ASIA/EUROPE FOREX NEWS WRAP

The USDJPY fell to its lowest level in two months – since April 4, the day that the Bank of Japan unveiled its sweeping QE program that touched off the run to ¥100.00 – and the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) has erased all of its gains since the first week of May. Needless to say, it’s been tough to be a US Dollar bull of recent, thanks to meddling by the BoJ (will they or won’t they add accommodative measures to soothe investors’ fears?) and by the Federal Reserve, who meets next Wednesday for a critical policy meeting (will they or won’t they reduce the pace of QE3?).

Price action in the Euro has been particularly informative overnight, as the EURUSD – seemingly aloof to the rising Italian and Spanish bond yields following the European Central Bank’s policy meeting last Thursday – failed to take back the $1.3400 level, and at the time of writing, was trading back under Right Shoulder resistance on a developing Head Shoulders pattern. Accordingly, the 4H chart this morning showed a Bearish Key Reversal – that is, there was a new high, only to be faded with price closing below the prior period’s low.

If the US Dollar is to stabilize against the Yen – truly the lever right now in markets – and fulfill its potential EURUSD Head Shoulders destiny, then today’s Advance Retail Sales (MAY) report could help spur a reversal in sentiment, even if only through the end of the week. The consensus forecast, per a Bloomberg News survey, is for slight growth of +0.4% m/m from +0.1% m/m in April, as a notable turnaround in automobile purchases is expected to have driven consumption. Considering that US data has missed to the downside in recent weeks (save NFPs), a major beat here would be a big surprise and likely put the “QE3 taper trade” back on the table – long USDJPY, short US Treasuries, and short precious metals.

Taking a look at European credit, short-term peripheral bond yields have continued to press higher relative to their core counterparts, putting increased pressure on the Euro over the course of the morning so far. The Italian 2-year note yield has increased to 1.732% (+2.6-bps) while the Spanish 2-year note yield has increased to 2.107% (+0.8-bps). Conversely, the Italian 10-year note yield has decreased to 4.347% (-3.4-bps) while the Spanish 10-year note yield has decreased to 4.576% (-3.2-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:50 GMT

JPY: +1.71%

AUD: +0.90%

CAD: +0.55%

NZD:+0.25%

GBP:-0.01%

CHF:-0.03%

EUR:-0.04%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.51% (-0.93% prior 5-days)

ECONOMIC CALENDAR

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TECHNICAL ANALYSIS OUTLOOK

EURUSD: Yesterday I said: “We had a tag of the level where the Right Shoulder should form – $1.3225 – with a small overshoot to 1.3333. Price has come off since then, and considered in context of (1) the USDCHF failing to set a new monthly low as the EURUSD set a new monthly high today and (2) the EURJPY reversing sharply off of ¥129.00, there is evidence building that a turn may be coming.” There was overshoot to just under 1.3400 overnight, and the 4H candle from 01:00 EDT to 05:00 EDT put in a Bearish Key Reversal. I prefer the EURUSD short at these levels, with risk contained to the mid-January swing high at 1.3400/05.

USDJPY: Yesterday I said: “With US Treasury yields at their highest level in 16-months and the USDJPY sinking, there is probably trouble ahead (I don’t think Fed begins QE3 taper in June; thus yields fall as bond prices move up, weighing on USDJPY).” There are two major bearish patterns in play right now: a Bearish Rising Wedge; and a Bearish Broadening Wedge. The Bearish Rising Wedge was initiated on May 30, and the measured move calls for a return to the base at 92.55. The Bearish Broadening Wedge, initiated yesterday, calls for a move back to the base near 90.84. Accordingly, in context of retail traders adding to their USDJPY longs, we find that the combination of sentiment and technicals offers a favorable opportunity for continued losses.

GBPUSD: No change from Friday: “Indeed, the pair has rallied to the 200-SMA at 1.5700 before reversing, and finds itself holding near early-May highs, as well as the 50% Fibonacci retracement of the January high to March low, at 1.5585. Similarly, the pair found resistance at the top rail of the ascending channel off of the March and May lows (drawn to the early-May high); and in context of the daily RSI failing at 66 again.” The GBPUSD is creeping back towards its 200-SMA once more, at 1.5698, but thus far has failed on the swing higher and is working on a lower high relative to last Thursday. Once more, “A near-term top may be forming, but it’s best to be neutral in my opinion.”

AUDUSD: No change: “The daily Hammer yesterday at major support – the Oct’11 low as well as the Nov’09 and Apr’10 highs between $0.9380/410 – has yielded to a surge higher today, back to the 8-EMA at 0.9538. It’s worth pointing out that the last big countertrend rebound – June 3 – produced a rally back to the 23.6% Fibonacci retracement from the April high to May low (at the time), and then failed. If this happens again, the AUDUSD could climb back to 0.9620/25 before sellers reemerge.”

SP 500: No change: “The SP 500 found support ahead of the 61.8% Fibonacci retracement of the April swing low to May swing high (1593.6) on Thursday, and following the better NFP print, and closed the week above the conflux of the 8-/21-EMA at 1630/33. Now price faces a new challenge: the 61.8% Fibonacci retracement of the decline from the May high to the low on Thursday at 1653. A daily close here opens the door for a run back at the yearly high of 1687.4.” The circled/highlighted Evening Star candle cluster that formed June 7 to June 11 points to losses towards 1580/85 (also 50% Fibonacci retracement from the February 25 low to the May 22 high).

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.”

— Written by Christopher Vecchio, Currency Analyst

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

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