EUR/USD Failing Support Test? CAD and JPY on the Move on Oil.

today shows further signs of falling through key swing support levels, while the JPY is weak on inflation data and the oil spike. The latter is also finally seeing CAD awaking from its slumber.

EUR/USD has fallen through the first key support area in the 1.3300/25 area, and if it closes well below there today, we begin to have confirmation that the lower range toward at least 1.30 is coming back into play. The relative resilience of the US dollar after yesterday’s blowout rally in risk is notable, with the focus on the USD/JPY pair at the moment after Japan released important inflation data overnight and on the latest spike in oil prices.

Chart: EUR/USD
EUR/USD has failed a test of important support. The USD picture is mixed elsewhere (USD/CAD has broken lower and GBP/USD remains above key support at 1.5900, so the jury is out on the USD part of the EUR/USD equation. Today’s close is a key test of whether the bias is pivoting back to the downside now that the LTRO is out of the way and the focus switches to whether Portugal becomes the next Greece and on German politics and its stance on bailouts.
EUR/USD" title="Chart: EUR/USD" width="652" height="478">JPY even weaker on deflationary numbers
The inflation data out of Japan was relatively in-line with expectations and the most recent Feb. Tokyo CPI data showed both headline and core inflation running at slightly deflationary levels, data that encourages speculation that the BoJ will move forcefully again to bring inflation into positive territory. Meanwhile, oil is also a factor as Japan’s dependence on the energy imports – particularly from the Persian Gulf region – is notable, and on word that oil importers have been active in hedging.

Chart: AUD/CAD
CAD made a move recently, breaking down through the 0.9900 level in USD/CAD and finally taking a chunk out of the Aussie, as the latter currency has finally consolidated against the rest of the G-10 after its recent record run. Oil is a critical part of the equation here, as any threat to Iranian and Persian Gulf exports will hit Asia – and in particular China – the hardest and as oil is Canada’s most important commodity export. As well, from a valuation and interest rate differential perspective, this pair long ago became overvalued.
AUD/CAD" title="AUD/CAD" width="652" height="478">
Looking ahead
Risk appetite is going to have a very hard time making further headway today if yesterday’s oil price surge holds into the weekend. It was very impressive to see yesterday’s turnaround in risk appetite and strong close in the US and carry through into Asia despite the weak ISM data point out of the US, but the fact that it was the first day of the month may have been a factor. The unexpected addition of tension in Saudi Arabia into the equation yesterday makes the potential for oil price appreciation almost unimaginable if any portion of Saudi supplies are interrupted on top of the fears about Iran as Saudi Arabia is considered the only credible swing supplier. The Brent crude price hit another record in Euro and Sterling yesterday and oil prices are far less prominent in the news than they should be. The cycle of events in Iran will soon enter a critical phase as Israel’s Netanyahu is visiting with Obama on Monday and the Iranian election is set to take place today.

Otherwise, there is not much in the news mix for the rest of the day in terms of the economic calendar, save for the latest Canadian GDP report for December, which is a more interesting than usual as CAD seems to be awaking from its slumber. On Monday we get the latest batch of services PMI’s from around the world.