Are Spanish Auction Results Keeping Euro Propped Up?

Although the Euro has managed to mount an impressive recovery, with the market trading well off of the multi-week lows set on Monday by 1.2875, we continue to classify the move as corrective, and fully expect to see a bearish resumption over the coming days. For now, the market has been propped by a potential EU aid package for Portugal, and solid bond auction results out of both Portugal and Spain. Also seen helping to keep the Euro somewhat bid have been comments from Germany’s Merkel who has pledged to protect the Euro with “whatever needed.” However, it is quite evident that despite efforts to intervene on behalf of the ailing Eurozone economy, there is a long road ahead which is likely to produce some unpredictable and unwelcome results. As such, we see any additional gains being well capped below the 1.3300 figure on a close basis, and would recommend considering to build into short positions on a rally towards 1.3300 (no specific trade recommendation here at the moment).

Relative Performance Versus USD Thursday (As of 11:05GMT)

1. KIWI+0.42%
2. EURO -0.01%
3. AUSSIE-0.02%
4. YEN-0.07%
5. STERLING-0.10%
6. CAD-0.22%
7. SWISSIE-0.69%

There is some event risk worth mention today, although we do not expect any surprises. Both the ECB and BOE are scheduled for rate decisions, and as is usually the case, the risk from the BOE comes from any changes to the QE program, while risks to the ECB decision will originate from the post decision Trichet press conference. At the end of the day, we do not expect to see any surprises from either central bank, but will be watching closely should anything materialize. While the beleaguered Eurozone peripherals are obviously problematic for the health of the Eurozone economy, we expect Trichet to downplay any such threats and maintain a less pessimistic outlook. Meanwhile, UK inflation data has been concerning of late and definitely makes it harder to justify the ultra accommodative monetary policy, but here too we do not expect any changes with the central bank still needing to focus on the current economic recovery. Data released in Europe overnight has failed to materially influence price action with German wholesale sales improving from the previous month, while UK data was mixed with industrial production slightly weaker and manufacturing production a little stronger.

Moving on, although price action in the Australian Dollar is rather subdued on Thursday thus far, we would be on the lookout for a pickup in volatility over the coming hours. While the currency still remains well bid on dips for now, the much weaker than expected employment data only helps to reaffirm our downgraded outlook for the local economy. Economic data results over the past few months are not as promising as they once were, and we continue to see risks to the downside in the Australian Dollar despite the attractive yield differentials. December jobs data showed a net gain of only 2.3k after the market had been looking for an increase of 25k. Additionally, while the unemployment rate showed a drop to 5.0% ,which was on the surface better than expected, the decline was more likely due to a lower participation rate due to a softer overall employment sector.

In terms of where the value lies at the moment and over the coming sessions, we continue to look to the Canadian Dollar as a currency that is on the verge of a sizeable depreciation. This currency has held up so well over the past few sessions, and USD/CAD trades by multi-month lows into the 0.9800’s thus far. Cyclically, the market looks to be quite stretched, and our technical studies suggest that a major trend shift is on the horizon. At this point the fundamental catalyst has yet to present itself, but we will be paying close attention. Our strategy will be to continue to look for opportunities to buy USD/CAD on overdone intraday dips in anticipation of said correction. On Wednesday we had issued a buy recommendation that never materialized, and we will once again look to be buyers at lower levels in Thursday trade if given the chance. Also on the strategy front, we have finally exited our entire EUR/CHF long position from 1.2550 at 1.2825 on Thursday for a nice profit.

Looking ahead, the BOE (unchanged 0.50% and 200B) and ECB (unchanged 1.00% expected) rate decisions filter over into the North American open at 12:00GMT and 12:45GMT respectively. The attention then shifts to North American economic data at 13:30GMT with the release of US producer prices (0.2% expected), the trade balance (-$41B expected), initial jobless claims (402k expected), continuing claims (4100k expected), and Canada international merchandise trade (-C2.0B expected). US equity futures and commodity prices are tracking lower, led by moderate declines in gold prices.

TECHNICAL OUTLOOK

EUR/USD:Although the market has rallied quite impressively out from the recent multi-week lows set by 1.2875 earlier this week, we continue to classify the bounce as corrective, with any additional rallies expected to be well capped by the 1.3300 area 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 1.3300 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.

GBP/USD: As we had written in our commentary from previous daily analysis, the current bounce was not to be unexpected despite our bearish outlook, with the market in the process of carving out a fresh lower top below 1.5900 ahead of the next downside extension. At this point, we do not see gains extending much further and would recommend looking to consider selling rallies towards 1.5850 on Thursday.

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 the 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 0.9500 on a close basis.

FLOWS

An ACB has been selling around the day’s highs in Eur/Usd along with Middle East and Eastern European sellers. Export sales reported in Usd/Jpy with a real money account on the bid. A corporate account has been a dip buyer in Nzd/Usd.

Markets Calmed After Euro Debt Auction

Portuguese Auction Gives Euro Relief

The euro found a bit of relief overnight as a much anticipated auction of Portuguese debt was fairly well subscribed.  The initial results of the auction saw the EUR spike higher against the USD through the 1.30 level, only to be sold off again to settle near the 1.30 mark at the time of writing.  This price action suggests that traders are still dubious as to the prospects for a workable solution to the European debt crisis and as a result there are ample offers in the market to sell EUR at levels above 1.30.  Bloomberg reports that plans are in the works by the EU to put together an aid package for Portugal that would guarantee lower interest rates on bailout loans.  The plan could be in the amount of 60 billion euros and would be an attempt by European lawmakers to subdue the crisis that has caused so much strife in the region.  Many market participants have been questioning the health of the Eurozone due to these debt issues and the viability of the euro as a going concern has even been brought up.  If these reports do come to fruition it would signal that the EU was being proactive in their attempts to contain the crisis rather than bail out nations after they get into trouble.  The market wants to see a concrete plan before they embrace the euro again, so until something tangible is in place we can expect to see price action similar to today’s, where any rally in the euro is met with significant selling pressure. 
M&A Talk Fuels CAD Rally
The Canadian dollar has reached a 32 month high overnight against the USD as news that Cleveland-based Cliffs Natural Resources has agreed to purchase Canadian miner Consolidated Thompson for over $4 billion in cash.  The purchase will be made in Canadian dollars, so clearly the flow will be significant enough to push the USDCAD pair to a new low in the mid 0.98 cent level.  The Loonie has been fairly quiet this week and intraday ranges have been tight as little in the way of Canadian (or international for that matter) data has been enough to knock the CAD from its current strong levels.  From a purely technical perspective the CAD is beginning to look a little overbought and has been able to withstand changes in risk sentiment over the past few weeks with little movement.  The Loonie now seems to be reacting favourably to good economic data from the US, our largest trading partner, but has also been able to withstand recent bouts of risk aversion that have seen other commodity linked currencies falter.  The question on many people’s minds right now is whether or not the Loonie can stay below par for any longer.  Data from Canada has been good but inflation is far from out of control, thanks in large part to the strong Loonie, so the Bank of Canada could be on hold in the near term.  Secondly, an overly strong dollar is far from what our government wants as it places a big strain on our manufacturing sector causing our products to become more expensive relative to the rest of the world.   For the time being it seems as if the CAD will be content to follow the news and equities in order to find direction until something tells us otherwise.  Canadian trade balance figures are released tomorrow and could have a big impact should the figure come out far from expectations.
Aussie Shows Resilience
The Australian dollar is off its recent lows against the US in the 0.98 cent region even as devastating floods continue in Queensland.  RBA board member McKibbin was on the tapes last night suggesting that the floods could wipe out as much as 1% of Australian GDP growth for this year.  This report initially caused a selloff in the AUD but it has come back on good developments in Europe this morning.  The RBA has maintained that they will be vigilant on interest rates should inflation continue to rise, and with commodity prices staying firm there is a good chance this will materialize.  This tightening bias has effectively put in a floor for the AUD for now, while data and equity market developments will continue to dictate price action.
Have a great day.