Positive News Spurs Sharp Recovery

EUR/USD

Sharp recovery following positive news.

EUR/USD extended sharply higher, as six central banks, reduced their USD funding costs to ease the debt crisis. The impact was very positive for investors around the world and has encouraged traditional “risk appetite” markets, such as EUR/USD, AUD/USD and S&P500 to turn back higher

Expect the recovery to be limited into 1.3610, then 1.3730 and perhaps even 1.3850-90. Probability still favours a bearish reversal at these levels.

Meantime, support can be found at 1.3380 and 1.3146. 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). Inversely, the USD Index is maintaining its recovery higher and still targets its 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

Break out from short-term range required.

GBP/USD has met initial resistance close to the 50% retrace of the 1.6167 – 1.5423 fall. We now seek a break out of the 1.5577 – 1.5726 short-term range. A further push under 1.5577 in the hourly timeframe will continue to weaken the near-term structure, warning of an increased likelihood of continuation back towards 1.5423. Alternatively, a push back over 1.5726 will warn of a fresh leg higher in the recovery from 1.5423.

The actions of the six central banks to cut rates last week is likely to act as a short term relief to the European debt markets. However, a return to stresses in the Euro-Zone is anticipated and thus Sterling has the capacity to be deemed as a safe haven.

With the above in mind it may be advantageous to sell into a break under the recent 1.5577 low, for a near-term return to 1.5423. Alternatively buying at lower levels for a return to range bound trading is a medium-term option.



USD/JPY

Minor rebound capped at 78.24 (DeMark™ Level).

USD/JPY’s minor rebound is still 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 back over 0.9252 suggests a return to strength.

USD/CHF has broken back over 0.9252 in today’s trade. This now increases the probability that the correction from 0.9331 is complete, with a return to strength possible.

The respite that was offered to 10 year Italian government bond yields following the USD based swap rate cut is likely nearing completion. The 6.00% level is seen as offering support with the potential of a return back towards 7.00% over coming sessions. If upside pressure were to return to Italian and Spanish yields then USD/CHF will likely experience a degree of downside pressure too.

Spanish and Italian government bonds remain elevated, currently trading at 5.140% and 5.950% versus 6.478% and 7.355%, before the six party central bank agreement.

Looking at the German sovereign yield curve in particular we note that yields are lower across all maturities when compared with a week ago (with the exception of 6 months). Assuming German yields are not pressured to the upside, this should also act to ease downside pressure in USD/CHF.



USD/CAD

Sharp Setbacks hold steady.

USD/CAD’s sharp setbacks are holding steady, following the recent shortterm 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 1.0120 and parity unlocks bearish setbacks into the long-term 200-day MA at 0.9852 and 0.9726 (31st Aug low).

EUR/CAD remains beneath its 200-day MA, still within a large multi-month trading range. The strong multi-month distribution pattern is likely to breakdown further into support levels at 1.3570 and 1.3380.

CHF/CAD has also broken back beneath its 200-day MA at 1.1375, while breaching a multi-week trading range. This follows the dramatic price slide lower (which was triggered by the SNB intervention). The cross-rate has retraced more than half of its 2011 gains.



AUD/USD

Extended recovery beneath 200-day MA.

AUD/USD has extended its recovery into key resistance at 1.0340 (61.8% Fib-Oct 28th decline) and 200-day MA which is currently holding at 1.0412. 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

Rising wedge begins to break down.

Sell strategy at 123.00 removed. Short-term negative bias remains. GBP/JPY continues to exhibit price action warning of a loss of momentum. The rising wedge that we had noted in recent reports has seen its support broken in trade today. This now warns of a possible topping formation, with scope now for a return to the 120.00 region in the short-term.

If 120.00 is met, a degree of support would be anticipated there. An earlier push back over 122.64 would be expected to meet resistance at 123.00. A failure to hold over 119.38 will warn of a return to 116.84.

Over a longer period of time a substantial recovery higher is favoured, initially towards 163.09.



EUR/JPY

Short-term correction possibly complete at 105.70.

EUR/JPY has potentially completed a corrective phase higher after peaking at 105.70. A break back under 103.36 is now sought.

Despite this short-term weakness, we view the fall that has taken place since 111.60 as being corrective in nature, suggesting potential for a return to this same level. Thus we have a directional clash in two timeframes.

The EUR component of this pair is clearly affected by the movement in EUR/USD. 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.

Given the above clash between the structure and events in the Euro-Zone, we prefer to wait on the side lines.

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




EUR/GBP

Failed downside break warns of a larger corrective phase higher.

EUR/GBP failed to gain momentum again, this time in the hourly timeframe, after breaking under 0.8546, reaching 0.8525. This now warns of a larger rise higher, back towards the 0.8700 region. As has already been seen, following the recent push under 0.8530/31, this failure to garner momentum is a hallmark of this currency pair in recent trade. Thus the strategy remains to sell, but at higher levels.

Given the precarious situation in the Euro-Zone, it is anticipated that if yield curve deterioration continues then Sterling could be viewed as a safe haven. Italian and Spanish government bond yields have eased back somewhat after the coordinated cut in USD based swap lines amongst selected central banks. However, a lasting solution still appears a long way off with the recent intervention simply easing a dire situation.

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, which would then likely have a knock on effect in all EUR crosses.



EUR/CHF

Returns to re-test the 1.2400/2500 region.

EUR/CHF continues to trade in a tight range, failing to meet the 1.2500 level thus far. However, a fresh attempt appears to have been initiated to re-test the 1.2400/2500 region. This return to the upper end of the recent trading range has been assisted somewhat by the six bank dollar swap rate coordination. An eventual return to rising yields is anticipated and with this downside pressure should return to EUR/CHF.

Our strategy is 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. Alternatively if short-term structure supports, then a sell limit order could be employed at or above the recent trading range ceiling, between 1.2400 and 1.2500.

The failure of this pair to break over the 50 week moving average over recent weeks is also an initial warning that the prior downtrend may not be over. The large cluster of stops that is likely to be placed around the 1.2000 level is also anticipated to aid any short positioning, questioning the ability of the SNB to hold back the possible flow of funds into Swiss Francs