Currencies Still Confined to Broader Ranges Despite Latest Rallies

• Euro rally impressive but still confined to broader range
• Fed hawks on the wires and warn against extended easing
• SNB and BOJ actions could open the door for USD gains
• Still looking to sell Aud/Usd on rally to 1.0630
• Gold well bid and still contemplating assault on $2000
• UK retail sales and US CPI on tap

Overall market conditions remain rather subdued in the current week, and although we have seen some impressive gains in the Euro and other currencies over the past few sessions, these markets are still confined to broader ranges with the price action classified as consolidative. Euro gains have stalled out for now ahead of some critical resistance by 1.4535, and we will use this level of a gauge for directional bias over the coming sessions. Should the market manage to close above this level, then we could see an upside acceleration in the Euro and a fresh wave of Greenback selling. However, inability to establish above 1.4535 will put the pressure back on the downside and open the door for a bearish resumption.

Moving on, more Fed officials have been on the wires in recent trade with Dallas Fed President Fisher and Philly Fed chief Plosser offering their views on monetary policy and the latest FOMC decision. Both members are in the minority and both have expressed concern over the commitment to leave rates ultra accommodative for such an extended period of time. While Fisher is certainly the more hawkish and optimistic of the two, both officials were very quick to point out that the Fed should not react to drops in the equity markets and other asset classes and instead should be more focused on reacting to any impairment of function in the financial markets (ie liquidity drying up). As far as his optimism is concerned, Fed Fisher seems to share the sentiments of Warren Buffett who says that he thinks the US economy just might recovery faster than the Fed has anticipated.

These more hawkish Fed views have not helped the US Dollar in recent trade, although we do believe that the minority view of the Fed is worth serious consideration. Many Fed officials have provided clarity on the language in the previous statement which expressed the misleading commitment to leave rates as is until mid-2013. It is now clear that this does not represent a firm commitment by any means and should market conditions change, the Fed will be prepared to look to reverse policy.

Ultimately, any reversal in policy, whenever it may happen should narrow yield differentials back in favor of the US Dollar and provide a fresh prop for the buck. In the interim, we still see room for USD appreciation even with the ultra accommodative policy, as the uncertain outlook for the global economy still warrants a flight to safety trade that should benefit the buck. As we have mentioned in previous reports, the more active intervention on behalf of the SNB and BOJ in recent weeks should make these currencies less attractive safe haven options which leaves the USD as the potential primary beneficiary of these flows.

Some markets that we recommend keeping an eye over the coming session in addition to the Euro (as discussed above) are Usd/Jpy, Aud/Usd, the Swiss Franc and gold. Usd/Jpy looks like it wants to break to yet another fresh record low below 76.25 and once it does you can bet that the intervention talk will heat up dramatically which could spark a good deal of volatility. Aussie has been in the process of recovering following a violent drop off in the previous week but could soon come under renewed pressure as it approaches a key technical confluence in the mid-1.0600 by the 20/50/100-Day SMAs and the 61.8% fib retrace off of the recent move. The Franc has found renewed bids after the SNB failed to come out as aggressive as they had suggested they would be in attempts to depreciate the currency, and it will be interesting if the measures in place are enough to still do the trick. Finally, gold prices remain exceptionally well bid and the yellow metal looks like it is prepping to accelerate to yet another fresh record high on its path towards the major psychological barrier at $2000.

Looking ahead, the European economic calendar is rather light, with the key releases coming in the form of UK retail sales and Eurozone construction output. The calendar heats up in North America, with US CPI, initial jobless claims, existing home sales and the Philly Fed taking center stage. Also worth mention are Canada leading indicators and wholesale sales. US equity futures and commodities prices are fairly quiet at the moment and consolidating their latest moves.

ECONOMIC CALENDAR

TRADE OF THE DAY

AUD/USD: (Sticking with Wednesday's Recommendation) The market is in the process of retracing the major drop off from the post-float record highs at 1.1080, with the price pushing back over the 50% fib retrace off of the 1.1080-0.9925 move by 1.0500 thus far. While there is certainly the possibility that gains will stall out somewhere in the 1.0500's around the 50% fib, we suspect that the greater probability is for continued gains back towards a major confluence of resistance in the mid-1.0600's, which comes in the form of the 20/50/100-Day SMAs and the 61.8% fib retrace off of the 1.1080-0.9925 move. Overall however we contend that any gains are corrective and would be looking for opportunities to sell in anticipation of the formation of a material lower top below 1.1080 ahead of the next major downside extension back below parity. STRATEGY: SELL @1.0630 FOR AN OPEN OBJECTIVE; STOP ONLY ON A DAILY CLOSE ABOVE 1.0800.

TECHNICAL OUTLOOK

EUR/USD: The market continues to adhere to a bearish sequence of lower tops since May, with a fresh lower top now in place by 1.4535 ahead of the next downside extension back towards and eventually below 1.4000. In the interim, look for any intraday rallies to be well capped by 1.4500, while only a daily close back above 1.4535 negates. Short-term support now comes in by 1.4325 and a break back below should accelerate declines.

USD/JPY:Setbacks have stalled out just ahead of the 76.25 record lows from March, with the market dropping to 76.30 ahead of the latest reversal. Given that we are seeing the rate by record lows, we would not at all be surprised to see the formation of a material base in favor of significant upside back towards the 82.00 area over the coming sessions. However, the overall structure still remains bearish and it will take a break back above 80.00 to officially alleviate downside pressures and confirm reversal prospects. Short-term resistance comes in by 77.30 and a daily close above will encourage bullish reversal prospects. Below 76.25 negates.

GBP/USD: The market remains locked in a broader consolidation off of the April highs, and a fresh top is now sought out somewhere around 1.6550 in favor of the next downside extension back towards the recent range lows at 1.5780. Ultimately, only a daily close above 1.6550 would delay outlook and give reason for pause, while back under 1.6350 should accelerate declines.

USD/CHF: The latest sharp reversal off of record lows just shy of 0.7000 is encouraging and could finally be starting to signal the formation for a major base. Weekly studies are also confirming with the formation of a very bullish bottom close. From here, look for an acceleration of gains back towards the 0.8500 area over the coming days with setbacks expected to be well supported above 0.7500 on a daily close basis.

Written by Joel Kruger, Technical Currency Strategist

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