ASIA/EUROPE FOREX NEWS WRAP

The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) has exploded to fresh yearly highs, and its highest level since July 2010, as the stream of negativity from outside the United States continues, diverging from the increasingly optimistic view of the US economy. While early-Monday presented a day of consolidation for the greenback, the stronger than expected April sales report prompted market watchers and economists around the globe to raise their 2Q’13 GDP forecasts.

With momentum, firmly in the US Dollar’s favor, we’ve seen the GBPUSD break below significant technical support at $1.5350, the EURUSD fail to reclaim $1.3000, and the AUDUSD plummet towards $0.9900. With that said, the USDOLLAR is showing signs of exhaustion, with price overtaking the early-March highs but daily RSI failing to confirm. As such, despite the mounting bullish fundamental bias for the US Dollar, we have to respect the potential for near-term technical consolidations and/or reversals as profit taking occurs. Already, the USDJPY is seeing signs of this, having been rejected at ¥102.00 multiple times since the market opened this week.

The AUDUSD’s fall today was stoked by the government’s release of the 2013-14 federal budget. While the government expects deficit as a percentage of GDP to remain between 1.1% and 1.3% in the 2012-13 and the 2013-14 fiscal years, there were three items that prompted the sell-off (and confirming my rationale for shorting the AUDUSD last week). First, the government expected A$3.6B less in resource tax revenue in FY2012-13, a sign that the commodity supercycle may be finished. Second, the inflation forecast for the FY2012-13 was trimmed to +2.5% from +3.0%, and at +2.25% in FY2013-14 and FY2014-15. Finally, the government expects growth to slow from +3.0% in FY2012-13 to +2.5% in FY2013-14. These factors have accelerated AUDUSD selling and my 0.9850/900 target may be hit sooner than expected (mid-June).

Taking a look at European credit, slightly higher peripheral yields coupled with strong US Treasuries has cast a negative tone for the EURUSD for the day (risk off). The Italian 2-year note yield has increased to 1.354% (+1.0-bps) while the Spanish 2-year note yield has increased to 1.706% (+4.7-bps). Similarly, the Italian 10-year note yield has decreased to 3.952% (-2.1-bps) while the Spanish 10-year note yield has increased to 4.284% (+1.6-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:45 GMT

JPY: +0.16%

CHF: 0.00%

EUR: -0.13%

NZD:-0.13%

GBP:-0.16%

CAD:-0.23%

AUD:-0.34%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.15% (+1.70%past 5-days)

ECONOMIC CALENDAR

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TECHNICAL ANALYSIS OUTLOOK

EURUSD: There’s a potential for a Bearish Key Reversal today (misplaced though) should price close below 1.2943, signaling a deeper pullback towards the 50% Fibonacci retracement off of the July 2012 low and February 2013 high at 1.2875/80. Price has been sustained below $1.3000, with the 200-DMA at 1.2985/90 serving as intraday resistance this week. Should price close below the late-April swing low at 1.2950/60, evidence for a break mounts.

USDJPY: No change: “I like USDJPY higher now that US data has started to improve, and a move above 99.95 would warrant a long entry in the pair for a quick move towards 102.00…The break of 99.95 has led to a sharp move up into the mid-101.00s, and at the time of writing, the pair had surged above 102.00 earlier today. With the Bullish Ascending Triangle in play and 102.00 reached, I’m now looking for a small pullback before the march towards 103.50 begins. I’m bullish and long from 99.95 and 100.19.”

GBPUSD:The GBPUSD slidehas continuedafter falling below the ascending channel support off of the March 12 and April 4 lows is at 1.5350/75. It is worth noting that the RSI uptrend that’s supported the rally since early-March has failed, additional failure below the 47 level (a floor in April) suggests that price could continue to fall towards 1.5200/20 before support is found.

AUDUSD: No change: “The AUDUSD continues to falter as market participants remain focused on the renewed easing cycle that the RBA has entered. Between the RBA’s rate cut on Tuesday and the decision to lower the 2013 growth and inflation forecasts on Friday, the AUDUSD has held below $1.0000 despite several attempts to reclaim the psychologically significant figure today. I’m bearish and short from 1.0150.”

SP 500: No change as a potential Bull Flag forms: “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). As first noted in mid-April, 1625 should be a big figure where sellers come in: channel resistance off of the February 25 and April 18 lows (drawn to the April 11 high) aligns neatly with the 100% Fibonacci extension off of the December 28 (fiscal cliff) and February 25 (Italian election) lows. 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).”

GOLD: No change: “Price has rebounded nicely following the dramatic sell-off in the beginning of April, yet remains contained by the crucial 61.8% Fibonacci retracement at 1485/90. This “Golden Ratio,” if achieved with a weekly close above, would suggest that a major bottom is in place, setting up for a rally back towards 1565/70 at a minimum. 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.”

— Written by Christopher Vecchio, Currency Analyst

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

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