Currencies Well Bid But Euro Still Capped Below Key Resistance

It is good to be back on the desk after being away for a couple of days and in the end, nothing much has really changed. Overall price action in the Euro remains consolidative, with the market stalling out ahead of some key resistance by 1.3500 and rolling back over. The intense Euro rally in the previous week is now being attributed to nothing more than a major bout of profit taking on shorter-term USD long positions, and some market participants are once again back to focusing on broader Eurozone structural deficiencies. Nevertheless, the single currency has been very well supported in Tuesday trade and has found renewed interest on increased optimism over the outlook for the region (EFSF package) and some very solid data in the form of the German ZEW.

Relative Performance Versus USD Tuesday (As of 11:35GMT)

1. EURO+0.89%
2. STERLING +0.72%
3. SWISSIE+0.54%
4. AUSSIE+0.43%
5. CAD+0.24%
6. YEN+0.17%
7. KIWI+0.03%

If one other currency stands out at all in Tuesday trade thus far, it is most certainly the Pound, which outperforms across the board on the back of some solid data and elevated inflation readings. Nationwide consumer confidence came in much better than expected, while RICS house price data was encouraging with the data series producing less of a deterioration than consensus estimates. Meanwhile, the latest CPI readings were through the roof and have added to Sterling’s bid tone as investors start to price in the increased possibility for rate hikes. Consequently, Cable has managed to easily clear psychological barriers by 1.6000. Still, this is a market that we are much more comfortable selling into rallies rather than looking for opportunities to buy, with the overall structure tilted to the downside, and any rallies on strong data and speculation of rate hikes not expected to last.. As such, we have issued a recommendation to sell on a rally to 1.6090 today (see below).

Also on the strategy side of things, while most major currencies are well off of their respective multi-week highs against the Greenback, the Canadian Dollar has been doing its own thing and continues to trade by multi-week highs. In our opinion the currency is not likely to remain well bid for much longer, with longer-term technical and cyclical studies warning of the formation of a major top in the Canadian Dollar. In light of this, we will also be aggressively looking for opportunities to buy USD/CAD on dips into the 0.9800 area.

Elsewhere, China is back in the news as things heat up ahead of President Hu’s visit to Washington, with a Chinese spokesman warning that US lawmakers should avoid harming the overall interest in China/US trade. We will be watching developments here closely but ultimately do not expect to see anything that moves the markets too much on this end.

Looking ahead, there is some key event risk in the North American session, with the Bank of Canada set to decide on rates at 14:00GMT. While no change is expected (1.00%), we would be on the watch for any accompanying language out from the central bank that expresses concern over the relative strength in the Canadian Dollar. With USD/CAD trading by multi-week lows, we would not at all be surprised to see any comments re the strong currency open the door for a decent bout of CAD liquidation. Also out in North American trade is US Empire manufacturing (13.00 expected) at 13:30GMT, TIC flows at 14:00GMT and NAHB housing at 15:00GMT. US equity futures and gold prices are bid, while oil consolidates and trades flat on the day.

TECHNICAL OUTLOOK

EUR/USD:Although the market has rallied quite impressively out from the recent multi-week lows set by 1.2875, we continue to classify the bounce as corrective, with any additional rallies expected to be well capped by the 1.3500 range highs ahead of some fresh weakness. As such, the preferred strategy is to stand aside for now and look to sell a little higher up. Ultimately, only a close back above 1.3500 would give reason for concern and delay outlook.

USD/JPY: The market appears to be locked in some consolidation with clear directional boas not easily determined. The latest rally has stalled out by the Ichimoku cloud top to suggest that the pressure still remains on the downside for now. Back below 82.00 should accelerate declines and expose the multi-year lows from 2010 just ahead of 80.00, while back above 83.70 will relieve downside pressures and shift structure back to the topside.

USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. The latest bounce back above 0.9600 is certainly encouraging and the rally has also triggered the break of a previous weekly high to set up a bullish reversal week. Look for continued acceleration of gains back above parity over the coming sessions, with any setbacks expected to be well supported above 0.9400 on a close basis.

FLOWS

An ACB and a Middle Eastern account have been on the bid in Eur/Usd. Usd/Jpy is being supported by cross demand from Japanese names. A Middle East account and a hedge fund have driven gains in Cable. Usd/Chf sales by an ACB which has been seen selling Usd’s across the board.

TRADE OF THE DAY

GBP/USD: The latest break back above 1.5910 delays bearish prospects for the time being and now opens the door for additional strength towards the key 78.6% fib retrace off of the October-November major move which comes in by 1.6090. Nevertheless, our core bias still remains bearish and any rallies into this fib retrace are viewed as a formidable sell opportunity in favor of some renewed downside pressures. A test of this level on Tuesday will also have the daily ATR well exceeded and hourly studies severely overbought to make for a very attractive entry with what should be limited downside risk. Look for a break and close back below 1.5835 to confirm bias and accelerate. A close above 1.6100 concerns.STRATEGY: SELL @1.6090 FOR AN OPEN OBJECTIVE; STOP 1.6215. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON TUESDAY.