By Christopher Vecchio
Published: September 20, 2012
Perhaps it was too soon to call fundamentals ‘dead’ in the wake of the massive easing programs announced across the globe the past two-weeks, as markets have responded quite negatively to PMI data out of China and Europe. Naturally, the Japanese Yen and the US Dollar have outperformed as investors seek safety.
The risk landscape is firmly negative this morning with high beta and risk-correlated currencies trading substantially lower. The Australian Dollar and the Euro, on the back of weak Chinese and Euro-zone PMI figures (but for Germany, which improved), have fallen to critical levels of support while the Japanese Yen and the US Dollar, amid the flight to safety on the day (and a continuation of the rebound out of oversold technical levels), have perked up quite nicely. Although the general risk-off atmosphere circulating the globe this week, with the European Central Bank, the Federal Reserve, and the Bank of Japan priming the pump for the foreseeable future (only a matter of time before the BoJ adopts an unlimited program), risk-correlated assets will not stay low for long.
While the disappointing private sector PMI Manufacturing reading for China comes as no surprise (we’ve been in the “hard landing” camp since 4Q’12), the Euro-zone PMI readings are far more interesting. The Euro-zone figures themselves showed a miss on both the expectations and the prior readings, but the divergence that we’re drawn to comes in the core: German PMI Manufacturing and PMI figures showed a flip back to growth conditions while the same French PMI figures slid sharply low. Or, the economic crisis, one that can’t be solved by lower bond yields because, let’s face it, no consumer whose wages (especially when adjusted for inflation) are dropping alongside shakier employment prospects is going to spend conspicuously just because the ECB has unveiled its ‘bazooka.’ Theory might state otherwise (vis-à-vis the lending transmission mechanism that suggests banks will dole out credit), but in reality, such an event has yet to be seen.
Taking a look at credit, peripheral European bond yields are mostly higher amid the Euro’s weakness. The Italian 2-year note yield has increased to 2.083% (+0.5-bps) while the Spanish 2-year note yield has decreased to 2.967% (-1.1-bps). Similarly, the Italian 10-year note yield has increased to 4.959% (+6.2-bps) while the Spanish 10-year note yield has increased to 5.691% (+5.1-bps); higher yields imply lower prices.
RELATIVE PERFORMANCE (versus USD): 10:52 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.35% (+0.56% past 5-days)
The docket is considerably more saturated today, with five important data releases due in the first half of the North American trading session. At 08:30 GMT / 12:30 EDT, USD Initial Jobless Claims (SEP 15) are expected to improve slightly, though we caution that recent prints have disappointed (alongside labor market weakness elsewhere). At 08:58 GMT / 12:58 EDT, the USD Markit US PMI Preliminary (SEP) will show a slowing pace of manufacturing growth. At 10:00 GMT / 14:00 EDT, the USD Leading Indicators (AUG) will show a slight contraction, adding to fears of a US recession, while the USD Philadelphia Fed Index (SEP) will show further signs of slowing growth in the Mid-Atlantic region. Also released after the US cash equity open is the EUR Euro-zone Consumer Confidence (SEP A) report, due to indicate some slight improvement in sentiment (though still very negative).
EURUSD: The pullback off of the 76.4% Fibonacci retracement (February 2012 high to the July 2012 low) at 1.3145 appears to have run its course in the short-term, with the EURUSD trading back to the 61.8% Fibo retracement at 1.2934 today, off of which price has rebounded. Although the daily RSI has exited overbought territory, we note that the 4-hour RSI is close to oversold with some significant diverging (given the relationship between price and RSI the last time the 4-hour RSI was at this level). Interim resistance lies at 1.3000 (5-EMA), 1.3145, 1.3165/70, and 1.3240. As noted previously, “It is possible that a long-term bottom is now in at the 1.2040/45 low set in late-July.” We’d like to expand this view by noting that a Double Bottom on the June 2010 and July 2014 lows – within 150-pips of one another – could be forming. Near-term support comes in at 1.2930/35 and 1.2820/30 (200-DMA, late-April swing high).
USDJPY: The USDJPY has pulled back as key resistance alongside a general feeling of disappointment on the BoJ’s newest stimulus measures has created the ideal sell-off situation. With price below 78.60, our focus lies in the 78.10/20 region. A close above 78.10/20 leaves open the possibility for a rebound to 78.60 and 79.10/30 (100-DMA, 200-DMA, descending trendline off of the April 20 and June 25 highs). A close below 78.10/20 suggests 77.90, 77.65/70 (June 1 low), 77.45/50, and 77.10/15 (September low).
GBPUSD: The pair has pulled back to the key 5-EMA at 1.6196 (for an indication of short-term strength) and the gap between the 5-EMA and the 20-DMA has started to turn lower, suggesting a compression of price is occurring. If the 5-EMA holds, we’re looking for further rallies; if not, support is close by. The key 1.6120/40 level, broken on Friday, remains our guide for bullish/bearish price action. As long as the GBPUSD closes above said level this week, the door is open for a move towards 1.6400 by the end of the month. The former April swing highs at 1.6260 (by close), 1.6300 (by high) are in focus, now that the descending trendline off of the April 2011 and August 2011 highs broke last week. Below 1.6120/40 support comes in at 1.6030/35 (20-DMA), 1.5970 (ascending trendline off of August 2 and August 31 lows, former channel resistance off of June 20 and August 23 highs), and 1.5770/85 (late-August swing lows).
AUDUSD: Despite the spike to the 50-DMA (1.0375) today, the pair has rebounded back to the classic support noted yesterday – at former resistance. The descending trendline off of the August 9 and August 23 highs has kept the pair supported the past three-days, and as noted “with the 20-DMA overlapping at 1.0415/20, a base could be building for the next move higher.” As long as this level holds today – despite the intraday spike lower – we continue to look higher. Near-term resistance comes in at 1.0410/20 (descending trendline off of the August 9 and August 23 highs, 20-DMA, mid-August swing lows), 1.0480/85, 1.0550/60, and 1.0615/30 (August high). Support comes in at 1.0325 (200-DMA), and 1.0250/70.
— Written by Christopher Vecchio, Currency Analyst
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