DailyFX | August 1 2011 12:31 EDT
Risk correlated assets have been well bid in early Monday trade following the announcement from President Obama that an agreement has been reached on the debt ceiling…
The announcement from President Obama that an agreement has been reached on the debt ceiling discussions and that the US will be able to avoid default has been the clear driver of price action in Monday trade thus far, with risk correlated assets initially benefitting from the news. We have already seen some relative weakness in both the Yen and Swissie, while the higher yielding Aussie and New Zealand Dollars have rallied since the Monday open. We suspect that markets will take the remainder of the day to fully digest this latest news, and it at this point, it is difficult to determine whether fear and uncertainty will once again creep back in when the dust settles or if there is a genuine sense of confidence that grows from the debt ceiling resolution.
We would continue to recommend paying close attention to price action in the safe haven and higher yielding currencies, with the Yen, Swiss Franc, Australian Dollar and New Zealand Dollars all tracking by record highs despite starkly contrasting risk profiles. Surely, something has got to give and inevitably, we would expect to see some relative underperformance in these markets going forward given the exhaustive state of technical studies.
While rallies in the Australian Dollar on Monday have made sense from a broader global macro risk standpoint, economic data out of the region has been less than supportive with Aussie performance of manufacturing and new home sales data grossly disappointing. This in conjunction with some higher inflation readings and deteriorating manufacturing readings out of China could start to weigh on the antipodean into the remainder of the day. However, for now, Aussie remains very well bid on any form of a dip and we would need to see a break back below 1.0900 at a minimum to officially relieve immediate topside pressures.
Looking ahead, UK manufacturing PMI and Eurozone unemployment are the key releases in European trade. However, as mentioned above, we expect to see price action for the remainder of the day revolve around the reaction to the latest debt ceiling announcement from the President. US equity futures are tracking a good deal higher thus far, while oil is also bid. Gold on the other hand is showing some rare relative underperformance.
EUR/USD: The market has been carving out a series of lower tops since stalling shy of 1.5000 in early May, and the latest rally still maintains the integrity of this broader downtrend. If the market is to adhere to this broader downtrend, a fresh lower top could take form somewhere below the previous lower top from July 4 at 1.4580. At this point, 1.4580 becomes the key level of resistance, and only a break above this level will officially relieve downside pressures and open the door for a bullish shift in the structure. Until then, we are still in a broader downtrend and would therefore be looking for opportunities to fade the move. The recent topside failure by 1.4535 could very well set up the next lower top ahead of the next downside extension back towards and below 1.4000.
USD/JPY: The market remains under some intense pressure since dropping back below 80.00 with the latest setbacks extending towards the critical March record lows by 76.30. At this point, look for a test and break of 76.30 before considering any possibility for a reversal, while ultimately, a break and close back above 78.00 would be required at a minimum to relieve immediate downside pressures.
GBP/USD: Despite the latest rally back above 1.6400, the market still remains locked in a broader downtrend off of the April highs, and a fresh lower top is now sought out somewhere ahead of 1.6550 in favor of the next downside extension back towards the recent range lows at 1.5780. Ultimately, only a break back above 1.6550 would delay bearish outlook and give reason for pause.
USD/CHF: Despite the intense downtrend resulting in recently established fresh record lows below 0.8000, short/medium/longer-term technical studies are looking quite stretched to us, and we continue to like the idea of taking shots at buying in anticipation of a major base. On Friday, the latest sharp drop resulted in a move well into the 0.7800’s and we once again looked to buy by 0.7885 in anticipation of some corrective upside. Indeed the downtrend remains well intact and this is precisely why taking shots at the long side should only be done on exhausted intraday drops or on a break back above some key short-term resistance. For all those on the sidelines, buying dips towards 0.7830 or rallies back above 0.8050 is the preferred strategy over the day ahead.
Written by Joel Kruger, Technical Currency Strategist
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