ASIA/EUROPE FOREX NEWS WRAP

High beta currencies and risk-correlated assets in general are rebounding on Wednesday, in what is seen as a technically driven move rather than a concerted shift in underlying fundamentals. On the commodity currency front, the New Zealand Dollar has emerged as the top performer amid signs that the Reserve Bank of New Zealand will keep its key interest rate on hold at 2.50% for the remainder of the year, and given the central bank’s belief that the Kiwi is too strong, this is a view that I believe should hold for at least the 2Q’13 and 3Q’13.

The neighboring Australian Dollar is having a rougher go of things after a disappointing 1Q’13 Consumer Price Index was released earlier, as the data stands to confirm that economic activity in the region is starting to suffer (this fits in neatly with weak growth readings out of China and Singapore recently). While these inflation data initially leveled the Aussie, an announcement by the Reserve Bank of Australia – the RBA intends on investing 5% of its foreign currency assets in China – has lifted spirits. As explained below in the technical section, there is developing evidence that the Aussie could rally into the end of the week.

Overall, price action this week can be characterized as “sideways,” best displayed by the EURUSD’s inability to shake $1.3000, or the USDJPY’s inability to break through ¥100.00. As is the case in both pairs, there’s significant event risk coming up over the next week that should keep price action relatively contained until the events come to pass: the Bank of Japan meeting on Friday; the US 1Q’13 GDP release on Friday; and the European Central Bank meeting next Thursday.

Taking a look at European credit, it appears that peripheral bonds aren’t impressed with the Italian PM announcement, but the Euro hasn’t suffered or benefited wholly. The Italian 2-year note yield has increased to 1.213% (+7.6-bps) while the Spanish 2-year note yield has increased to 1.866% (+3.8-bps). Similarly, the Italian 10-year note yield has increased to 4.010% (+7.5-bps) while the Spanish 10-year note yield has increased to 4.296% (+3.5-bps); higher yields imply lower prices.

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RELATIVE PERFORMANCE (versus USD): 11:00 GMT

NZD: +0.65%

GBP: +0.18%

AUD: +0.15%

EUR:+0.12%

CAD:-0.03%

CHF:-0.04%

JPY:-0.06%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.06% (+0.34%past 5-days)

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TECHNICAL ANALYSIS OUTLOOK

EURUSD: No change: “After stalling for several days at the 38.2% Fibonacci retracement from the Jul’12 low to the Feb’13 high at 1.3075, the EURUSD has fallen back below its 8-EMA and 21-EMA amid a breakdown in the daily RSI uptrend. Although retail sentiment remains short (thus the contrarian SSI indicator is bullish), we’ve seen positioning narrow, a sign that the breakdown transpiring may be legitimate. With a rate cut being tentatively priced in (see: Italian and Spanish bond yields), soft support at 1.3000 has broken. Losses could extend to 1.2930/50 (200-DMA) in the short-term. Rallies should be capped by 1.3130 and 1.3200/10.”

USDJPY: There are two possible outcomes here: a Bearish Double Top below 100.00; or a Bullish Ascending Triangle. With the daily RSI uptrend intact, I am partial to the bullish outcome, which is reinforced by price remaining supported by the 8-EMA, now at 98.85/90. The Hammer yesterday at the 8-EMA bolsters the bullish case as well. Deeper pullbacks eye 97.60/65 (21-EMA) and 96.60.

GBPUSD: Price is consolidating just above its lowest levels since early-April, and the breakdown in RSI has steadied as well, holding near 50. The lower rail of the ascending channel off of the March 12 and April 4 lows was touched yesterday at 1.5175/200, opening the potential for a rebound high. A break of the downtrend off of the mid-April highs will have to break, at 1.5290/300 today. It is worth noting that a modest 1Q’13 GDP print later this week could help the British Pound recover off of the bottom rail in its ascending channel off of the March 12 and April 4 lows.

AUDUSD: No change: “Channel support off of the March 4 and April 8 lows at 1.0390/400 broke after another rejection at 66 in the daily RSI suggests that another period of weakness could be beginning. Now the 8-/21-EMA structure has flipped bearish amid the breakdown in the RSI uptrend. Although shorter-term time frames (1H, 4H) have shown the proclivity to force consolidation when they become this oversold, I favor selling bounces in the AUDUSD amid declining base metals’ prices and poor data out of China.” It is worth noting that the AUDUSD is working on a three day pattern of “Doji-Hammer-Doji,” a potential basing pattern that would suggest another rally.

SP 500: No change: “Is the top in? A dramatic sell-off yesterday dropped the SP 500 below the crucial 1570/75 area, former swing highs as well as the ascending trendline support off of the late-December and late-February swings lows – coincidentally the pre-fiscal cliff deal low and the post-Italian election low. We’re in a bit of “no man’s land” here, with either a close back above 1570/75 necessary for a retest of the highs, or a close below 1530/35 to signal weakness towards and below 1500.”

GOLD: No change: “The major support zone from the past 18-months from 1520 to 1575 gave way with fervor last week, as the combination of weak fundamentals (financial institutions scrambling for cash in Europe after Cyprus) and broken technicals produced the ideal selling climate. Precious metals in general have gotten hammered, and Gold has fallen back to the mid-March swing lows near 1380/85. A weekly close below 1430 this week leaves the possibility of a bigger dip towards 1305.”

— Written by Christopher Vecchio, Currency Analyst

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

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