The financial markets were rocked by the surprised result of the bailout referendum in Greece and stock market crash in China for the earlier part of last week. Yen surged sharply on risk aversion but pared back much gains after markets stabilized. Instead, Euro ended as the strongest major currency and later developments provided optimism that Greece will finally secure a bailout agreement with its creditors. Meanwhile, the Chinese stock markets also staged a strong rebound on Thursday and Friday on the government's rescue measures. Nonetheless, the Australian dollar extended the medium term down trend and ended as the weakest major currency on deteriorating outlook of its main trading partner China. Canadian dollar followed as the second weakest as crude oil gapped down the week and stayed weak. Sterling was the third weakest thanks to rebound in EUR/GBP. Dollar ended the week mixed.
Greece was once on the blink of exit from Eurozone as more than 60% voters said "no" to austerity measures that are required for the bailout aid from creditors. But later in the week, Greek prime minister Alexis Tsipras sent a letter to European creditors requesting a three year bailout, followed by a detailed 13 page proposals with terms meeting much of the requirements. On Saturday, Tsipras won backing from the parliament for the reforms he proposed. The European Commission, ECB and IMF also sounded positive by telling Eurozone governments that, after a review of the proposals, they were of sufficient basis to start negotiation conditional loans. Now, it's the turn for EU leaders to decide on the bailout on Sunday in another crisis summit and it looks positive that an agrement would finally be reached.
Judging from investors response to the German DAX index, sentiments were positive towards the Greece situation. DAX initial dipped to 10652.79 but then rebounded strongly to close at 1315.63, slightly above the 55 days EMA. There are a few points to note. Firstly, the structure of the fall from 12390.75 was clearly corrective. Secondly, the index was held well above 50% retracement of 8354.96 to 12390.75 at 10372.86, which was not bad for a correction. Thirdly, there is mild bullish convergence condition in daily MACD. Fourthly, the index also bounced from 55 weeks EMA, which is at 10625.46. So technically, the development is supporting a stronger rise in DAX this week and a break of 11635.85 would pave the way back to 12390.75 high. Such development would likely provide some support to Euro, at least in crosses against Sterling and yen.
The China Shanghai A share index dived to as low as 3535.59 last week, which was nearly -35% off the 5423.24 high made less than a month ago. The crash spilled over to other Asian markets and impacted European and US markets to a certain extent. The index then rebounded both on the government's rescue measures, as well as strong support over a key long term zone of 3194.45, 3570.26. Also, it was supported by 55 weeks EMA which is at 3563.21. The development suggests that the selloff in the index should have past its climax temporarily. And there should be room for a rebound back to 55 days EMA at 4503.14. While the index is clearly in a corrective mode, which might head lower again later, we'd more likely see some more recovery in near term. Thus, the global back will be back to usual and forget about China stocks for the moment.
Regarding trading strategies, we'd like to look at opportunities of buying Euro on positive news out of Greece this week. Our view on going EUR/AUD medium long is so far correct but we were unluckily stopped out by some market jitter two weeks ago. As the cross is now pressing a medium term falling trend line, we'll give it a pass for the moment and look for opportunities elsewhere. We'll tend to avoid EUR/USD, EUR/GBP and EUR/JPY as they are still range bound and the relative strength is unclear.
Instead, the break of 1.4159 resistance in EUR/CAD suggests that rebound from 1.3019 is resuming. close above 55 weeks EMA also supports that case that down trend from 1.5585 is completed at 1.3019. And rise from there is heading to 61.8% retracement of 1.5585 to 1.3019 at 1.4605. Hence, we'll try to buy EUR/CAD on break of last week's high of 1.4253. Above mentioned 1.4605 is an initial target and we'll see if the cross has sustainable strength to get through this level.
Our AUD/USD short is still running well so far. There was some support ahead of 61.8% projection of 0.8910 to 0.7625 from 0.8161 at 0.7367. But price actions from 0.7371 temporary low looks corrective so far and indicates further downside ahead. We'll keep our stop at 0.7600 and target next long term fibonacci level at 0.7182. We might start to consider exiting the short position below there.
Also, we're short Aussie in AUD/USD which is running well so far. The break of 0.7532 low was anticipated. And as the larger down trend is resuming, we'll stay short. We'll hold on to AUD/USD short and lower the stop to 0.7600.