Euro Hits New 2012 Lows on S&P Credit Downgrades; S&P 500 Finds Fibonacci Support

The Euro is holding steady at its lows from last week and Asian trade was mostly quiet after the increased volatility that was seen on Friday.  This quiet trade is likely to continue for most of the day, as US markets are closed for the Martin Luther King holiday.

Macro data out of Japan showed that Machine Orders rose by 14.8 percent for the month of November, which was more than twice the consensus estimate (5.1 percent) and this helped to eliminate the sharp drop that was seen in both September and October.  Another positive here is that this will put the validity of the previous Tankan survey into question (which showed a negative reading from the nation’s manufacturing companies).

There was also some macro data out of Australia, which showed that a reduction in mortgage rates is helping boost home loans (albeit at a slow pace) as the November numbers showed a 1.4 percent rise in the monthly data (the eight consecutive monthly rise).  Other data showed signs of weakness in the labor market as ANZ job advertisements dropped 0.9 percent for the month of December and this will likely lead to some downside revisions to the monthly payrolls report that will be release on Thursday this week.  The consensus estimate for this data is a rise of 10,000 jobs and this will be the main source of volatility in the Australian Dollar in this week’s trade.  The November data showed a job of 6,900 jobs.

The main story on Friday was the decision by S&P to downgrade 9 Eurozone member countries, with most of the attention focused on France.  On the positive side, the AAA rating of Germany was re-affirmed. The countries of Cyprus, Portugal and Italy were lowered by two levels while France, Austria, Slovakia, Slovenia and Malta were lowered by one level.  The long-term ratings for Finland, Belgium, Estonia, Luxembourg and Ireland were kept at their previous levels.  The Euro started on a massive decline early in the session as rumors of the downgrade began to circulate and the EUR/USD is now trading at fresh lows for 2012.

There were other negative Eurozone headlines as well, as news broke that there are currently political obstacles stalling the Greek PSI agreement talks but Euro losses were stalled by supportive comments from German Chancellor Merkel.  US macro data was also damaging for risk sentiment to close the week as both the US Trade Balance showed a larger deficit at $47.8 billion for the month of November and the JP Morgan earnings report missed market expectations.  Today, remain watchful of the hangover effect of these events on the holiday thinned trading volumes, as this could lead to large increases in volatility.

Technical Analysis:

The EUR/JPY is continuing strongly on its monthly downtrend with prices hitting new lows just ahead of 97.  Hourly indicators are over extended but we have yet to see any substantial evidence of a reversal and this will be the case as long as prices remain below 98.80.  A break here would target the initial Fibonacci resistance, which matches up nicely with historical levels at 100.30.  Long trades give the most favorable risk to reward ratios but look for reversal signals before establishing positions.

The S&P 500 is showing a negative daily candle but the negative follow through was limited, with prices bouncing off of the 23.6% retracement of the latest rally.  We will need to see a clear break here before we can turn the short term bias back to neutral.  Longer term, the uptrend remains intact and any major dips are expected to be met with active buyers.