Euro Drops to Fresh Multi-Month Low Exposing 1.2500 Further Down

• Spain looking to recapitalize; Greece working to secure bailout money
• Rumors of additional E.C.B rate cuts making the rounds
• EUR/AUD cross finally breaks to fresh record lows
• EUR/JPY remains under intense pressure
• French auction results fairly well received
• Aussie data comes in weaker than expected

Ongoing concerns over the health of the Eurozone and its impact on the broader global macro economy continue to dominate trade. The latest talk of Spain looking to recapitalize its banking sector, a German institution recapitalization and Greece working hard to secure bailout funds, has not inspired any confidence and we are once again seeing a continuation of risk correlated liquidation, highlighted by Euro declines. A decent French auction has also not helped to bolster the Euro at all on Thursday and the market has broken to fresh multi-month lows towards 1.2800. Rumors of additional rate cuts have also been making the rounds and this could put additional pressure on the beleaguered Euro currency. EUR/JPY continues to drop and has recently moved into the 98.00’s.

1. JPY -0.13%
2. CAD -0.57%
3. GBP -0.63%
4. NZD -0.75%
5. CHF -0.76%
6. EUR -0.81%
7. AUD -1.08%

Still, we see a point at which the crisis intensifies to the east and puts even more pressure on China, it correlated economies and emerging markets. One such correlated economy is Australia, and with the EUR/AUD cross rate trading over 85 big figures off its 2008 peak, we anticipate relative weakness in the Australian Dollar going forward, even against the Euro. Just as we saw the crisis spread from the US to the Eurozone and the USD start to find relative bids, so too here, we see the crisis spreading to Australia and the Euro finding relative bids. The EUR/AUD cross rate has now traded to fresh +20-year/record lows, and technically, charts are screaming for a much needed healthy corrective bounce at a minimum. Australian data overnight has not been encouraging and perhaps this could provide the initial spark for some form of a bounce in the cross rate.

Looking ahead, US Challenger job cuts, ADP employment, initial jobless claims and ISM non-manufacturing are the key releases in North American trade. But with all the focus on Eurozone deterioration, markets will likely continue to be influenced by these broader macro themes. Also worth noting is the potential for downgrades from the rating agencies on European countries after S&P hinted at such developments in late 2011. Global equity markets have been rather supported in recent trade, but are starting to show signs of renewed weakness. 

The Euro and risk correlated assets remain under pressure heading into Friday and at this point, there appears to be no sign of any relief for these markets. Rumors of an S&P France downgrade and an incident at a North Korean nuclear facility have not helped matters, and this weighs on an already stressed situation on the global macro front, with the Eurozone economy looking increasingly fragile. The latest suggestion by Greece’s PM that the country may default in March and the leave the Eurozone has been a primary driver of Euro selling over the past few hours and disappointing EZ auction results coupled with talk of recapitalizations have added to the high degree of uncertainty in the region.

At this point, next key support for the Euro comes in by the 1.2500 area, and we could see a test of this level sooner than even we had anticipated. We are also starting to see a potential breakdown in familiar correlations where USD performance had been inversely correlated with US economic data results. Economic data has been quite solid out of the US in recent trade and the stronger results have actually been inspiring fresh USD bids. As such, we continue to be very bullish on our outlook for the US Dollar across the board, and recommend looking to fade other major currencies against the buck over the coming months. Some of these currencies include the commodity bloc currencies, highlighted by the Australian, New Zealand and Canadian Dollars. Looking ahead, all eyes will be on today’s US employment report.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: After finally taking out the 2011 lows from January by 1.2870, the market seems poised for the next major downside extension. Overall, we retain a strong bearish outlook for this market and look for setbacks to extend towards the 1.2000 handle over the coming months. While we would not rule out the potential for corrective rallies, any rallies should be very well capped above 1.3500. Meanwhile, a daily close below 1.2850 on Thursday will accelerate declines.

USD/JPY:Despite the latest pullbacks, we continue to hold onto our constructive outlook while the market holds above 76.55 on a daily close basis. We believe that any setbacks from here should be limited in favor of a fresh upside extension back towards 79.55 over the coming weeks. Look for a break above 78.30 to confirm and accelerate, while only a daily close below 76.55 negates and gives reason for pause.

GBP/USD: Rallies have been very well capped ahead of 1.5800 and it looks as though a lower top has now been carved out by 1.5780 ahead of the next major downside extension back towards the October lows at 1.5270. Key support comes in by 1.5360 and a daily close below this level will be required to confirm bias and accelerate declines. Ultimately, only back above 1.5780 would negate bearish outlook and give reason for pause.

USD/CHF: The recent break above the critical October highs at 0.9315 is significant and now opens the door for the next major upside extension over the coming weeks back towards parity. A confirmed higher low is now in place by 0.9065 following the recent break over 0.9330, and next key resistance comes in by 0.9785. Ultimately, only back under 0.9065 would delay constructive outlook.