EUR/USD
Far from seeing a relief rally following the announcement of Berlusconi’s resignation, panic
more or less set in with 10 Year Italian bond yields trading up to 7.5% following the Clearing House, LCH, decision to raise margins on Italian debt to 11.65% from 6.65% and the ongoing political uncertainty. If a yield above 6% was uncomfortable, this is completely unsustainable and the ECB, pumping funds into Italy over the last few weeks looks to have been a complete waste of time as they sit on huge paper losses. The MIB closed down 3.8% - not a bad result, having been down 5% at one stage – having recovered somewhat when a press release announced that austerity measures would be set in place by the end of the week. The DAX & CAC closed down 2.2% and the S&P is closing 3.6% lower. Elsewhere Greece still has no Prime Minister although Papandreou has confirmed that that a new unity government will be formed without delay. In another worrying move, LIBOR rates moved close to 1% - almost twice the Base Rate, - indicating the increased concerns in the banking system over the direction that Europe is heading and the stability of the financial system.
Technically, the Euro looks to be standing at seriously important support, which if it gives
way has an ominous look. A daily Head/Shoulder formation (Chart) looks to have formed,
with the neckline converging with the important Fibo support at 13565. We are currently
sitting right on this and if it gives way the target would be around 1.2950. The indicators are
now pointing lower and the first decent level of interim support, should we head in this
direction, would come in at 1.3410.
We may of course see some improved news tomorrow. If Berlusconi can be convinced to go immediately and Greece gets a new PM, we could be in for a short but sharp relief rally. At this point it looks highly unlikely, but we could get a move back towards previous support-
turned resistance at 1.3750.
For today’s Asian session, given that the hourly indicators are oversold, I would expect the
session lows to hold (1.3523), as they unwind, but when Europe gets in it could be a whole
new ballgame. Very nervous conditions dominate so tread carefully!
Later in the day we see China’s Oct Trade balance and then from Germany, the Wholesale
Price Index and CPI. From the US we get Jobless Claims and Trade Balance, but it appears that economic data will be swamped by other events.
AUD/USD
AUD got hit when the Italian Bond market collapsed, with a quick move down
through 1.0300 support at the European open. It never recovered and despite
holding support at 1.0200 for a while the weight of the equity markets
eventually helped push the AUD to a session low of 1.0140. The S&P is currently
down 3.7% which is not assisting the AUD at all and the bounce is anaemic.
Technically the AUD looks pretty horrible. In much the same situation as the
Euro, a Head Shoulder formation has seen the neckline broken with an
objective of around 0.9625. This won’t happen overnight, so don't get too
excited, but we are looking at a clear directional move over the next few weeks.
Over the last couple of days I had thought we might see a move towards 1.0500
before we get the big move lower although this doesn't currently look to be the
case. Don't count it out altogether though. As the market gets itself short down
here, a nasty squeeze higher to shake everyone out, before it commences the
big move lower would be typical Aussie! Don't be in doubt though, one way or
another, the AUD is going back under parity. As Europe slides into recession and
everyone looks for the exit in the equities market, the AUD will bear the brunt of
the move to risk aversion.
For today’s Asia session, I would think we might see some consolidation ahead
of the Unemployment No’s at 11.30, as the short term indicators unwind their
oversold status, but rallies should see good selling interest. As usual the Asian
C/Bs are likely to be seen on dips and I think 1.01/1.02 should hold at least until
the numbers (Exp +10k, 5.3%) and then take further direction when Europe get
going. Longer term the outlook isn’t very pretty all round.
