ASIA/EUROPE FOREX NEWS WRAP

The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is having only its second positive day over the past eight, as the non-JPY components of the index have all pulled back amid rumors that the Federal Reserve will detail its QE3 unwind at its meeting next week, on June 19. For now, the USDOLLAR is holding above the key May 9 swing low at 10480, the day the USDJPY pushed through and cracked ¥100.00 (a break below here would leave support quite sparse which could result in another dive lower in USDJPY).

In light of yesterday’s better than expected US Advance Retail Sales (MAY) report, it’s clear that the US consumer has taken advantage of low interest rates, with credit growth accelerating, house prices rising, and auto sales at their highest levels in years. Next week, this will be a major reason why the Fed will signal that it intends to keep interest rates low, so as to not disrupt a fragile recovery hamstrung by feckless fiscal policy, thanks to the lowest-rated Congress ever (per a Gallup poll released yesterday).

Accordingly, I think that the trade remains to sell xxx/JPY (i.e. EURJPY, USDJPY, etc.) rallies. There are two reasons why. First, US Treasury yields have spiked higher in recent weeks, with the 10-year yield hitting a 16-month high earlier this week. However, during this time, the Japanese Yen strengthened, particularly against the US Dollar, an unusual occurrence. Should the Fed keep its QE3 program in place on Wednesday, there is scope for a pullback in yields, which will accelerate weakness in the weak USDJPY right now. Secondly, and just as important, the BoJ has shown no intention of addressing recent volatility in Japanese bond and equity markets, which the May 21 to 22 Minutes showed last night. Accordingly, this is the perfect fundamental combination for selling rallies in the JPY-crosses for the next week.

Taking a look at European credit, bond yields have compressed across the region on the day, although recent divergence since the European Central Bank meeting last Thursday between the Euro and short-term Italian and Spanish debt raised the likelihood of a modest correction; that is, yields fall back as does the Euro. The Italian 2-year note yield has decreased to 1.701% (-4.9-bps) while the Spanish 2-year note yield has decreased to 2.140% (-1.8-bps). Likewise, the Italian 10-year note yield has decreased to 4.264% (-9.1-bps) while the Spanish 10-year note yield has decreased to 4.523% (-7.6-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:20 GMT

JPY: +0.46%

CAD: -0.13%

AUD: -0.26%

CHF:-0.27%

NZD:-0.37%

EUR:-0.39%

GBP:-0.60%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.15% (-1.47% prior 5-days)

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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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