FX Technical Outlook - Monday 13th February

Well it all looks like coming to a major resolution very soon as we move on to the next phase of the EU crisis, otherwise known as Greece. The government is warning of the alternative to not backing the austerity measures, but the issue remains finely balanced, with social unrest spreading and it looks as though we are heading towards a very nervous week, with sentiment becoming very fragile. The amount required to avoid a default has bumped up to Eur 145 bio and a meeting to decide the course of action is to be held later on today(Sunday night  - Europe/Monday – Asia). The EU have given Greece until Feb 15(Wednesday) to agree to the austerity plan, in order for them to receive the new bailout package, which will then allow the Greek government to pay off their existing Eur 14 bio debt repayments before the March 20 deadline or face the prospect of default. Mr Papademos has been very plain in his address to the nation about what an EU exit would mean although it doesn’t sound as though anyone in Greece is listening.  The flow-on effect to the banking system in general would be enormous and the potential effect of such an outcome does not appear remotely priced into the markets. We shall soon find out.

Technically, the US Dollar having weakened against almost all currencies during the week turned around sharply on Friday as traders returned to the safe haven of US Treasuries and now looks as though it could be on the verge of another move higher. Also, keep an eye on the VIX (see below), which had a strong move higher on Friday, reversing its recent trend and potentially giving us an early warning of a down leg for the equity markets.

The Eur lost ground on Friday, but currently remains within the upchannel that commenced at the recent 1.2623 low. The divergence on the 4 hour chart and the negative indicators suggest that we have further downside ahead of us. The first support is at the base of the channel (1.3145). This is pretty close, leaving little room for manoeuvre, so beyond here look towards Fibo levels of 1.3047 and then 1.3005 to provide some backup early in the week. If Greece does default, the charts will temporarily go out of the window, but for what it is worth, the channel support line on the daily chart is at 1.2475. Let’s hope we don’t see that level, too soon!

To the topside, short term resistance is now at 1.3250 and beyond here; Last week’s high was at 1.3320 which would provide a barrier prior to various levels above 1.34 that look unlikely to be disturbed early in the week.

Other than Greece, there is some economic data that needs to be looked out for in the coming week. German/EU ZEW Survey & US Retail Sales (Tuesday) and German/EU GDP and FOMC Minutes (Wednesday) provide the highlights, ahead of US PPI (Thur) and CPI (Fri).

The Greek vote may well be known in Asian time today! Be very nimble , it could all get rather hectic!

The Chinese trade data and the RBA did most of the damage to the Aud on Friday, taking some of the heat out of the topside and providing some welcome, although possibly brief, relief to the country’s manufacturing and tourism sectors. The coming week will, as usual, be reliant on risk sentiment, which, with the news coming out of Greece doesn’t look as though it will be overly buoyant, come Monday morning. The possibility of default seems to be increasing and if that turns out to be the case we have seen a medium term top last week, at 1.0844.

Technically, the Aud behaved pretty much to our expectations on Friday, breaking below  the bottom of the wedge and then continuing on to the pivot level of 1.0680. It actually overshot that to 1.0640 but has bounced and closed around 1.0670. Direction, early on Monday is going to depend on how much we know at the time about the fluid situation in Greece. If the wrangling is still continuing, we will likely hang around current levels, with a downward bias, while the short term charts unwind their oversold situation. If progress has been made – one way or another – we will probably see a gap scenario, either higher or lower. That doesn’t look likely at present and indeed it may not be until the midweek deadline that we see any real action.

In the meantime the levels to watch are at 1.0640 (Fridays low), followed by 23.6% Fibo support (0.9860/1.0844) at 1.0610. 1.0570 is 23.6% of 0.9660/1.0844 and 1.0500 is 23.6% of 0.9353/1.0844. – All very confusing, but suffice to say, there will be plenty of support on the way down. There are a good supply of investors out there still looking to pick up some cheap Aud, so I don’t expect a bloodbath on the way down, if Greece does default. We need to remember that Australia is still AAA rated, offers a good yield and political stability, so could end up being a major beneficiary from all this confusion.

The topside now looks likely to see sellers at 1.0700 and above towards the 1.0844 high of last week. Particular levels  to watch are at 1.0740 and at 1.0765, but I don’t think these are likely to be tested early this week. If they are though, above 1.0844, 1.0890 will be a barrier ahead of 1.09/1.10 congestion.

Economic data this week will include Home Loan Data (Mon), NAB Bus. Confidence (Tues),  WBC Consumer Confidence (Wed), CPI Expectations, Unemployment (Thur).