Despite a late-day Spanish downgrade yesterday, which sent the Euro tumbling across the board, risk-appetite is on the mend today following some better than expected data out of Asia and growing speculation that Spain needs a bailout. Meanwhile, the US Dollar weakness has boosted precious metals and stocks.
There were two major developments over the past 24-hours, one in Asia and one in Europe. Yesterday after US equity markets closed, Standard & Poor’s announced that it had cut the Spanish sovereign debt rating to ‘BBB-’ from ‘BBB+’, bringing the nation to the brink of ‘junk.’ Yes, that’s right: Spanish debt is still considered investment grade paper. Although the Euro reacted quite negatively to the news (a downgrade from Moody’s Investors Service was expected, not from S&P), it has since rebounded on the sentiment that any additional bad tidings could force the government into seeking a bailout via the European Stability Mechanism (ESM), which came online Monday. This would also pull the European Central Bank into the market as a lender of last resort for Spain, given its unlimited sterilized bond-buying program.
In Asia, data showed that the Australian labor market made strides forward in September, despite a sizeable increase in the Unemployment Rate: jobs were added at a quicker pace than previously thought; and the participation rate, a gauge of the population in the labor pool, increased as well (hence the jump in the Unemployment Rate). Considering that Australia’s largest sector is mining, this is a welcomed development for a nation whose fate is very much tied to the Chinese growth picture. It is of little coincidence that the Australian Dollar leads as more evidence gathers that fears of a Chinese “hard landing” are overblown in the near-term.
Taking a look at credit, peripheral European bond yields are mixed, holding back further intraday Euro strength. The Italian 2-year note yield has decreased to 2.294% (-0.3-bps) while the Spanish 2-year note yield has increased to 3.217% (+2.6-bps). Similarly, the Italian 10-year note yield has decreased to 5.059% (-2.8-bps) while the Spanish 10-year note yield has increased to 5.768% (+0.7-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:33 GMT
AUD: +0.54%
CHF: +0.37%
NZD: +0.32%
CAD: +0.29%
EUR: +0.23%
GBP: +0.17%
JPY: -0.06%
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.21% (+0.26% past 5-days)
ECONOMIC CALENDAR
While there are numerous American and Canadian data releases this morning, there are only three that are worth paying attention to. At 08:30 EDT / 12:30 GMT, the weekly USD Initial Jobless Claims (OCT 6) report is due, with claims hovering near recent levels; at this rate, October jobs growth looks to be in the area of +105K to +125K per month. Also released then is the USD Trade Balance (AUG), which should show a wider deficit despite a weakening US Dollar throughout the month. Finally, in the second half of the North American trading session, the USD Monthly Budget Statement (SEP) is forecasted to show a surplus.
TECHNICAL OUTLOOK
EURUSD: Although the EURUSD continues to find support at its 200-DMA, I remain neutral on the EURUSD as prices remain within our key levels. Resistance comes in at 1.2930/35 (61.8% Fibo on February 2012 high to July 2012 low), 1.3000, 1.3070/75 (October high), 1.3145, and 1.3165/75 (September high). Support comes in at 1.2895/1.2900 (20-EMA), 1.2820/30 (200-DMA, late-April swing high), and 1.2750/65 (ascending trendline off of July 24 and August 2 lows, 50-EMA).
USDJPY: No change from Monday: “Although price breached the 78.40/60 zone [on Friday], overhead resistance at 78.80/90 (100-DMA, descending trendline off of the April 20 and June 25 highs) proved too great to overcome. Thus, the downtrend from April remains. With the USDJPY holding near 78.10/20, this is the bull/bear line: a hold above gives scope for a rebound to 78.40/60, whereas a close below opens up room for a move towards 77.90, 77.65/70 (June 1 low), 77.40/45 (September 28 low), and 77.10/15 (September low).”
GBPUSD: Support continue to hold at 1.5975/95 (former channel resistance off of June 20 and August 23 highs, 50-EMA), sending the GBPUSD higher so far today. Accordingly, price remains below the 20-EMA and the descending trendline off of April 2011 and August 2011 highs (confluence at 1.6100/20). Until the GBPUSD gets back above this trendline, we are neutral for the coming days. Support comes in at 1.5975/95 and 1.5770/85 (late-August swing lows). Resistance comes in at 1.6135, 1.6260 (the former April swing highs by close) and 1.6300 /10 (September high).
AUDUSD: “Despite some muddling the past few days, the AUDUSD is carving out a short-term bottom.” The pair has broken free of the congestion between 1.0150 and 1.0270 to the upside. It is crucial that the pair closes above 1.0215/25 today, the descending trendline off of the September 12, September 20, and September 26 lows. Resistance 1.0330, 1.0405/25 (mid-August swing lows), and 1.0470/85 (former intraday swing levels). Support comes in at 1.0260/70 (100-DMA, early-October swing highs), 1.0160/75 (mid-July and early-September swing levels), 1.0145/50 (October low), 1.0100/10, and 1.0000.
SPX500: Crucial support at 1420/25 (the 61.8% Fibo retracement on June 2012 low to September 2012 high, ascending trendline off of the June 4 and July 24 lows, 50-EMA) held, and upon further examination, it appears a Bull Flag off of the September 14 and October 5 highs may be forming; a break above 1470 could signal a move to 1500. For the first time since early-August, the SPX500 has closed below the 20-EMA, and that over this time frame, the daily RSI has held below 50 for the first time. A close above the 20-EMA today at 1443/45 would be very bullish (a sign bulls remain adamant). Support comes in at 1420/25 and 1400. Resistance comes in at 1443/45, 1460, 1470, and 1498/1504.
GOLD: The steep ascending trendline off of the August 15 and August 31 lows, at 1780, remains broken, though the 20-EMA at 1759/61 has held up as expected. As long as this soft support holds, a move back into the 1785/1805 zone can’t be dismissed (advances rejected in November 2011, February 2012, and October 2012 thus far). Resistance lies there and at 1840. Support comes in at 1759/61, 1746/51, and 1735.
— Written by Christopher Vecchio, Currency Analyst
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