FUNDYS
After seeing some jumpstart action in early Monday trade, most currencies have quickly traded back towards or near daily opening levels. The one minor exception is the Euro which has been relatively well bid across the board and outperforms all currencies. Data on Monday has been scarce with many countries still off for holidays. However, we did manage to see some early UK data with Hometrack house prices released and putting in a sixth straight monthly decline. Japanese data was also out but failed to factor (see below). The big story on the day has undoubtedly been the latest 25bp China rate hike announced on Christmas Day.
Relative Performance Versus USD Monday (As of 11:15GMT)
- EURO+0.34%
- CAD +0.16%
- YEN+0.07%
- STERLING+0.02%
- SWISSIE+0.01%
- AUSSIE-0.11%
- KIWI-0.16%
Initial market reaction was as to be expected with currencies weighed down, led by the closely correlated Australian Dollar. But lack of any real market presence on the thin trade resulted in some whipsaw price action back towards opening levels. Also seen supporting currencies, was some upbeat rhetoric out from Chinese officials to offset any fears of a slowdown following the latest moves. Australia, New Zealand and the UK markets were all closed on Monday, while many other countries are still unofficially on holiday. As such, we would continue to expect to see some light trade over the course of this week and into the first week of 2011.
Japanese markets were open and the Yen has mostly been consolidating, with a number of economic releases failing to materially factor into price action. Market participants have been less focused on economic releases and instead having been paying attention to the latest political polls which show the disapproval rating for PM Kan’s cabinet rising to an all-time high of 67%. A Nikkei poll confirms general sentiment showing the government approval rating dropping below 30% for the first time.
In our opinion, the moves by China to raise rates are quite significant and from a currency standpoint, should significantly weigh on the Australian Dollar and other commodity currencies over the coming year. The tighter monetary policy will likely slow down growth in China which in turn will curb demand for commodities. As such, we see this as a major theme over the coming year and with the Australian Dollar trading by cyclical highs, we see these China moves acting as the catalyst for the start to a critical bearish trend shift in the antipodean. Our EUR/AUD long trade established today (see “Trade of the Day” below) is already showing promise.
Looking ahead, all is quiet on the economic calendar for the rest of the day, and we mostly expect markets to trade accordingly. We could see a bit more action and volatility into North America in response to the latest China moves, but that should be the only thing that factors into price action. Of course, market participants should always be on the lookout for additional ratings warnings and downgrades on the beleaguered Eurozone economies. UK markets were closed for Boxing Day, while European markets were light. US equity futures are tracking moderately lower, and commodities are mixed with oil slightly offered and gold mildly bid.
TECHS
EUR/USD:The market has mostly been locked in a choppy consolidation over the past several days, but a lower top looks to have carved out by 1.3500, with a break back below 1.2970 over the coming sessions to confirm and open the next major downside extension towards the 1.2585 platform base from August 2010. As such, any intraday rallies towards the 1.3300 area should be used as formidable sell opportunities.
USD/JPY:Despite the latest pullbacks below 83.00, the market still remains confined to a broader consolidation, and while the price holds above the bottom of the Ichimoku cloud, the overall outlook remains constructive with dips towards 82.00 to be used as compelling buy opportunities. A break and close back above 84.50 will however be required to end what is perceived to be a bullish consolidation and accelerate gains. A close below 82.00 on the other hand, would compromise outlook and give reason for pause.
GBP/USD:The market remains under pressure and now seems poised for a retest of the platform base from early September at 1.5295. Daily studies are however looking a little stretched so we would not rule out the possibility for a bit of a bounce over the coming sessions towards the 1.5700 area from where a fresh lower top will be sought out ahead of an eventual drop to challenge and break 1.5295. In the interim, we remain sidelined and await a clearer signal.
USD/CHF: Setbacks have most recently stalled out just shy of the record lows by 0.9460 from October, and with daily studies looking a little stretched, we would expect to see any additional declines very well supported in favor of a major bullish reversal. Cyclical studies continue to warn of a major trend shift at current levels, and a bullish outside day last Thursday after failing to establish fresh record lows, could very well act as the initial catalyst for said reversal. Look for a break back above 0.9735 to confirm and accelerate gains. A break and close back below 0.9460 delays.
TRADE OF THE DAY
EUR/AUD: This is our favorite trade for 2011 in general and with the market trading by fresh multi-year lows and deeply oversold, the risks for a major corrective bounce seem highly probable. We have taken shots over the past few days with no downside, and have once again taken a shot on Monday. The cross has finally stalled out just ahead of major psychological barriers by 1.3000 and any additional declines below this level are not seen as sustainable. Monthly, weekly, and daily studies are all in oversold territory at the same time, and this very rare occurrence should be a red flag for a potential trend change. Fundamentals are also playing their part in the trade, with China hiking rates over the weekend. The move to a more restrictive policy will inevitably slow growth which will in turn weigh on the highly correlated Australian Dollar. POSITION: LONG @1.3070 FOR AN OPEN OBJECTIVE; STOP 1.2970.
Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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