ASIA/EUROPE FOREX NEWS WRAP

The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) endured its worst loss of the year yesterday as a massive USDJPY unwind (rumored $22 billion) sent the highly-levered pair to its worst loss in three years – yes, since the Fukushima earthquake. Interestingly enough, the major swings all happened after the European close; but the roots of the major US Dollar dislodging are rooted in the European Central Bank’s press conference.

After the ECB’s press conference, in which President Mario Draghi made it clear that the move to negative deposit rates would remain on the backburner, investors found renewed faith in the Euro, and thus began a brutal day of USD selling across the board. This view has been compounded by the fact that the recent string of US data has come to disappoint mostly since Fed Chairman Bernanke’s testimony in late-May, leading general market sentiment to agree that QE3 will remain in place for the foreseeable future. With only modest data during May, today’s NFP report represents a very real threat to the bearish US Treasury outlook, as estimates extend below +100K/month.

With that said, it appears that investors may be getting ahead of themselves. The 12-month jobs average is +188K, and our in house model suggests upside risk to +202K to +212K. Both of these figures eclipse the consensus forecast of +1653, and given our bias for a surprise, the US Dollar selloff may not extend through the end of the week. I would not rule out a major reversal, extending through 97.00/20 to 98.60, should today’s NFP report post a sizeable surprise. (View the NFP model.)

Taking a look at European credit, bonds have been bid up across the board, but for an outlier performance in Portugal. The Italian 2-year note yield has decreased to 1.521% (-6.3-bps) while the Spanish 2-year note yield has decreased to 2.081% (-1.5-bps). Likewise, the Italian 10-year note yield has decreased to 4.284% (-7.4-bps) while the Spanish 10-year note yield has decreased to 4.618% (-4.9-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:30 GMT

JPY: +1.31%

CHF: +0.26%

EUR: +0.03%

CAD:-0.01%

GBP:-0.17%

NZD:-0.87%

AUD:-0.92%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.20% (-1.71% past 5-days)

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TECHNICAL ANALYSIS OUTLOOK

EURUSD: The break of the 38.2% Fibonacci retracement (Jul’12 low to Feb’13 high) at $1.3075 has put the EURUSD in the position to achieve 1.3190/245 today, the zone containing the mid-April swing highs. However, it is important to note that alongside this price resistance zone, the daily RSI hasn’t eclipsed 61.5 during rallies. Thus, I will look to fade the EURUSD should price enter this area. Overall, I maintain that “the technical structure is near-term bullish, and the rejected break of the Head Shoulders neckline suggests there may be another thrust higher left before an eventual breakdown. Accordingly, I’m bullish above 1.2930, but looking to sell rallies into 1.3200.”

USDJPY: While we favor the USDJPY lower in the near-term due to retail trader positioning, the USDJPY has achieved its near-term target lower and now faces staunch support at ¥98.60/85, the conflux of the: 55-EMA; weekly S2; ascending channel support off of November 14, 2012 and April 2, 2013 lows; and early-May swing support before the thrust through 100.00. If there was a place to look for a rebound, this is it. Conversely, a poor showing by NFPs tomorrow could trigger an even deeper pullback towards 97.00 and 95.75 over the coming week.

GBPUSD: No change: “Despite failure on Friday, the turnaround late-day led to a Hammer forming in the 8-/21-EMA “catch” zone, and price action today has seen the pair trade through the 21-EMA at $1.5220/25. This would be the first close above the 21-EMA since May 9. A close 1.5280 should indicate a Double Bottom has formed, with potential for the pair to reach 1.5500 at some point the next week or two.”

AUDUSD: Rebounds have been shallow 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 $1.1071. Although there was some upside the first few days of this week, the AUDUSD once again finds itself down after a bounce, and price has fallen back to the 50% Fibonacci retracement from the May 2010 low to the July 2011 high, at 0.9572. Considering that there has been little buying attraction here, a break below – in what would also be a break below major lows set a year ago this past week – would represent another material breakdown in the AUDUSD, with 0.9380/90 and 0.9210/20 eyed lower.

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.” Now, the SP 500 has fallen to the 38.2% Fibonacci retracement of the April low to May high at 1629.4 and has held; a close below this level would open the door for a deeper retracement to 1580/85.

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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