EURUSD failed to continue along the comeback trail after a late rally on Wednesday fizzled yesterday. The market is looking ahead toward the EU elections this Sunday as an important input, though today’s German IFO certainly also has the potential to add volatility to the situation (more on that in Looking Ahead below).
Elsewhere, USDJPY and other JPY crosses pulled back into the range after a big false break mid-week as risk appetite remained relatively buoyant and US yields pulled a smidge higher. The rally hasn’t been overwhelming, however, and it would be easy to re-engage the bearish case if the pair crumbles back through 101.00 again. In EURJPY, the rally attempt has been even more modest and the 200-day moving average also looms there.
Chart: EURJPY
The EURJPY bearish move is still in play, especially with the Lagging Span line (Green) plunging well through the price line over the last 8-10 trading days. Note the 200-day moving average coming into play near the recent lows. Significant further downside consolidation remains in play if this recent rally in risk appetite fades again and if the euro remains soft.
Elsewhere, the action remains incredibly restrained. The latest New Zealand confidence number for May showed a huge drop and I’m surprised the market isn’t taking more note of the shine coming off the kiwi bullish case. We’ve got an RBNZ leaning much more heavily on the NZD rate by suggesting there are policy implications if the strength remains, house market activity has plummeted, milk prices are down, confidence has peaked and took a big dip in May.
The risk-on market of the moment may be masking some of the eroding fundamentals for the kiwi, but take note. The next technical indication that the NZD bear case is emerging would be a break back above 1.0900 in AUDNZD and/or a break down through the 0.8525/00 area in NZDUSD.
The tactical outlook for GBPUSD is particularly uncertain at the moment, as yesterday's sell-off keeps the last bearish arguments in place (that the throwback rally to between the 61.8 percent and 76.4 percent retracement areas (call it 1.6900/25) may keep a lid on the upside for now.
Looking ahead
The latest German IFO survey is up this morning and should receive considerable focus with EURUSD pushing at the 200-day moving average and after the April data failed to show the negative trend developing in the expectations portion of the index that has long been evident in the ZEW survey. Expectations usually lead the current situation and yesterday’s weak German manufacturing PMI should sharpen the focus on whether we are seeing a slowing economy in the EU core.
Remember that the EU parliamentary elections are up this Sunday. The consensus seems to have written off any risk that these lead to a significant enough results for the EU-sceptic parties to rock the EU boat. We’ve only seen the most marginal of profit taking in the “long peripheral EU bonds” over the last week or so.
Portuguese 10-year benchmark yields have surged around 50 basis points over the last week, for example, as the market perhaps remembers that Portugal will never pay its debt and is entirely dependent on the goodwill of mostly German taxpayers (or at risk of a Greece-style PSI, OSI deal, which may be more likely.) In any case, with no Eurobonds in sight, a yield on 10-year Portuguese debt recently of as low as 3.50 percent has to make one wonder if the overall complacency on tail risks to the EU may have peaked and can only head south from here.
Stay tuned – this spread widening at the periphery is a key contributor to the EURUSD weakness. If we are merely seeing a bit of profit-taking until the election results are known, we could see some consolidation in this trade in the weeks ahead offering the euro some support if things calm back down again.
Stay careful out there, even with volatility heading back toward those record lows.
Economic data highlights
- New Zealand May ANZ Consumer Confidence fell to 127.6 vs. 133.5 in Apr.
- Upcoming Economic Calendar Highlights (all times GMT)
- Sweden May Consumer/Manufacturing Confidence (0700)
- Eurozone ECB’s Linde, Lautenschlager to Speak (0730)
- Germany May IFO Business Climate (0800)
- Canada Apr. CPI (1230)
- US Apr. New Home Sales (1400)
- New Zealand Trade Balance (Sun 2245)
- Bank of Japan Apr. Meeting Minutes (Sun 2350)