29.11.2011 Daily Technical Report

EUR/USD

Temporary unwinding from oversold conditions.

EUR/USD is temporarily unwinding from oversold conditions. However, it is still likely to see the bearish impulsive move extend from key overhead resistance (primarily a 2 year trend and its long-term 200-day average). Bearish sentiment also remains anchored by heightened contagion fears driven from the greater European sovereign debt risk.

A sustained close beneath 1.3146 (Oct swing low) will re-establish the larger downtrend from April and target 1.3000 (psychological level), then 1.2870 (2011 major low). Expect resistance to cap at 1.3610 and 1.3730.

Keep an eye on highly correlated risk-related proxies, such as the S&P500 and AUD/USD, which both continue to exhibit downside presssure.

Inversely, the USD Index is maintaining its recovery higher and is fast approaching the recent 9-month highs near 80, (a move worth almost 10%).

Speculative (net long) liquidity flows have unwound from recent spike highs (3 standard deviations from the yearly average). This will likely remain strong and help resume the USD’s major bull-run from its historic oversold extremes (momentum, sentiment and liquidity).




GBP/USD

Second leg higher initiated in recovery phase.

GBP/USD saw a minor recovery higher in the hourly timeframe. Today’s break back over 1.5566 has likely initiated a second leg higher in the recovery from 1.5423. Scope is now seen for a return to the 1.5700 region.

We remain wary of the generally rangebound nature of the market in the medium-term timeframe, favouring a return to 1.6167.

A sustained break under 1.5272 is required to turn the medium-term bias decidedly bearish.

We await the formation of short-term structure to assist us in our formulation of strategy.





USD/JPY

Minor rebound capped at 78.24 (DeMark™ Level).

USD/JPY’s minor rebound is being capped at 78.24 (DeMark™ Level). Moreover, downside risks remain, with the growing probability of a third price retracement back to pre-intervention levels (PIR III) and potentially even a new post world war record low beneath 75.35 (PINL).

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.

This may 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 into November-December this year, offering a sustained move above our upside trigger level at 80.00/60, then 82.00 and 83.30.




USD/CHF

Break over 0.9316 strengthens medium-term outlook.

USD/CHF saw a break back over 0.9316 last week. This structural break over the October high strengthens the medium-term structure. However, scope is seen for a corrective phase lower, with resistance anticipated close to 0.9600, should further strength follow. Demand for Swiss Francs is likely to continue while yields on Spanish and Italian government bonds remain elevated, currently trading at 6.570% and 7.320% respectively.

We continue to monitor the German sovereign yield curve with ten year yields there currently trading at close to 2.259%. If yields in Germany continue to rise, this will likely mark an acceleration of deterioration in the Euro Zone.

Movement in USD/CHF is likely to be affected by EUR/CHF should the latter rate get closer to the 1.2130 region, which marks the lower end of the recent trading range.





USD/CAD

Sharp Setbacks.

USD/CAD has triggered a sharp setback, following a short-term DeMark™ exhaustion sell signal.

A directional confirmation above 1.0658 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.

Only a sustained close beneath 1.0230 and parity unlocks bearish setbacks into the long-term 200-day MA at 0.9849 and 0.9726 (31st Aug low).

EUR/CAD has broken back beneath its 200-day MA, still within a large multi-month trading range. Key resistance continues to hold at 1.4379 (June swing high), which has for some time marked a strong distribution pattern.

CHF/CAD is now retesting its 200-day MA at 1.1369, while maintaining a multi-week trading range. This follows the dramatic price slide lower (which was triggered by the SNB intervention). The cross-rate has now retraced more than half of its 2011 gains.





AUD/USD

Unwinding from oversold conditions.

AUD/USD is still unwinding from oversold conditions, following its accelerated decline through the 1.0000 psychological level.

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 dollar remains strong against the New Zealand dollar. However, near-term price activity is mean reverting back into the 200- day MA. Expect a sharp setback to ensue over the multi-day horizon.

The Aussie dollar has triggered a mild recovery against the Japanese yen and is now trading back 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 risk appetite.





GBP/JPY

Higher low anticipated for a fresh leg higher.

GBP/JPY may be entering a corrective phase higher following the break out of hourly bear channel resistance. With this in mind, a higher low is anticipated ahead of 119.38, should a short-term pullback take place. This is also supported by the minor recovery seen in equities globally and in particular in the S&P500.

Although a break over 121.77 could not be achieved, a further leg higher is anticipated to complete the corrective phase from 119.38. A failure to hold over 119.38 will warn of a return to 116.84. Bigger picture a substantial recovery higher is favoured, initially towards 163.09.





EUR/JPY

Enters into a near-term corrective phase.

EUR/JPY appears to have completed an initial corrective phase higher, with scope now for a further swing to the upside. We view the fall that has taken place since 111.60 as being corrective in nature, suggesting potential for a further leg higher. The break out of the hourly falling channel that has taken place during recent sessions is now suggestive of a larger corrective phase higher.

However, the EUR component of this pair is highly affected by the movement in EUR/USD. As the yields in Spanish and Italian government bonds continue to rise, this puts more downside pressure on the EUR. A break under 1.3146 in EUR/USD will end the rising phase seen since 2010. This would likely be associated with a fall back down to 100.76 and potentially lower.

A sustained hold over the 200 day moving average will turn the mediumterm outlook more bullish.





EUR/GBP

Bias remains bearish.

EUR/GBP continues to frustrate, failing to garner any momentum following the recent break of the key 0.8530/31 lows. Given the precarious situation in the Euro-Zone, our mild bearish bias remains, favouring an eventual return to weakness if core/periphery sovereign debt continues to be sold off. It is anticipated that if the deterioration in the Euro-Zone continues then Sterling could be viewed as a safe haven. Thus focus remains on the Italian and Spanish government bond markets too.

An eventual fall back under 0.8486 is anticipated. With this in mind, the formulation of a short strategy is still favoured, although a deeper pullback of the 0.8831-0.8486 fall is required ahead of entry.

Our bias remains mildly bearish with trade continuing under both the 200 day and 50 week moving averages. We keep an eye on the 1.3146 level in EUR/USD. A push under this level will mark a clear breakdown of confidence in the EUR.





EUR/CHF

Re-test of the base of the recent trading range now favoured.

EUR/CHF continues to trade in a tight trading range just under the 1.2500 level. Focus still remains on the yields on periphery and core Euro-Zone sovereign debt. Over time, this may lead to a renewed desire for a safe haven, with downside pressure returning to EUR/CHF.

Our strategy remains to trade opportunistically from a momentum perspective, awaiting a return to the 1.2000 region. Should a re-test of the 1.2000 region take place with a fall under 1.1973 also following, this would warn of the end of the recovery seen since 1.0075, increasing the probability of a return to this level.

Near-term, a break back under 1.2251 will warn of a failure to re-test the 1.2500 region, suggesting an earlier return to 1.2123/31. In any case, a retest of the base of the recent trading range is anticipated over coming sessions.

It remains to be seen if the SNB will be able to hold back the possible flow of funds into Swiss Francs, that may occur, if further stresses lead to yet higher yields in Italian/Spanish/French government bonds.