EUR/USD
It has been another volatile week for the Euro and the Dollar. The Euro, yet again, saw an early, Monday morning Asian high at 1.3806, that hasn't been visited since. It has been, more or less, downhill from there with the odd bout of short covering thrown in. The usual conflicting Eurozone headlines were, again responsible, with Friday’s news being the revived idea that the ECB could potentially fund the bailout package for indebted Eurozone nations, through the IMF, who could then on-lend the funds. Germany is still much against the idea of the ECB being a lender of last resort, but for lack of alternatives the plan might yet have legs. If it were to happen, it does not get around the potential problem of igniting inflation as the ECB prints endless Euros and it will be even worse if we eventually get inflation without any economic growth, as the EU slips into recession. Merkel and Cameron met on Friday to voice their opinions on the best way forward. Merkel is dreaming if she thinks the UK would allow the implementation of an EU zone “Robin Hood” Financial Transactions Tax, applied only in the EU and not globally. As all the politicians are ultimately pulling in the direction that best suits their own nation’s economy, it is not easy to see a sensible resolve to this enormous mess any time soon. It is therefore difficult to see any real turnaround in the fate of the single currency. However, if an ECB/IMF deal were
to come off, we would certainly see a pretty sharp rally, and possible turnaround in the fortunes of the Euro, so pay attention! This would have the potential to be a game changer, if it were to happen. Never mind the inflation worry; that will come later. In the mean time the market would charge back into the Euro. Big mistake!
Back in the real world, from a technical point of view, the Euro did as we suggested last week and stayed within the wide 1.40/1.34 range and this could well continue to be the play in the next few days. The 1.34 base looks pretty solid right now and the topside looks to be 1.3620 – tested and failed on Friday – followed by 1.3695 (50% of the 1.3145/1.4245). Given the way the 4 hour indicators are looking it would not surprise me to see a test of the upside. This would unwind the oscillators easing the way for a move through 1.34 towards 1.3350 and then to the 1.3260 medium term objective. The dailies point lower but
are possibly showing the initial signs of flattening out, so be flexible and watch the news out of the EU. The next disaster is only a headline away! The European Bond markets are permanently balancing on the edge and we have the Spanish election today. The expected winner, Mariano Rajoy, has already pleaded with markets to “give him more than half an hour” to put a plan together! He has a lot to learn! No chance!
It is a shortened week due to Thanksgiving, but action-packed nonetheless. The highlights will be the Wednesday deadline for the Congressional committee to conjure up $1.2 trillion in spending cuts over the next 10 years – don't hold your breath,- the US GDP & FOMC minutes (Tues) and there is a host of stuff out of Germany and the US. As usual these days though, data may be overwhelmed by politics, so tread carefully – Good Luck!
AUD/USD
The Aud looks sick, with the odd round of short covering thrown in to give the pretence of
health. We saw this on Friday in the US, with a short, sharp rally to 1.0107 – exactly 38.2% of the weeks move from 1.0350 to 0.9962. It didn't last long though as grateful sellers emerged to knock it back to parity in the last couple of hours of trading.
Where to from here? The obvious answer is down. But the Aud is never obvious! While the
dailies are strongly suggesting we point lower, the 4 hour charts look as though they want to endure some more consolidation before we can attack the 0.9910 support (61.8% of
0.9385/1.10750). Fridays rally though conveniently unwound the 1 hour charts and they now
look to be headed lower, so you never know, we may get lucky! My early week view would
be to stay short from Friday and to be taking profit at 0.9910 – should we see it. For those
who want to hang in for the ride, 0.9860 (12 Oct low) should provide the next support and I
doubt we are going below here early in the week. Infact, I think we would be very lucky to
see it at all.
To the topside, Fridays 1.0107 will be the first hurdle. This is followed by 1.0150, 1.0200 and 1.0250 – all being Fibo points from last week’s move lower from 1.0350, early last Monday. So, all in all, use the rallies early in the week as opportunities to join the queue of sellers, bearing in mind the 0.9910 support, which is likely to be quite strong.
The only thing that worries me here is that the market is overwhelmingly bearish. Take a look at the daily chart. If we were to bottom out around current levels (0.95/1.00 etc) and make a sharp rally (ECB/IMF deal to save the Euro?) - Then look at the potential for a reverse Head/Shoulder formation that would blow everybody’s socks off! The neckline would be at 1.0765. With the base at 0.9385, that would give us an Aud objective of 1.2145!! That would sort a few people out. Don't panic – that is very much Plan B at this stage but worth keeping in mind.
Keep an eye on Aud/Jpy(76.97).The cross has trended steeply lower from 84.00 to 76.58. A
break above 77.75 now though would most likely see fresh buying emerge. In the meantime the downtrend continues, although we are sitting on support at current levels. Below 76.50 would target 74.90. Data wise it is pretty light and I suspect liquidity will get thin late in the week as we head into Thanksgiving w/e. Good Luck.
