –so it’s likely to be a stubborn barrier should we managed to get back up there.
UsdChf USDCHF remains in consolidation mode between 0.9600 and 0.9700, so for the time being our bias is neutral. We have however been following the progress of a potential bearish flag pattern on the hourly chart which has a target around 0.9480 below (calculated by measuring the length of the flag pole and applying it to an approximated point of break out). At the end of last week there were a number of dips below the lower edge of this flag, but none could hold below the flag perimeter for long, so there’s good reason to be cautious when proceeding with this pattern. However, if the pair can break below Friday’s low of 0.9605 (also the 7 Jan low), then there may be a dual reason to be bearish, as it will have potentially activated a bigger head and shoulders pattern on the hourly chart, with a target around 0.9425. Only other support noted on the horizon is 0.9530 (former resistance now turned support). Resistance levels to watch on the topside now stand at 0.9687 (Friday’s high), 0.9784 (11 Jan high), 0.9850 (12-13 Dec highs) and 1.0065 (1 Dec high).
Similar Posts:
- Inflation Still A Concern, But RBA Unlikely To Hike Until July
- Risks Now Skewed To The Upside For Sterling
- EURUSD Weekly Summary – September 18
- FX Markets Just Drifting
- EURUSD Weekly Summary: Bullish continues, targeting 1.4050 even higher
