EUR/USD
Markets rallied on Friday as both Greece and Italy were see to make some headway in
solving their never ending crises. Equities generally rallied by 2%/3%, Italian bond yields fell to 6.4% and the Euro had a move of 300 points above the weeks lows in what was a volatile weeks trading. The close was only 50 points below that of the previous week and it looks as though we may well have some more consolidative, but choppy, action ahead. Following the Italian Senate’s approval of the budget-cuts, promised to the EU in exchange for assistance to reduce the national debt, they been ratified over the weekend by the lower house and Berlusconi has finally resigned, which could give further encouragement to the Euro early in the coming week.. In Greece, the new PM, Papademos has the dubious task of implementing the austerity measures in order to ensure the next tranche of the bailout package of EUR 8 bio is handed over by the EU. It was seen as a positive move that Greece had a PM at all! It wasn't all good news on Friday though. Italy and Greece remain in a precarious state, as concerns continue to build over Spain, after the GDP data showed the country coming to a standstill in Q3, amidst growing unease that deficit reduction targets will not be met. Spanish bonds are catching up with those of Italy, finishing Friday at 5.9% and with elections due on Nov 20. How the new Government intends to implement the required austerity measures remains to be seen. Watch this space!
Technically the Euro has broken up from its lows and remains largely unchanged on the
week. The indicators for Monday look as though we might be in for further strength and tests on 1.3820/70 are possible. The immediate support now looks to be 1.3720 and then 1.3670. In the longer term, the head/shoulder formation that we have been watching is now negated with the break back above the neckline. This often causes an impulsive move higher as shorts scramble to cover. The warning signs were there, in the form of the divergence on the charts, and it would not surprise now to see a move back to 1.4000. Beyond here would be doubtful, and given the ease with which the EU Officials manage to find ways of pushing the panic button, we are continually just a press statement away from a quick move lower.
Overall I still think we are unlikely to move too far from the wide but volatile 1.34/1.40 range
in the coming week but still prefer to trade from a bias of selling into strength. Every time the Euro makes a sharp move lower though, various Central Banks/ Government Organisations appear on the horizon to provide support. I suspect this is likely to continue to be the case.
Data this week will include EU/German ZEW Survey & GDP (Tues,) EU &US CPI (Wed),
German PPI (Thur), EU Consumer Confidence & German PPI (Fri). Good Luck..
AUD/USD
The AUD turned around sharply late on Friday, catching out plenty of shorts –
including me! Having looked comfortable at 1.0140 through Europe, the sudden
squeeze higher in thin conditions took out a couple of important technical levels.
The Head Shoulder formation that we have been monitoring looks to have been
negated with the break back above the neckline and a further squeeze higher on
Monday would not surprise, although Asian markets could well look at these levels
as welcome selling opportunities.
Technically, from here, the momentum in the short term appears to have further
upside potential, possibly to around 1.0400 where the 50% retracement of
1.0750/1.0050 lies, as does the 200DMA (1.0414). If this were to play out, Id then
expect the beginning of a steep leg lower in a Wave 3 which should take us under
parity, but we’ll have to wait and see.
For Monday, Berlusconi’s resignation may provide further food for Friday’s relief
rally, following the improved news from the EU. The hourlies are somewhat
overbought but the 4 hours are pointing higher. Quite possibly though, the Asian
session may see some consolidative trade before Europe get going. We often see a
directional move on a Monday that proves to be a weekly high or low, so if we do
move strongly higher today be very careful of going with it. The dailies still point
lower so don't get caught long at the top!
On the downside, immediate support should now be seen at 1.0205 (38.2% of the
move up from 1.0050 to 1.0304 on Friday.) Beneath here 1.0178 (50 % of the same
move) will provide support but I’d be surprised to see this early in the week.
Much of course will depend on the equity markets, and further short term strength
would not surprise. Once again though, a move above 1300 in the S&P looks as
though it may provide a selling opportunity for the next leg lower. In the meantime
1245/1285 looks to contain it, but momentum suggests we may want to look at the
topside.
The economic highlight of the week for the AUD will be the RBA minutes (Tues)
