Short-term Bearish Sentiment Eases as European Yields Relax

Poor Chinese trade data that showed the continued collapse of the Chinese consumer (plummeting price pressures alongside weaker Import figures) initially weighed on risk-appetite, but any trace of losses rooted in Asian growth concerns has been swept away as European funds have hit the market. Rumors have surfaced that the People's Bank of China will cut its reserve requirement ratio (RRR) either later today or tomorrow and this in turn has provided a lift to growth-linked currencies. Combined with the oversold technical conditions displayed by risk-correlated assets such as the Australian Dollar, and there has been enough impetus for a bounce this morning.

In Europe, it appears that the German constitutional court has ratified the European Stability Mechanism (ESM), the region's permanent bailout fund that should be used to pin down borrowing costs in the periphery. Certainly, European debt has responded neatly, which has eased pressure on the Euro. The Italian 2-year note yield has fallen to 3.751% (-27.3-bps) while the Spanish 2-year note yield has dropped to 4.628% (-23.0-bps). Similarly, the Italian 10-year note yield has slid to 5.911% (-16.0-bps) while the Spanish 10-year note yield has fallen to 6.784% (-19.8-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:07 GMT

AUD: +0.25%

JPY: +0.21%

NZD: +0.19%

CAD: +0.11%

EUR:+0.04%

GBP: +0.04%

CHF: +0.03%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.16%(+0.73% past 5-days)

ECONOMIC CALENDAR

The economic docket is rather dry for the second day in a row (and as will be the case this week), with no market moving US data due later today. However, there are still two items of interest. At 08:15 EDT / 12:15 GMT, Canadian Housing Starts for June are due, which could fuel concerns of a housing bubble in Canada if growth remains over +200.0K. At 10:00 EDT / 14:00 GMT, the British NIESR Gross Domestic Product Estimate for June will be released, and should show that growth remains at a very low, if not contractionary level.

TECHNICAL OUTLOOK

EURUSD: The pair has started to rebound as expected as short-term oversold conditions have provided the necessity for some relief. The EURUSD rally should be capped in the near-term, with resistance overhead at 1.2360/65, 1.2400, and the crucial 1.2440/80 zone (Symmetrical Triangle support). Near-term support comes in at 1.2285/90. Given the measured move and Fibonacci extensions, we are looking for a move towards 1.1695-1.1875 over the next eight-weeks.

USDJPY: The USDJPY is working on an Inverted Head & Shoulders pattern off of the June 1 low, with the neckline coming in at 80.60/70. Only a daily close above this level will signal the commencement of this pattern. With the Head at 77.60/70, this suggests a measured move towards 83.60/70 once initiated. Near-term support comes in at 78.85/90 (200-DMA). Price action to remain range bound as long as advances are capped by 80.60/70.

GBPUSD: GBPUSD strength is materializing aided by some better than expected data out of the UK but bounces are to be sold. Oversold technical conditions are being relieved and the pair has started to trade into some near-term resistance at 1.5540/45. More important resistance comes in at 1.5600/05 (20-DMA) then the monthly high at 1.5720/25. Near-term support comes in at 1.5460 then 1.5425/30 (Bollinger Band).

AUDUSD: The pair has settled back below the crucial 1.0250/60 area (100-DMA, 200-DMA) and has since pulled back below the pivotal 1.0210/15 level. It thus appears, now that there was a new low set on Friday, that prices have reversed and further losses are ahead. Near-term resistance comes in at 1.0250/60 and 1.0325/30 (monthly high); a break above 1.0325/30 would signal a reversal and point to more gains towards 1.0365/85. Support now comes in at 1.0120/25 (20-DMA), 1.0080 (former intraday swing highs), and 1.0005/10 (50-DMA).

--- Written by Christopher Vecchio, Currency Analyst

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