EUR/USD
Equities gained and the Dollar weakened against its major trading counterparts in Friday’s Europe/US session with substantial Euro short covering, as the markets looked ahead to the EU summit over the weekend and then to a second one on Wednesday, in the hope that the need to use the US$ and US Treasuries as a safe haven from Europe’s woes, will diminish.
The Euro was helped along as the Troika saw fit to extend the next EUR 8 Bio tranche of the
bailout package to Greece, despite a forecast that Greek debt will hit 181 per cent of GDP
next year and that lenders may have to face a 60% write-down on their existing investments.
In the meantime, France and Germany now need to overcome their differences and agree
how to maximise the impact of the EFSF and how to implement the final “comprehensive
package”. Friday & the weekend saw a plethora of Pollie-speak, none of it particularly
positive, and most of it very confusing..
Across the Atlantic, comments from Fed Governor Tarullo with regard to the possibility of the resumption of large scale purchases of mortgage backed securities were taken by the
markets as heralding the prospect of QE3, sending equity market 1.5%-2% higher and helping to push the dollar down.
There is so much conflicting news, it is almost impossible to take it all in and to come up with a clear picture, so best to just concentrate on the technical’s, where it looks to me as though we could be in for a volatile run in to Christmas.
The Euro finished the week on its highs in the face of the short covering, and is pushing
against resistance at 1.3900. A positive outcome from Europe would send the Euro sharply
higher and a case can be made out for a return to levels around 1.46/1.47. The indicators are
hinting that this may be the preferred direction in coming days. Alternatively, a failure of EU
leaders to provide a clear picture of how they intend to solve the issue, -which given their
track record would be at shorter odds than Black Caviar, -would see the Euro head quickly
back towards the lows at 1.31. Until we see something definitive it is pointless to speculate
on direction, but, should we head higher, resistance will be seen at 1.4005 (61.8% Fibo
resistance of 1.4545/1.3138), 1.4150 and then at 1.4210 (76.4% of the same move).
Short term support should be seen at 1.3725 now, and then at 1.3620 and 1.3530.
Economic Data is likely to go somewhat unnoticed in the wake of the outcome of the summit but highlights will be German/EU Services & Manufacturing PMI, today and US GDP
Thursday.
AUD/USD
The Aud took out the short term resistance and moved higher late on Friday
closing at the weeks high, but ultimately staying within the 1.01/1.04 range that
we spoke about throughout last week.
Right now, as with all the so called “risk trades” the indicators are pointing
higher early in the week. This needs to be taken with an element of caution as
things can turn around pretty quickly if things get sticky in Europe. The S+P,
which the Aussie has been following closely looks headed higher, but is up
against it, with strong resistance in the 1240/1280 area, and could well find a
top here before commencing another leg lower.
The weekend press in the UK are not supportive of a quick solution to the EU
issues, suggesting the various parties are as far apart as ever with regards to
finding a resolution to the problem. We shall see, but I’d be surprised if on
Sunday we see much more than a damp squib, given that another meeting has
already been arranged for Wednesday and would therefore think that strong
resistance at around 1.0400 may hold early in the week as 1.0403 (200DMA
and 1.0427(61.8% of 1.1082/0.9385) should perform a formidable hurdle to
climb.
In the meantime – wait and see what Monday brings, apart from 3rdQ PPI – but
a pullback towards 1.0300, from Fridays closing levels would not surprise
