Short-covering around the key 1.3000 level.
EUR/USD is unwinding mildly from oversold conditions, driven by shortcovering
as the market adjusts to a new bearish paradigm, following the break beneath that all-important psychological level at 1.3000.
Our cycle analysis successfully signalled increased volatility within the first two weeks of December across “risk” proxies, including the equity and commodity markets. Expect some respite ahead of the holiday period.
Watch for a sustained close beneath 1.3000 (psychological level) to resume EUR/USD’s multi-month downtrend into 1.2870 (2011 major low). Near-term resistance can be found at 1.3215 and potentially even 1.3550 (02 Dec high). Any rebound into these levels is likely to be short-lived.
Inversely, the USD Index has extended its recovery higher to new 11- month highs, (a move worth over 10% from the summer 2010 lows).
Speculative (net long) liquidity flows are strengthening once again and will continue to help resume the USD’s major bull-run from its historic oversold extremes (momentum, sentiment and liquidity).
Initial resistance seen close to 1.5770/80.
GBP/USD has tested the 1.5770/80 double top and met initial resistance. This may highlight the price action seen since 1.5423 as being corrective in nature, with a return to 1.5409 possible in the near-term.
Support for GBP/USD is anticipated given the negative structure that we are also seeing in EUR/GBP. Thus a continuation to the downside in EUR/GBP may be associated with the year’s range being maintained in GBP/USD.
We continue to expect an eventual return to 7.000% in 10 year Italian sovereign yields, which should support the arguements that we have detailed above.
Failure to remain above 1.5423 will see an immediate target at 1.5272 and then potentially trend-line support at 1.5110.
Weakening beneath 78.24 (DeMark™ Level) .
USD/JPY is still weak beneath 78.24 (DeMark™ Level), as price continues to hold within a multi-day trading range (see hourly chart below).
Confirmation beneath 77.25 (pivot level) would help trigger a third price retracement back to pre-intervention levels and potentially even a new post world war record low beneath 75.35.
Sentiment in the option markets continues to suggest that USD/JPY buying pressure remains overcrowded as everyone continues to try and be the first to call the market bottom, within the end of this multi-year contracting pattern (see top chart insert).
This may first inspire a temporary, but dramatic, price spike through psychological levels at 75.00 and perhaps even sub-74.00. Such a move would help flush out a number of downside barriers and stop-loss orders, which would create healthy price vacuum for a potential major reversal.
The medium/long-term view remains bullish, as USD/JPY verges toward a major long-term 40-year cycle upside reversal. Expect key cycle inflection points to trigger over the next few weeks, offering a sustained move above our upside trigger level at 80.00/60, then 82.00 and 83.30.
A return to the 200 day moving average now favoured.
USD/CHF has weakened substantially after meeting resistance close to 0.9550. This initial bout of weakness may now mark the end of the rising phase from 0.8568. A return back towards the 200 day moving average is possible from current levels.
The fate of USD/CHF is deemed to be tied to the direction of selected core Euro-Zone yields and in particular the yield on Italian sovereign debt. The yields on paper maturing in 6 years+ are all trading above 6%, with 5 year bonds just under 6.000%. It is anticipated that funding pressure will return in the early part of next year. This is likely to exert downside pressure on USD/CHF.
10 year yields in Spain and Italy are currently trading at 5.328% and 6.760% versus 6.478% and 7.355%, before the US Dollar based swap agreement. Thus Spanish debt is experiencing a stronger positive effect, in contrast to the Italian market. These yields were trading at 5.041% and 6.560% respectively yesterday.
Unwinding from intraday resistance at 1.0425.
USD/CAD is unwinding sharply from intraday resistance at 1.0425, which coincided with a short-term DeMark™ exhaustion signal.
We prefer to wait for a strong directional confirmation higher before initiating a buy trade setup.
Until then, keep a watchful eye on support 1.0220. A sustained break here would trigger further downside into 1.0000.
Meanwhile, the bulls need to push back above 1.0425 and 1.0524 (25 Nov swing high), in order to trigger a larger breakout from the rate’s multimonth triangle pattern.
In terms of the big picture, a directional confirmation above 1.0680 is still needed to unlock the recovery into 1.0850 plus. This would extend the upside breakout from the rate’s ending triangle pattern, which was part of a major Elliott wave cycle (see top chart insert).
EUR/CAD has breached the base of an important multi-month distribution pattern. A sustained break beneath 1.3393-79 (19th Sept low/61.8% Fib),
signals an important breakdown into 1.3140 and would provide substantial correlation pressure onto EUR/USD.
Strong unwinding from oversold conditions.
AUD/USD is unwinding strongly from oversold conditions, which also coincided with an intraday DeMark™ buy signal (see lower chart).
Although this recovery sharp, it is likely to be short-lived as signaled by the DeMark™ signal. The bears must sustain below 1.0000 to further compound downside pressure on the rate’s multi-year uptrend and push back towards 0.9611.
Elsewhere, the Aussie continues to weaken sharply, against the New Zealand dollar. Near-term price activity is mean reverting back into the 200-day MA and we watch for further setbacks over the multi-day/week horizon.
The Aussie dollar is also pairing back its mild recovery against the Japanese yen, while holding above the neck-line of its two-year distribution pattern. Watch for further downside scope into support at 72.00 which would signal further unwinding of global risk appetite.
Sustained over 122.23 suggests a fresh recovery leg higher.
GBP/JPY has broken over the resistance of a falling hourly channel. Coupled with this we have seen a push over the 122.23 lower high. If this rise can be sustained then a fresh leg higher will be favoured to form for a swing all the way back to 127.32.
A break back over 122.98 will add to a more medium-term bullish stance. A failure to do so will suggest that the recovery seen from the 116.84 low is corrective in nature. This suggests scope for a return to 119.38 and then potentially 116.84.
We do however note that for the majority of December a 120.33 - 122.64 range has been traded. A break out of this range is sought ahead of strategy formulation.
Continues to find support close to the 101.00 region.
EUR/JPY continues to meet support close to the 101.00 region after basing at 101.05 recently.
The negative effects of the breakdown in EUR/USD remain a potential large negative factor for this pair going forward, which warns of a re-test of 100.76 and then possibly lower.
However, from a structural perspctive, the medium-term recovery that we have already witnessed from 100.76 to 111.60 is viewed as the initial leg higher in a larger recovery structure and thus, while trade is maintained above 101.05, a further leg higher is favoured.
This clash between structure and event risk in the Euro-Zone keeps us on the sidelines for now.
Sustained under 100.76 will warn of a much larger continuation to the downside.
Finds initial support on bear channel support.
Sell level adjusted lower, with the appropriate changes made to the objectives and stop.
EUR/GBP has found initial support after bouncing from daily channel support near the 0.8300 region. Scope is seen for a minor continuation of the recovery higher. However, hourly structure remains bearish with a lower high sought versus 0.8613 for a fresh swing to re-test 0.8303.
If a sustained break under 0.8303 can be realized then an extension back to the 0.8068 – 0.8142 region would become viable. This view is assisted by the recent push under 1.3146 in EUR/USD, which may act to make EUR cross shorts easier to maintain.
Rising yields in the core Euro-Zone sovereign bond markets is a continued concern and one that may destabilise the FX markets going forward. Within this environment Sterling may well be judged the best of a bad bunch and to a degree be seen as a short-term safe haven, further adding to the potential for downside pressure ahead.
Hourly structure warns of an extension lower.
EUR/CHF is developing a structure in the hourly timeframe which is currently suggestive of a sizeable extension lower. If a break can be realised under 1.2170 then stops under 1.2123/30 will become vulnerable. If these are triggered, there may be sufficient momentum to target the large cluster of stops that are expected under the 1.2000 region.
Despite some reasonable auctions in Spanish governments bonds, the Italian 10 year sovereign yield remains elevated, with a re-test of the 7.000% level anticipated. A large tranche of rollover funding is expected in the new year and growth is also likely to contract in Italy. Thus, there is plenty of scope for the Swiss Franc to be sought once again as a safe haven. The low yield available on Swiss Franc deposits is unlikely to act as an impediment to it being sought as a safe haven.
As mentioned above, an initial breakout from the recent range has the potential to trigger clustered stops which may add to downside momentum. A failure to hold over the 1.2000 level will almost certainly see a return to the larger downtrend.
Gold re-testing its 200-day average.
Gold is temporarily re-testing its 200-day average, which was recently broken for the first time in 3 years. The move was triggered by a multi-month triangle pattern breakout (see both daily and intraday charts).
Downside pressure remains heavy from inter-market weakness across related risk proxies such as EUR/USD and equity markets. Moreover, there is still heightened risk for a much larger decline if we confirm a weekly close beneath $1600 and $1530 (swing low).
A number of “bargain hunting” trend-followers will be watching this benchmark “line in the sand” for repeat support or a potential big squeeze lower into $1300 and perhaps even $1040-1000 (12-year channel–floor/see top chart insert).
Speculative (net long) flows also support this view having recently breached a key downside level which may threaten over 2 years of sizeable long gold
positions. This will trigger a temporary, but dramatic setback that would ultimately offer a unique buying opportunity into summer 2012.
Weak bounce retesting $30.0000.
Silver’s weak recovery from oversold conditions is retesting key support at $30.0000. Only a sustained close below here would trigger a test of the previous swing low at $26.0700.
Macro price structure continues to focus on the downside risks, following the major sell-off in September. Such a dramatic move traditionally produces volatile trading ranges. This allows the market to have enough time to recover and accumulate renewed buying interest.
Expect a large trading range to hold between $37.0000-26.0700 over the multi-week/month horizon, with downside macro risk into $21.5165 (61.8% Fib-1999 bull market) and $20.0000. This would still maintain silver’s long-term uptrend and help offer a potential buying opportunity for the eventual resumption higher.
Continue to watch the gold-silver “mint” ratio (see top chart insert) which has now accelerated higher by 70%, suggesting further risk aversion over the next few weeks. This also helps explain recent divergences between gold and silver.