EUR/USD
The Euro shrugged off Spain’s 5 million unemployment number and Fitches downgrade of Spain, Italy, Belgium, Cyprus and Slovenia on Friday, preferring to concentrate instead on the possibility of a deal on the Greek debt situation. Whether any deal is affected by the downgrades remains to be seen, but now the IMF has weighed in by suggesting that Greece will need to give up autonomy of its budget in order to receive the next Eur 130 billion of the bailout package. This has gone down very well in Athens! Weaker than expected US GDP did little to help the US$, that continues to be rattled by the FOMC statement earlier in the week, keeping interest rates at basement levels until the end of 2014. Fed Governor, Dudley, did little to help the dollar with his dovish comments on the outlook for the economy, extenuating hopes of QE3. Interestingly though Equities failed to
follow up on this, finishing very slightly lower in the US.
ECB governor Draghi helped the Euro’s cause earlier in the day when he outlined how the LTRO operation has helped avoid a credit crisis, and similar demand is seen for the next round of LTRO. Suddenly it appears the Euros problems have gone away as it continues its rally from 1.2625. I suspect they will return with a vengeance sooner rather than later.
Technically the Euro traded to within 7 points of the 1.3240 (38.2% of 1.4242/1.2623), resistance that we have been hoping for over the last few days. This remains in place and above here 1.3275 provides a minor target, but the daily charts are pointing north still and the next major point of resistance is not seen until 1.3350. The dailies are not at overbought levels and the general momentum looks to continue higher. 4 Hr indicators are O/B and warn of a possible correction first and on the downside, 1.3180 is the first support, followed by 1.3160 and 1.3090. Price action will remain choppy and dependent on political/official statements, particularly from Europe. If seen, a Greek deal is likely to see a knee jerk move higher, but this is surely mostly priced in, and at the end of the day, a 70% debt writedown – if that's what it is going to be – is hardly something to celebrate – unless you are Greek!
The big game changer looks to be the Feds move at the FOMC last week and this could well further undermine the dollar. The DXY index looks to be headed lower, and if so the Euro shorts are going to be badly squeezed. Be flexible and take it session by session and be careful of getting too sucked in by the current Euro rally at these levels. It is going to be a volatile week.
There is a fair bit of data due this week. The highlights are Monday - German CPI , Tuesday EU unemployment rate, Wednesday China Mfg PMI, EU CPI, Thursday – EU PPI, Friday- Non Farm Payroll, US unemployment.. Good Luck.
AUD/USD
The Aud has had a strong week as risk appetite increased along with the recovery in the Euro with the market waiting on some kind of deal over the Greek debt situation. The generally weak US$, care of the FOMC, helped things along, as did the fact that Australia is one of a rapidly diminishing club of AAA rated nations where investors can park funds in a stable economic/political environment – especially one that pays a yield. With last week’s Australian CPI figure making a February rate cut a 50:50 bet, funds are likely to keep flowing in. Even if the RBA do cut rates, it looks doubtful as to whether the banks will pass much of the cut on. The recent covered bond issues from 2 of the big 4 banks are evidence of the difficulties in raising capital, transacting at roughly 170 basis points above swap rates , putting yields on the 5 year term being above 6%, and with up to $20billion due to be raised by the end of March.
Technically the Aud looks strong and a test of the major resistance at 1.0750 may well be on the cards. A break of this level would see a wave of fresh buying. The daily charts continue to point higher, although they are reaching overbought levels. The weeklies are turning around from pointing lower over recent weeks and are looking to gain momentum, although it is early days to read too much into this. Before we reach these giddy heights though, we need to overcome the weeks high at 1.0688 and the channel top which is now at 1.0728. As with the Kiwi, while it looks headed higher, I would be very wary of getting too long up here. Just when the market gets itself comfortable with the renewed strength, you know an accident is waiting to happen around the corner.
The downside now has support at 1.0590, backed up at 1.0570. Beneath here, 1.0500 and
the bottom of the channel at 1.0415 will provide a base. Dips will be well supported.
On the crosses, Eur/Aud (1.2404) was volatile but directionless last week but has finished
near the top end of its recent range. I suspect we are basing in the 1.2250/1.2450 area for a
move higher , but be wary of picking levels to buy the cross. The initial target appears to be
1.2595 Fibo level. Sterling/Aud is messy and likewise might be building a base, but difficult to tell. Aud /Jpy looks like it is going to be very choppy – as seen last week – but with an overall medium term bias to higher levels with 82.85 being the first target. Trading Balance, Building Permits - Thursday.
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