It is hard to remember a day when one currency was so dominant relative to all others, with the Euro breaking sharply higher across the board as comments from ECB President Trichet shot across the wires at the press conference on Thursday. While the ECB left rates on hold at 1.00% as was widely expected, the move by Trichet and co. to adopt a much stronger language which warned of imminent rate hikes, was enough to send the single currency racing higher, with EUR/USD stalling just shy of critical psychological barriers at 1.4000. The key phrase that "strong vigilance is warranted with a view to containing upside risks to price stability” was the kicker and undoubtedly the catalyst for the major upside move in the Euro. While many were skeptical of just how much the Euro could rally post the event risk given that a more hawkish ECB was already priced in, Mr. Trichet did not disappoint hawks with his even stronger (more hawkish) language.
Relative Performance Versus EURO on THURSDAY:
- CAD -0.63%
- USD -0.74%
- AUD -0.96%
- GBP -1.03%
- NZD -1.03%
- JPY -1.44%
- CHF -1.59%
From a broader price action standpoint, we were also quite fascinated to see the buck emerge as the second best performing major currency, with all of the other major currencies underperforming against the Greenback, despite the aggressive move higher in the Euro. The ability for the Greenback to hold firm and even rally against the other major currencies was certainly a welcome development for us, with our short Swissie, Aussie and Cad positions all moving in the right direction. Additionally, we were also delighted to see the strong move higher in our EUR/AUD long position from 1.3465.
Now that the ECB is behind us and markets have now priced in a more aggressive central bank going forward, we feel that the risks from here are actually tilted to the downside for the Euro, particularly against the US Dollar. While at this point, we would not rule out the possibility for additional short-term strength towards the November highs by 1.4280, any additional upside is seen limited with the Eurozone still very much riddled with uncertainty (as Trichet also noted at the press conference). We also must remind ourselves that the ECB has always carried an inflation-first policy mandate and it comes as no surprise that they are once again looking to respond to rising inflationary pressures. At the same time, the move to raise interest rates should not then be interpreted as a positive move that is necessarily all good for the Eurozone economy. Although it is on the surface Euro positive from an interest rate differential perspective, what good are higher yields if the local economy slips back into recession as a result of the less accommodative policy?
Moving on, one other currency that we feel could be very exposed over the medium and longer-term is the Australian Dollar. We currently hold a short AUD/USD position from 1.0170, and will look for an acceleration of declines over the coming days and weeks. Data out of Australia has been moving in the wrong direction, while the central bank has moved to a much less hawkish stance. Meanwhile China has been showing signs of cooling down, while Australia’s own PM has been out expressing serious concern over the impact of the strength of their currency on the local economy.
An article in the Economist reaffirms our net bearish Aussie sentiment, with the publication warning of a major housing bubble in Australia. The magazine’s quarterly index of house prices has Australian homes as the most overvalued across the globe. While in the United States, the ratio of house prices to rents is only 3% overvalued, in Australia, this same ratio shows Australian house prices to rents a dramatic 56% above their long run average. One cross rate that has yet to show any sign of weakness in recent days has been the AUD/NZD cross which races to near 20 year highs. Indeed the earthquake in Christchurch has set the New Zealand Dollar back significantly, but at the same time, we wonder if the Australian Dollar could also be exposed on this rate as well over the coming days. Technical studies are certainly well overbought on the daily chart.
Looking ahead, all is quiet in European trade (Swiss reserves and UK Halifax house prices) with market participants standing by once again for expected volatility in North American trade on the back of the highly anticipated monthly NFP release. Recent data out of the US has been encouraging, and employment data has also been producing optimistic results. The market could therefore be looking for a strong result from today’s release and it will certainly take front and center stage. On the official circuit, a slew of ECB officials are scheduled to speak, including; Trichet, Weber, and Bini-Smaghi, while Fed Yellen is also on the docket. We have yet to mention the surging commodity prices in this report, but as we had warned in the previous day, we have already seen some signs of corrective activity, with gold backing down a good deal from its record highs. Oil has been a little more stubborn, but here too we anticipate a significant short-term correction. US equity futures are tracking mildly higher into the European open after an impressive rebound on Thursday.
ECONOMIC CALENDAR
TECHNICAL OUTLOOK
EUR/USD: It seems as though there was no need to wait for confirmation following Wednesday’s daily close by 1.3860, with the market easily accelerating on Thursday above the level and towards our next key topside objective just shy of 1.4000. The market has since stalled out and the failure ahead of 1.4000 should not be taken lightly, with the market stalling by the 78.6% fib retrace off of the major November-January high-low move. For now, we will use 1.4000 as our gauge for directional bias. A daily close above 1.4000 will open the door for a direct retest of 1.4280, while inability to establish above the figure will open the door for a meaningful bearish reversal.
USD/JPY: Although the market has come under some intense pressure in recent trade back below 82.00, overall price action remains largely consolidative with the market once again very well supported in the 81.00’s. For now, 81.00 remains the key level to watch below, and only a close below this figure would negate the current range-bound price action and give reason for concern. As such, we like the idea of buying into the latest dips in favor of a bullish reversal back towards the key 84.50 multi-day range highs over the coming days.
GBP/USD: After failing to establish above 1.6300 over the past several weeks, the market finally managed to break and close above the level on Wednesday to suggest that a fresh upside extension towards 1.6500 could be underway. However, Thursday’s failure to hold above the figure once again leaves us doubting the latest move, and a break and close back below 1.6215 would confirm our suspicions and open the door for a key bearish reversal. For now we remain sidelined until a clearer opportunity presents.
USD/CHF: The latest break to fresh record lows by 0.9200 is certainly concerning and threatens our longer-term recovery outlook. Still, we do not see setbacks extending much further and continue to favor the formation of some form of a material base over the coming weeks in favor of an eventual break back above parity. From here, big figures become key support as we are in unchartered territory, while a weekly close back above 0.9320 would help to encourage bullish reversal prospects.
Written by Joel Kruger, Technical Currency Strategist
Source
http://www.dailyfx.com
