Bears push into 1.3146 after rating warning from Moody’s.
First objective met at 1.3140. Stop moved to entry.
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. Price has now broken 1.3146 (Oct swing low).
We remain short favouring downside scope. Our cycle analysis suggests increased volatility over the next two weeks across “risk” proxies, including the equity and commodity markets.
Yesterday’s close beneath 1.3146 re-establishes the larger downtrend from April and targets 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 has met 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).
Break over trend-line off 1.5770 sought before attempting longs.
GBP/USD has managed to break out of its prior sequence of lower lows and higher highs, forming an hourly falling channel. This may mark the end of the corrective phase off 1.5780. However, a break over the hourly channel resistance is sought before attempting longs.
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.
Failure to remain above 1.5423 will see an immediate target at 1.5272 and then and the potentially trend-line support at 1.5110.
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.
Short-term structure continues to favour extension higher.
Buy limit raised to 0.9410. Stop raised to 0.9310 and objectives adjusted as detailed below. An earlier break over 0.9555 without filling this strategy will negate this strategy and lead to us removing it from the report.
USD/CHF saw a minor retrace after breaking clear of the old 0.9331 high yesterday. The near-term structure exhibited on the hourly charts continues to suggest scope for a test of the region close to the March high at 0.9776.
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 5.699% and 6.685% versus 6.478% and 7.355%, before the agreement. (These yields were trading at 5.881% and 6.684% 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 1.0413. 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.
Channels lower in a possible corrective structure.
Sell strategy removed. Await fresh signal.
GBP/JPY has been largely contained within a falling hourly channel for the majority of December. This structure is seen as being part of a corrective phase with an eventual return to strength anticipated, potentially close to the 120.00 region.
However, the recovery seen from the 116.84 low appears corrective in nature, suggesting scope for a return to 119.38 and then potentially 116.84. 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.
Support anticipated close to 100.76.
EUR/JPY has been greatly affected by the recent fall under 1.3146 in EUR/USD, particularly in light of the recent static nature of USD/JPY. This has seen a break under 102.49 yesterday. However, the 100.76 level is seen as potentially offering strong support.
As mentioned in prior reports, the medium-term recovery that we have already witnessed from 100.76 to 111.60 is viewed as the initial leg higher in a larger recovery structure.
Even if a lower low were to be printed, an initial recovery from the 100.76 region is anticipated. With this in mind we look to attempt longs just ahead of the key 100.76 level.
Sustained under this level will warn of a much larger continuation lower.
Retrace back towards old trend-line support sought.
EUR/GBP has broken under 0.8486 which was followed by a re-test of this same level yesterday, ahead of further weakness. This now highlights an emerging falling channel as shown in the daily chart to the right. We await a re-test of the old trend-line support as resistance ahead of possible short positioning.
We also note that 1.3146 has now been broken in EUR/USD, weakening the longer-term outlook there. This may assist a short EUR/GBP bias going forward.
An initial target for the current downswing in the daily timeframe is on the support of the previously mentioned falling channel, currently at 0.8330.
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.
Messy sideways trade continues.
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 from 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 towards 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.