ASIA/EUROPE FOREX NEWS WRAP

The Australian and New Zealand Dollars have been the two worst performing major currencies since the beginning of May, losing -5.79% and -5.54%, respectively, through yesterday’s close versus the US Dollar (these values have worsened today, after general weakness in the commodity currency complex once more). The past several days, there had been hope that the weakness exhibited by the Aussie would change the Reserve Bank of Australia’s dovish tone – a weaker currency should help the economy’s export sector – but such was not the case. Instead, the RBA’s focus remained honed in on the dampened inflation outlook, and my belief that the RBA will continue its rate cut cycle through the 4Q’13 holds (at minimum, another 50-bps; at maximum, 75-bps).

Elsewhere, the Euro is holding onto gains accumulated the past few days as, at least in the near-term, there’s very little negative news coming out of the Euro-zone. Data the past week has ‘turned,’ in so far as it’s not been as bad as the market consensus; and with many of the other major currencies – the Aussie, the Japanese Yen, the US Dollar – undergoing their own mini-identity crises, the Euro looks rather tame right now.

Generally speaking, the Euro looks set to continue to outperform this week, especially into the European Central Bank policy meeting on Thursday. There has been growing chatter that the ECB could implement negative rates in order to help stoke the region’s depressed and increasingly frozen credit flow, but that seems unlikely to me right now. On Friday, Italian ECB Governing Council member Ignazio Visco that the ECB “stands ready to intervene” to push yields lower. But three prominent ECB officials – Vice President Vitor Constancio, Joerg Asmussen, and Christian Noyer – indicated that negative rates are still in the initial stages of discussion, and that the ECB is not near implementing them.

Taking a look at European credit, today is shaping up to be a ‘classic risk on’ type of day in Europe, with core bond yields rising, peripheral yields falling, stock prices rallying, and the Euro leading the majors. The Italian 2-year note yield has decreased to 1.328% (-9.8-bps) while the Spanish 2-year note yield has decreased to 1.871% (-4.6-bps). Likewise, the Italian 10-year note yield has decreased to 4.088% (-6.5-bps) while the Spanish 10-year note yield has decreased to 4.401% (-4.9-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:35 GMT

EUR: +0.05%

GBP: -0.17%

CHF: -0.22%

CAD:-0.41%

JPY:-0.64%

NZD:-0.88%

AUD:-1.12%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.37% (-1.29% past 5-days)

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TECHNICAL ANALYSIS OUTLOOK

EURUSD: No change: “Failure to achieve the 38.2% Fibonacci retracement (Jul’12 low to Feb’13 high) at $1.3075 has further gains in question. Nevertheless, the technical structure is near-term bullish, and the rejected break of the Head Shoulders neckline suggests there may be another thrust higher left before an eventual breakdown. Accordingly, I’m bullish above 1.2930, but looking to sell rallies into 1.3200.”

USDJPY: The compressing nature of the 8-/21-EMA the past several days suggests that a near-term top may be in place, at least through the early part of June. A break of the ascending trendline off of the April 2 and April 30 lows has the bottom rail of the rally dating back to November in focus, coming in at ¥98.60 today. Accordingly, as long as pressure on US equities persist, we favor the USDJPY lower in the near-term, a view that is augmented by retail traders attempting to catch the bottom in the recent slide.

GBPUSD: No change: “Despite failure on Friday, the turnaround late-day led to a Hammer forming in the 8-/21-EMA “catch” zone, and price action today has seen the pair trade through the 21-EMA at $1.5220/25. This would be the first close above the 21-EMA since May 9. A close 1.5280 should indicate a Double Bottom has formed, with potential for the pair to reach 1.5500 at some point the next week or two.”

AUDUSD: No change: “Price has been steady below the ascending trendline off of the October 2011 and June 2012 lows, suggesting that a top in the pair is in place, going back to the July 2011 high at $1.1071. Price has steadied at the 50% Fibonacci retracement from the May 2010 low to the July 2011 high, as well as the 2012 low set (coincidentally) this week last year. In the very near-term, with the weekly RSI at the lowest level since the height of the global financial crisis in the 4Q’08, the AUDUSD is probably close to a point of near-term exhaustion. Rebounds should be sold. Ideally, 0.9860 is reached to the upside for a strong sell.”

SP 500: No change: “The SP 500 has traded back to former channel resistance, which contained the US equity market from late-February to early-May (drawn off of the February 25 and April 18 lows, to the April 11 high). The support coincides with the 21-EMA currently, forming a zone of support from 1639 to 1650. In conjunction with a descending trendline off of the May 22 and May 28 highs, it appears a triangle may be forming for a push higher. Bulls’ hopes would be squandered below 1634.” Now, the SP 500 has fallen to the 38.2% Fibonacci retracement of the April low to May high at 1629.4 and has held; a close below this level would open the door for a deeper retracement to 1580/85.

GOLD: No change: “If the US Dollar turns around, however (as many of the techs are starting to point to), then Gold will have a difficult gaining momentum higher. Indeed this has been the case, with Gold failing to reclaim the 61.8% Fibonacci retracement of the April meltdown at $1487.65, only peaking above it by 35 cents for a moment a few weeks ago.” Price is back under 1400, and if US yields keep firming, a return to the lows at 1321.59 shouldn’t be ruled out.

— Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

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