ASIA/EUROPE FOREX NEWS WRAP

The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is down on the first trading day of June, as further weakness in Japanese bond and equity markets has once again provoked gains by the Japanese Yen, while a stronger than expected Chinese manufacturing report has the commodity currencies, led by the Australian Dollar, on the bid this morning. Overall, it’s important to consider that the US Dollar just had its strongest month in a year (May 2012), and with technical conditions in the Asian-Pacific currencies exceptionally stretched, a period of consolidation/give back shouldn’t be ruled out.

Certainly, if there is a time for the US Dollar to give back gains, the stage has been set neatly at the beginning of the week. The Chinese PMI Manufacturing (MAY) report beat expectations (50.8 versus 50.0 expected, from 50.6) after market close on Friday, while the smattering of the final May PMI Manufacturing reports from Germany, France, Italy, and the broader Euro-zone suggested that the rate of contraction is slowing; these reports in tandem have offered a counterpoint to excessive negativity re: global growth.

Even though there is the always important US labor market report due this Friday, my focus is first drawn to the European Central Bank policy meeting on Thursday. The big question this week is: what will the ECB to stoke credit flow throughout the region? As per data released on Wednesday by the ECB, loans to the Euro-zone fell by -0.9% y/y in April, worse than the -0.7% y/y forecast. This was the twelfth consecutive month of contraction, underscoring the hesitancy of banks to inject capital into the periphery. One such measure being discussed is the implementation of negative deposit rates. The short of it: negative rates should incentivize banks to step up loan originations, but also boost capital spending – both of which would provide a much needed boost to the economically and social depressed region.

Taking a look at European credit, higher yields across the continent, likely pricing in no action from the ECB this Thursday, has lifted the Euro. The Italian 2-year note yield has increased to 1.443% (+1.0-bps) while the Spanish 2-year note yield has increased to 1.961% (+5.7-bps). Likewise, the Italian 10-year note yield has increased to 4.190% (+3.8-bps) while the Spanish 10-year note yield has increased to 4.483% (+6.5-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:35 GMT

AUD: +0.89%

NZD: +0.60%

GBP: +0.41%

CAD:+0.25%

EUR:+0.16%

JPY:+0.14%

CHF:-0.05%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.30% (-0.60% past 5-days)

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TECHNICAL ANALYSIS OUTLOOK

EURUSD: The Symmetrical Triangle note the past several days yielded a break to the upside but failure to achieve the 38.2% Fibonacci retracement (Jul’12 low to Feb’13 high) has the EURUSD under $1.3000 once more, and testing the triangle’s former resistance. With the mid-May swing highs of 1.3030 broken, I’m certainly more open to a bullish stance from here, although failure to notch a weekly close outside of said triangle (price closes 1.3065 today) would represent a material detractor to the bullish interpretation. At this point in time, I’m going to stay flat as it’s best to wait, in my opinion, to see how several key currencies react at significant psychological levels on the last day of the month.

USDJPY: Yesterday I said: “Although the daily RSI uptrend appeared to be back in play, today’s selling has a clear break once more. A further breakdown through trend support eyes a move towards ¥100.00, then 97.50.” Indeed the RSI uptrend broke but the 50 level, which held the previous decline and has been support for the past several months, is now in play. The failure of the US GDP report now puts the big 100.00 figure in focus, and I imagine that, with month-end rebalancing in play, a big fight could be on the horizon. Stops are heavy below this key figure, and a break below could be a major blow to bulls.

GBPUSD: The pair traded back up into mid-May support, finding it as resistance in the $1.5185/225 zone, coinciding with the 21-EMA, which the GBPUSD hasn’t closed above since May 9. Similarly, the rally off of the psychologically significant 1.5000 level was halted at the 61.8% Fibonacci retracement at 1.5241 (May 13 swing high to May 29 low). A close 1.5280 should indicate a Double Bottom has formed, with potential for the pair to reach 1.5500 at some point in June.

AUDUSD: No change: “The past several weeks I’ve maintained: a deeper pullback towards 0.9580 and 0.9380/400 is beginning. 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 1.107. I maintain that I’m awaiting a monthly close below $0.9860, but that seems all but guaranteed with two days left in the month. The first target of 0.9580 was hit overnight and I expect a reaction at this level, given its significance as 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.”

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.”

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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