Bears push into 1.3146 after rating warning from Moody’s.
EUR/USD bears have continued to push lower, after a recent warning from Moody’s which cited that it would review ratings for all European Union countries. In price terms, bears need to break near-term support at 1.3146 (Oct swing low).
We have opened short position favouring extended downside scope. Our cycle analysis suggests increased volatility over the next two weeks across “risk” proxies, including the equity and commodity markets.
A close beneath 1.3146 will re-establish the larger downtrend from April and target 1.3000 (psychological level), then 1.2870 (2011 major low).
Meanwhile, resistance can be found at 1.3550 (02 Dec high), then 1.3610 and 1.3730. Any rebound into these levels is likely to be short-lived.
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).
Range formed by a sequence of false breaks.
GBP/USD has formed a sequence of false breaks on the hourly chart. We now await to see if the most recent push lower, to 1.5538, will see any follow through. This sequence of lower lows and higher highs has formed a range bound market for the majority of December.
Demand for sterling is likely to be affected by the movement in selected core Euro-Zone sovereign markets. In particular we note that Italian 10 year
yields are trading close to 7.00%. Daily structure is also suggestive of a return to test 7.00% and higher. A continuation of higher yields may see Sterling being adopted as a safe haven again. This reasoning would likely help to keep cable within its year long range.
With the above in mind, the region near 1.5400 may offer attractive levels to enter into medium-term long positions. Taking this approach will need to see levels closer to 1.5400 for a well placed stop. The range bound trade of the last few days is best avoided.
Weakening beneath 78.24 (DeMark™ Level).
USD/JPY is still weak beneath 78.24 (DeMark™ Level). There is an ever growing probability of unfolding a third price retracement back to preintervention 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 December this year, offering a sustained move above our upside trigger level at 80.00/60, then 82.00 and 83.30.
Over 0.9331 opens up a return to 0.9776.
USD/CHF saw a break over 0.9331 yesterday. This warns of a larger swing higher, back towards 0.9776. We now look to see if the region just above 0.9331 has the capacity to act as support for a further extension higher.
This pair is currently ignoring the early warning signs exhibited by the continued rise in some core Euro-Zone government bond markets. If the yield on 10 year Italian government bonds continues to rise towards 7.000% and higher, there is scope for a degree of downside pressure to return to USD/CHF. In the meantime, the above mentioned extension higher is favoured.
Referencing Spanish and Italian government bonds back to their respective levels prior to the six party central bank agreement, we note that most of the positive after effects have worn off, with yields trading at 5.881% and 6.684% versus 6.478% and 7.355%, before the agreement. (These yields were trading at 5.897% and 6.521% respectively at the same time yesterday.)
Bulls rebound above 1.0200.
USD/CAD is maintaining its sharp bullish rebound above 1.0200. We are watching for further sustained price activity to open a buy trade setup.
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.
Only a sustained close beneath 1.0080 and parity unlocks bearish setbacks into the long-term 200-day MA at 0.9870 and 0.9726 (31st Aug low).
EUR/CAD is unwinding mildly ahead of the base of an important multimonth distribution pattern. A 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.
CHF/CAD, which serves as a proxy for “risk appetite”, remains weak beneath its 200-day MA (which had provided support for most of the uptrend since mid-2010). Key support now holds at 1.0893 (61.8% Fib retrace). A break here would extend the sharp decline into 1.0332 (01st March low) and help confirm further unwinding of global risk appetite.
Sharp setbacks beneath 200-day MA at 1.0414.
AUD/USD has resumed its sharp setbacks beneath its 200-day MA which is currently holding at 1.0414. This key level is likely to encourage further downside scope over the multi-day-week horizon.
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/week horizon.
The Aussie dollar 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.
Fails to maintain break lower in the hourly timeframe.
GBP/JPY continues to trade in a similar manner to GBP/USD. Yesterday’s downside test of the month long range failed, returning to trade within the range. However, the rise seen since 116.84 is deemed corrective in nature suggesting scope for a return to 119.38 and then 116.84 in the near-term, before a more lasting recovery.
As noted in prior reports, should this pair reach the 123.00 level, a degree of resistance would be anticipated. In the meantime, we remain wary of the
short-term range bound environment but are re-instating the sell strategy at 123.00.
If the recent range bound trade is resolved to the downside, then the 120.00 level should provide a degree of support, from where a short-term leg higher would be favoured to develop.
Trend channel contains hourly weakness.
EUR/JPY is likely to see a period of volatile trade due to its clear association with EUR/USD which is now approaching the key 1.3146 level. We are also wary of the possibility of coordinated intervention to maintain the stability of the Euro as a currency. This acts as a manipulation of the market, making technical analytics harder.
The clash in structure that we have noted in previous reports remains present, with the recent rise from 102.49 being deemed as corrective. However, the larger 100.76 – 111.60 rise is suggestive of a further leg higher back towards 111.60. Thus the directional clash in two timeframes is ever present.
As mentioned above, if EUR/USD breaks under 1.3146 this will end the rising phase seen since 2010 and would likely be associated with a fall back down to 100.76 in EUR/JPY and potentially lower. It is preferred to see if a sustained break can be achieved under 1.3146 in EUR/USD, before committing to any directional bias.
Possible exhaustion pattern after break of trend-line support.
Sell strategy at 0.8700 removed. Negative bias remains.
EUR/GBP broke under 0.8486 yesterday. In doing so, a break under longterm trend-line support from 0.8068 has been achieved. However, we note that in the hourly and 5 minute timeframes, there are initial signs of exhaustion. It is anticipated that these patterns may lead to a repeat behaviour of this currency pair to exhibit a false break lower. Thus, although we have removed the prior sell strategy, we still await a recovery higher before participating in this market.
The message that we take away from the recent six party central bank coordination is that there is a demand for US Dollars amongst European banks. This fact is a warning sign and a clear weakness, suggesting scope for a credit contractionary phase. We continue to expect a continuation of rising yields in the Euro-Zone and it is within this environment that we see the potential for Sterling to be perceived as a safe haven.
Another trigger for participation in this possible break lower would be a lasting break under 1.3146 in EUR/USD, as this would likely have a knock on effect in all EUR crosses. We also note the continued trade under the 50 week and 200 day moving averages.
Continues to trade within a tight range.
EUR/CHF saw an initial push higher above the 50 week moving average which again failed close to 1.2500, adding a further lower high to the sequence seen since the middle of October. Since reaching the 50 week moving average earlier in the year, it has acted as a decent region of resistance, warning that the larger down-trend may not be over. We will maintain our sell limit strategy at 1.2480 for now, as this represents a decent trade location during thin Christmas markets. However, we look to see if a break under 1.2226 can be achieved.
1.2226 will be used as a filter. Under 1.2226 we will swap our current sell limit strategy to a sell stop strategy at 1.2130, with objectives at 1.2030/1.1526/1.1002 and a stop at 1.2230.
A rising sovereign yield environment may now be returning within the Euro- Zone, as discussed in other parts of this report. We look to see if Italian 10 year sovereign yields can return to the 7.000% handle. It is these kinds of pressures that may assist a return to and break of 1.2123/31. This represents the real goal of a lasting breakdown in the recent range bound structure.
The 1.2000 level is the only level that the SNB has suggested they will defend. There is thus likely to be a large cluster of stops under this level, which if triggered, could herald a return to the 1.0075 level.
Bearish breakout from triangle pattern targets $1600.
Gold’s bearish breakout from a multi-month triangle pattern targets initial support at $1600/17. This is likely to accelerate 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 $1600/16 and $1530 (200-day MA/swing low), which has not been breached in 3 years!
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).
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.
Key support at $30.0000.
Silver is holding around 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 longterm uptrend and help offer a potential buying opportunity for the eventual resumption higher.
Continue to watch the gold-silver “mint” ratio 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.