ASIA/EUROPE FOREX NEWS WRAP

The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) initially rallied in the Asian session on the back of a weaker Japanese Yen once more, which based right below ¥101.00 and surged into ¥102.00 amid a pickup in the Nikkei, which is still recovering from its 10% selloff at the end of last week. However, with Europe fully back online – the UK had a banking holiday yesterday – traders have dumped the US Dollar in favor of the commodity currencies, the British Pound, and the Euro, though seemingly with no apparent catalyst in site.

Of note today, there are two issues worth focusing on. First, as has been pointed out over the past few days in various research notes (I was first directed to this issue thanks to Nordea Markets’ Aurelija Augulyte), ECB base money – excess liquidity has fallen to €270B, the lowest level since late-2011, and quickly approaching the ECB’s line in the sand of €200B. What this means is that the ECB is likely going to have to introduce new easing measures to fight the credit crunch starting to make its way back into the region. With the ECB meeting next Thursday, it is likely that we hear about new measures that could be implemented to help small- and medium-sized enterprises. While this might be economically positive, initially, the extra liquidity – currently unexpected – would need to be priced in, which is Euro negative.

The other issue today is the US Consumer Confidence (MAY) report due out at 10:00 EST/14:00 GMT, which might be the most significant US event risk on the docket this week. Consumer confidence is especially important considering it is a proxy for consumption, the largest component of the headline US GDP figure. Accordingly, with US equity markets holding all-time nominal highs, US consumers are likely feeling a bit more confident. Certainly, consumption trends have picked up despite the fiscal obstacles that are the payroll tax and the budget sequestration.

Taking a look at European credit, strength in the peripheral is helping power the Euro higher today. The Italian 2-year note yield has decreased to 1.343% (-1.6-bps) while the Spanish 2-year note yield has decreased to 1.739% (-7.9-bps). Similarly, the Italian 10-year note yield has decreased to 4.018% (-2.6-bps) while the Spanish 10-year note yield has decreased to 4.248% (-6.1-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:40 GMT

AUD: +0.49%

NZD: +0.33%

GBP: +0.08%

CAD:+0.04%

EUR:-0.01%

CHF:-0.52%

JPY:-1.00%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.03% (-0.38% past 5-days)

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TECHNICAL ANALYSIS OUTLOOK

EURUSD: On Wednesday I said: ”My bearish bias would be negated on a weekly close $1.3000/30 (May 14 swing high and 200-SMA).I prefer selling rallies into 1.2975/3000.” Today, continues to ride along the ascending trendline off of the July 24 and March 27 lows, with a small Hammer forming on the daily chart. I thus maintain a bearish bias, but a close 1.3000/30 will negate and imply a rally towards 1.3220/50 (mid-April swing highs). To the downside, a break of 1.2795/800 would confirm the move towards 1.2750 and 1.2680.

USDJPY: Price has attempted to retake ¥102.00 today, and trading in the European session has seen the USDJPY at least sustain gains around the level. Overall, price is relatively unchanged from Thursday, with the 21-EMA pacing the ascending trendline support off of the April 2 and April 31 lows as support. Additionally, with the daily RSI uptrend back in play, the corrective nature of the decline off the Wednesday highs suggests that another move higher could be in the cards. A further breakdown through trend support eyes a move towards 100.00, then 97.50.

GBPUSD: No change: “The GBPUSD is back pressuring last week’s lows…the lower 1.5035 target was reached, and with the trade stretched to the downside, brief pause allowing the 8-EMA to catch up to current price could occur. I still prefer selling rallies towards the big picture move towards 1.4200.” Although a small Hammer has formed on the daily charts, there is evidence that a move back towards 1.5000 may be beginning.

AUDUSD: No change: “The AUDUSD closed below the key 0.9860 level last week, ascending channel support off of the October 2011 and June 2012 lows, as well as the weekly 200-DMA. That is to suggest that a top in the pair back to the July 2011 high at 1.1079 is in place, though I’d prefer for a monthly close below 0.9860/900 for better confirmation. Now, a deeper pullback towards 0.9580 and 0.9380/400 is beginning. 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.”

SP 500: No change as the intraweek Bull Flag broke to the upside and hit top rail resistance at 1665 on Friday: “The headline index remains strong although there is some theoretical resistance coming up (this is unchartered territory, so forecasting price relies heavily on valuations, mathematical relationship, and pattern analysis)…It’s hard to be bearish risk right now, but it is worth noting that the divergence between price and RSI continues, suggesting that few new hands are coming into the market to support price (recent volume figures would agree).” Channel resistance from mid-April comes in at 1670, while support is at 1648 (8-EMA) and 1642 (steep channel support).

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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