Euro Rally Still Has Room to Run Before Broader Downtrend Resumption

• Euro still well bid on IMF and solid auctions
• Technical studies showing bullish weekly reversal

The Euro is looking to mount its first major short-term correction in several weeks, with the market attempting to establish back above the previous weekly highs by 1.2880. Market participants have found some renewed confidence in the single currency despite all the troubles in the region with the news that the IMF will be looking to offer another $1Trillion in aid and some very well received auctions out of Spain and France seen as the primary drivers for the renewed bid tone. Technical studies have also been warning of the need for some form of a bounce in this market, and although we continue to see the broader risks tilted to the downside, we would still not rule out the potential for this rally to extend over the coming days into the 1.3200-1.3500 area before underlying bear trend resumption.

While at this point it is still way too early to make any serious calls, we have been projecting relative underperformance in the commodity currencies over the coming months as the fallout from the global recession spreads. Our view from the start of the recession has always been a 3 phase recession view which originated in the United States, spread to Europe, and will soon move on to China, the commodity bloc economies and emerging markets. Although these phase three economies have slowed in the face of the US and Eurozone slowdowns, in our opinion, the intensity of the recession has not been fully realized in these regions. As such, we project relative underperformance in these economies even against the Eurozone going forward and look for crosses that have recently posted multi-year and record lows, like EUR/AUD and EUR/NZD to soon aggressively reverse course.

Data out of China has been less and less encouraging of late, while both Australia and New Zealand produced some extremely discouraging economic data this week, with terrible employment and much softer CPI respectively. With markets, it is also always about what has been priced in and what has not been priced in rather than what actually is at present. We believe that as bad as things are in the Eurozone, there is very little room for additional downside as most of the bad has been priced in, while in Australian and New Zealand, there is still a good deal of downside risk that has not been appropriately priced into markets.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The market has finally managed to find some bids and although the broader underlying trend remains intensely bearish, the risks from here are for additional corrective gains back towards the 50 and 100-Day SMAs in the 1.3100-1.3400 area before the next lower top carves out. Some falling trend-line resistance has already been broken on the daily chart and the 10-Day SMA looks to be on the verge of crossing back above the 20-Day SMA to provide added confirmation for short-term bullish structural shift. Setbacks should now be well supported ahead of 1.2750, while only back under 1.2620 negates short-term bull bias.

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: The market has mostly been locked in some sideways chop over the past few weeks with any rallies very well capped ahead of 1.5800 and setbacks supported on dips below 1.5300. Until either side is convincingly broken, we would expect to see additional range trade. Therefore the preferred strategy is to look to buy range dips and sell by range highs. Only a weekly close above 1.5800 or below 1.5250 would give reason for outlook shift.

USD/CHF: Although our overall outlook remains intensely bullish, the market is in the process of some interday consolidation before the next major upside extension beyond 0.9600 and towards parity. As such, from here, we see risks for additional setbacks towards 100-Day SMA by 0.9100 from where a fresh higher low is sought out. Ultimately, only a sustained break back under 0.9000 would negate constructive outlook and give reason for pause. Dips towards the psychological barrier should therefore be used as formidable buy opportunities. 

Prepared by: Zeshan Muhammad Ali Awan 

GBP/USD Classical Technical Report 20th January

GBP/USD:The market has mostly been locked in some sideways chop over the past few weeks with any rallies very well capped ahead of 1.5800 and setbacks supported on dips below 1.5300. Until either side is convincingly broken, we would expect to see additional range trade. Therefore the preferred strategy is to look to buy range dips and sell by range highs. Only a weekly close above 1.5800 or below 1.5250 would give reason for outlook shift.

EUR/USD Classical Technical Report 20th January

EUR/USD: The market has finally managed to find some bids and although the broader underlying trend remains intensely bearish, the risks from here are for additional corrective gains back towards the 50 and 100-Day S.M.As in the 1.3100-1.3400 area before the next lower top carves out. Some falling trend-line resistance has already been broken on the daily chart and the 10-Day S.M.A looks to be on the verge of crossing back above the 20-Day S.M.A to provide added confirmation for short-term bullish structural shift. Setbacks should now be well supported ahead of 1.2750, while only back under 1.2620 negates short-term bull bias

Dollar Slides a Fourth Day as Risk Appetite Persists, Euro Rallies

Dollar Slides a Fourth Day as Risk Appetite Persists, Euro Rallies

On the week, the dollar finds itself significantly lower against all of its major counterparts with the exception of the Japanese yen. This is a move that fits the picture that the broader capital market is painting for us. Among the signs, we find the S&P 500 advancing to fresh five-month highs, volatility indexes are testing lows not seen since July and the euro is charging higher across the board. When the masses are pining for liquidity and safety of funds at the cost of a negative real rate of return, the greenback will shine. And, conversely, when this sentiment extreme isn’t pressuring the masses; funds will seek greater diversity. That said, a move away from an extremophile currency does not necessarily mean that risk appetite will naturally climb to new heights.

Everything we have seen from the capital and FX markets suggests that what we have seen to this point is a pull back or retracement. As the jitters of panic in the spread of a global crisis pass, there is room to unwind positions that look to speculation on or insure against impending catastrophe. Traders must ask: how much premium is there to unwind, and will fear return before this correction is naturally completed?

Euro Marks a Critical Technical Break Higher as Relief Pours In

After a round of Spanish and French bond auctions through Thursday’s session, we have officially closed out the last of this week’s important bond auctions. What started as a period that was destined for disaster after last Friday’s round of sovereign ratings downgrades (including France, Italy, Spain and Portugal), we are ending with a sigh of relief. Objectively, the rates that the various governments pulled from the market are not sustainable for financing deficits and spending over the medium to long-term, but they do ease the threat of imminent doom (a complete collapse of credit and funding). And, risk of uncontrollable financial crisis was what drove the shared currency so low, so quickly. Therefore, it is only reasonable that the immediate pressure relief should lead to near-term recovery. That said, over-estimating the pace (and possibly depth) of the crisis doesn’t imply a recovery with higher yields and non-existent risk.

With the bullish tide that accompanies this corrective rally, we can see optimism stain bond auctions outcomes and expectations for various open-ended problems. A notable example is the negotiations between banks and Greece for a viable agreement to help Greece to a surplus. FT reported a deal was close while the New York Time says Hedge Funds may sue. I refer to Fitch that says: regardless, it would be a default.

British Pound Slow to Follow Euro Higher, Looking Ahead to GDP

The FTSE 100 closed at a five-month high through Thursday’s close in London, but this is yet another example of asset pricing running astray of genuine fundamental potential. Typically, the stock market will follow growth potential through an ‘investment, wage, spending, production, revenue increase’ cycle. Yet, we know that expansion is exactly the opposite of what’s in store for the United Kingdom through the immediate future. In fact, the Bank of England Governor, Chancellor of the Exchequer, World Bank and industry groups have all warned that the country may dip into period of negative growth – if not technical recession. Suggestion an economic slump and all it would entail has already been priced in is preposterous as it entails an indefinite period of little-to-no dividend income alongside rising capital loss risk. This raises a very real red flag for next week’s 4Q GDP reading. Following the euro higher could set the sterling up for a big fall given the correct fundamental winds.

Gold Running at the Same Steady Pace as the S&P 500, With Better Fundamentals

Gold’s advance since the beginning of this year has run at about the same pace as the S&P 500’s gait: consistent but lacking for momentum. IN fact, looking at an intraday chart of the metal overlaid with the index; you would see a remarkable consistency in the two assets’ performance. In fact, the two-week rolling correlation between the two is currently 0.90 (exceptionally strong). That is very unusual given one is a safe haven and the other a risk barometer. We could attribute the general performance to anti-dollar capital flows, but that ignores the underling drive. Moving away from the greenback is essentially moving away from cash. In other words, capital is being reinvested into safe and risky assets.

ECONOMIC DATA

GMT	Currency	Release	Survey	Previous	Comments
0:30	AUD	Import price index (QoQ) (4Q)	0.6%	0.0%	Terms of trade important for Australia’s export-dependent economy
0:30	AUD	Export price index (QoQ) (4Q)	-2.0%	4.0%
1:35	CNY	MNI January Flash Business Sentiment Survey			Comes after GDP figures showing slowest growth in more than 2 years
2:30	CNY	HSBC Flash China Manufacturing PMI (JAN)		49
4:30	JPY	All Industry Activity Index (MoM) (NOV)	-0.9%	0.8%	Could point to period of slow growth in Japanese economy
7:00	EUR	Producer Prices (MoM) (DEC)	0.1%	0.1%	Price pressures to ease further amid threat of recession
7:00	EUR	Producer Prices (YoY) (DEC)	4.6%	5.2%
9:30	GBP	Retail Sales Ex Auto Fuel (MoM) (DEC)	0.7%	-0.7%	Some improvement expected amid holiday season
9:30	GBP	Retail Sales Ex Auto Fuel (YoY) (DEC)	1.7%	0.5%
9:30	GBP	Retail Sales (MoM) (DEC)	0.6%	-0.4%
9:30	GBP	Retail Sales (YoY) (DEC)	2.4%	0.7%
12:00	CAD	Consumer Price Index (MoM) (DEC)	-0.2%	0.1%	Price pressures remain weak in Canada; to further dampen expectations of BoC rate hikes
12:00	CAD	Consumer Price Index (YoY) (DEC)	2.7%	2.9%
12:00	CAD	Bank Canada CPI Core (MoM) (DEC)	-0.2%	0.1%
12:00	CAD	Bank Canada CPI Core (YoY) (DEC)	2.2%	2.1%
12:00	CAD	Consumer Price Index (DEC)	120.8	120.9
13:30	CAD	Wholesale Sales (MoM) (NOV)	0.5%	0.9%
15:00	USD	Existing Home Sales (DEC)	4.65M	4.42M	Recovery in US real estate market has lagged behind rest of the economy
15:00	USD	Existing Home Sales (MoM) (DEC)	5.2%	4.0%

GMT	Currency	Upcoming Events & Speeches
1/21	EUR	EU’s Barroso Speaks in Guimaraes, Portugal

SUPPORT AND RESISTANCE LEVELS

\Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist. 3	1.3132	1.5640	77.81	0.9442	1.0214	1.0556	0.8136	101.34	120.84
Resist. 2	1.3090	1.5602	77.64	0.9413	1.0191	1.0521	0.8110	101.02	120.51
Resist. 1	1.3048	1.5565	77.48	0.9383	1.0167	1.0487	0.8083	100.69	120.18
Spot	1.2965	1.5489	77.16	0.9323	1.0120	1.0419	0.8031	100.04	119.52
Support 1	1.2882	1.5413	76.84	0.9263	1.0073	1.0351	0.7979	99.39	118.85
Support 2	1.2840	1.5376	76.68	0.9233	1.0049	1.0317	0.7952	99.06	118.52
Support 3	1.2798	1.5338	76.51	0.9204	1.0026	1.0282	0.7926	98.74	118.19

USD Index At Critical Juncture, Euro Correction Eyes 1.3100

Index	Last	High	Low	Daily Change (%)	Daily Range (% of ATR)
DJ-FXCM Dollar Index	9921.26	9945.57	9909.47	-0.04	54.96%

Although the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) remains 0.04 percent lower from the open, the reserve currency should continue to retrace the decline from earlier this week as market sentiment wavers. In turn, the shift away from risk-taking behavior should prop up the greenback over the next 24-hours of trading, and the rebound looks poised to gather pace over the near-term as the more robust recovery in the world’s largest economy dampens the prospects for additional monetary support. However, as price action comes up against the downward trendline, former support around 9,947 may come in as new resistance, and the reserve currency may ultimately give back the advance from earlier this year should market participants continue to ramp up their appetite for risk.

As the index threatens the upward trend carried over from the previous year, we may see the bearish divergence in the relative strength index spur a sharp decline in the USD, and the dollar may fall back towards the 50.0 percent Fibonacci retracement around 9,828 as it searches for support. In turn, we may see the greenback track within a narrow range over the near-term, but the slew of event risks of tap for the following week could increase the appeal of the reserve currency as the recovery in the world’s largest economy gradually gather space. As we’re expecting to see GDP expand at an annual rate of 3.0% in the fourth-quarter, the Federal Reserve may continue to soften its dovish outlook for monetary policy at the rate decision on tap for January 25, and the central bank may endorse a wait-and-see approach for 2012 as the U.S. skirts a double-dip recession. As a result, the USD looks poised to regain its footing over the following week, and we may see the greenback make a run at the 78.6 percent Fib (10,117) as market participants scale back speculation for another large-scale asset purchase program.

Two of the four components gained ground against the USD, led by a 0.58 percent rally in the single currency, and the technical developments points to additional Euro strength as the exchange rate breaks out of the downward trending channel carried over from the previous year. As the EUR/USD clears the 20-Day SMA at 1.2868, the rebound from the January low (1.2623) may gather pace over the next 24-hours of trading, and the pair may come up against 38.2 percent Fib from the 2009 high to the 2010 low around 1.3100-20 to test for resistance. However, as the fundamental outlook for the euro-area remains bleak, the recent bounce in the EUR/USD could turn out to be a short-term correction, and the single currency remains poised to face additional headwinds this year as the region braces for a ‘mild recession.’ As the euro-area faces an increased risk of a major economic downturn in 2012, we expect the European Central Bank to ease policy further over the coming months, and speculation for additional monetary support continues to cast a bearish outlook for the EUR/USD as the governments operating under the monetary union struggle to address the sovereign debt crisis.

Dollar Salivating For Euro Troubles Or 4Q Earnings To Force Break

Dollar Salivating for Euro Troubles or 4Q Earnings to Force Break

With the global economy slowing, rates fading and financial instability becoming the norm; my medium-term outlook is for a meaningful risk aversion move. Yet, at this point, I would settle for a short-term rally in risk trends. We have lacked any kind of meaningful momentum since before the year began. Giving us a sense of this inactivity, the equity market’s (my passive barometer for market-wide risk) VIX Volatility reading is plunging its lowest level since late July while the currency equivalent is testing comparative lows. This is a measure of future activity. Those measures of current activity are running at similar levels. If we were in fundamental trough or plateau – or even a mixed scenario – this anchoring wouldn’t surprise me. That said, we are not facing balanced conditions. The threat of financial and economic risk is clearly rising (even politicians are admitting to it), and yet we still lack for conviction.
What is needed is a catalyst that draws investors off of the sidelines and encourages them to be active in this market once again. The European downgrades have so far failed to stoke fears of our next global financial crisis taking root (more on that below) and the steady slide in economic activity across various regions has yielded the same. That is the risk side of the balance, so now we will try the ‘return’ side. With Tuesday’s session, we will kick off the 4Q US earnings season in earnest . Will these figures finally return to reality and offer a spark for broader risk?
Euro has Not Dodged a Bullet with Downgrades, French Bond Auction
The Euro has passed the first opportunity to respond to the Standard & Poor’s round of Friday evening rate cuts , and not only has the currency avoided a strong bearish slide – it didn’t move at all. Neither the shared currency nor risk appetite trends made a meaningful move liquidity filled out once again. Should we take this to mean that the downgrades have no influence? Of course not. Less controversial, does this mean that the downgrades themselves were fully priced in? We could argue this point on price action, but the reality of the situation is that the full impact of this change cannot be fully appreciated due to the complexity of how this can further and accelerate the region’s financial crisis. Therefore, the rate cut to France itself may have been adjusted for, but its influence in undermining the region’s safe haven options, unnerving regional banks and diverting capital flow won’t be known until it is already behind us.
Far more influential in the rating agency’s offensive is the continued degradation of those members that are already on the cusp. Now rated ‘junk’ status, Portugal has seen its 10-year bond yield soar over 225 basis points. This brings up a serious concern of whether another member that is tapping the bailout program could follow down the same path as Greece. More certain in its influence over the region, both Spain and Italy didn’t see significant impact on their respective yields on the day, but the rating hit no doubt weighs the market’s confidence. Spain will find a vote of confidence in bond auctions tomorrow (on 12 and 18 month maturities – short-term usually has less risk). Also of note, we have Greek and EFSF bond auctions. The later will be particularly interesting after the S&P downgraded its ‘AAA’ rating Monday . This didn’t strike the market as much of a surprise however as it was warned well in advance that should France lose its top rating, so too would the bailout program.

Japanese Yen: Noda Warns Japan Cannot Abide Rates Above 3 Percent

When a currency stands in as a safe haven, it can override a significant number of fundamental concerns . So it is with the Japanese yen. The Japanese markets offer the kind of liquidity and financial structure that resembles the United States’ roll – just in the Asian sector. However, the country never really solved its credit issues of two decades ago and their currency is severely undermining economic activity in the region. Prime Minister Noda warned Monday (it’s an issue if your leader voices it) that they must reign in debts as they can’t absorb even 3 percent rates.
Canadian Dollar Response to BoC Decision Depends on Expectations
What should we expect from the Bank of Canada rate decision in the upcoming session? There may very well be higher expectation for volatility in reaction to this release as the speculative ranks are riding high off their RBA expectations. However, the market and economists are pricing in little to no chance of a move over the coming 12 months (much less this particular meeting). That said, the group has held a dovish tone for months – generally ignored by the market. If they threaten action to that outlook, we have a good risk aversion amplifier to work with.
British Pound Will Try to Look for Separation from Euro with CPI Data
The sterling is still following the track that the euro has laid out for it. Chancellor of the Exchequer reminded us of the two currencies’ fundamental connection when he warned that the Euro Zone’s crisis is “extremely challenging” for the UK (our skepticism should curb the attention we pay to his optimism surrounding certain, recent indicator releases). If the crisis intensifies in the Euro-area, it will certainly spill over to Britain. That said, if we can hold on to quiet markets, perhaps the upcoming CPI data can provide a small, temporary separation.
Australian Dollar Advances before Chinese GDP, Data Impact Reserved
The issue with quiet markets is that the impact from data will be muted whether it releases to the bullish or bearish side. As the most risk attuned commodity currency and an important raw material provider for China, there was an expectation that the Asian giant’s 4Q GDP figures could generate substantial volatility for the Aussie. However, a pick up from a quiet level is still quiet. The economy expanded 2.0 percent on the quarter and a greater than expected 8.9 percent on an annual basis. It’s still a cooling trend, just not at the pace that can spark fear.
Gold Slowly Advances as European Financial Health Deteriorates
While the euro and risk trends remain sedate in the aftermath of the Euro Zone downgrades, there is still a sense of risk aversion related to the development. The currency holds steady as capital circulates to other European members while sensitive assets (like equities) find ill-earned confidence in the promises of stimulus from policy bodies. Nevertheless, the slide into recession and the low firepower for monetary policy officials as their balance sheets balloon aren’t going unnoticed. In this troubled mix, capital will find its way to the non-currency metal.
ECONOMIC DATA
Next 24 Hours

GMT	Currency	Release	Survey	Previous	Comments
2:00	CNY	Real GDP (YoY) (4Q)	8.7%	9.1%	Expectations are that Chinese growth will be the slowest since 2009
2:00	CNY	Real GDP (QoQ) (4Q)		2.3%
2:00	CNY	Real GDP YTD (YoY) (4Q)	9.2%	9.4%
2:00	CNY	Industrial Production YTD (YoY)	13.8%	14.0%
2:00	CNY	Industrial Production (YoY)	12.3%	12.4%
2:00	CNY	Fixed Assets Inv Excl. Rural YTD (YoY) (DEC)	24.1%	24.5%
2:00	CNY	Retail Sales YTD (YoY) (DEC)	17.0%	17.0%
2:00	CNY	Retail Sales (YoY) (DEC)	17.2%	17.3%
09:30	GBP	CPI (MoM) (DEC)	0.4%	0.2%	UK inflation continues to show signs of easing on austerity and subdued activity, data unlikely to alter BoE’s dovish stance
09:30	GBP	CPI (YoY) (DEC)	4.2%	4.8%
09:30	GBP	Core CPI (YoY) (DEC)	3.0%	3.2%
09:30	GBP	Retail Price Index (DEC)	239.1	238.5
09:30	GBP	RPI (MoM) (DEC)	0.3%	0.2%
09:30	GBP	RPI (YoY) (DEC)	4.7%	5.2%
10:00	EUR	Euro-Zone CPI - Core (YoY) (DEC)	1.6%	1.6%	Expected to ease amid threat of recession in Eurozone
10:00	EUR	Euro-Zone CPI (MoM) (DEC)	0.4%	0.1%
10:00	EUR	Euro-Zone CPI (YoY) (DEC)	2.8%	3.0%
10:00	EUR	ZEW Survey (German Current Situation) (JAN)	24	26.8	Data could provide insight into whether Germany slips into recession
10:00	EUR	ZEW Survey (Eurozone Econ. Sentiment) (JAN)		-54.1
10:00	EUR	ZEW Survey (German Econ. Sentiment) (JAN)	-49.4	-53.8
13:30	CAD	Int'l Securities Transactions (NOV)		2.03B
13:30	USD	Empire State Manufacturing (JAN)	11	9.53	Expected to reflect the overall positive direction of US economic indicators
14:00	CAD	Bank of Canada Rate Decision	1.00%	1.00%	No change expected as Canadian economy confronts challenges ranging from uncertain growth outlook to unstable labor market
23:30	AUD	Westpac Consumer Confidence s.a. (MoM) (JAN)		-8.3%
23:30	AUD	Westpac Consumer Confidence Index (JAN)		94.7

GMT	Currency	Upcoming Events & Speeches
9:00	EUR	French Finance Minister Baroin Speaks to the Press
9:30	EUR	Spain Bond Auction (364- and 518-Day Bills)
10:00	EUR	Greece Bond Auction
10:00	GBP	BoE’s King, Haldane, Cohrs, and Jenkins Speak in London
11:00	EUR	EFSF Bond Auctions (182-Day Bills)
12:30	EUR	EU’s Van Rompuy Meets Spanish Prime Minister Rajoy in Madrid
17:30	EUR	EU’s Almunia Speaks in Brussels
18:30	GBP	BoE’s Posen Speaks in London
23:00	EUR	Italy’s Monti Speaks in London

\ Currency	EUR/USD	GBP/USD	USD/JPY	USD/CHF	USD/CAD	AUD/USD	NZD/USD	EUR/JPY	GBP/JPY
Resist. 3	1.3193	1.5672	78.76	0.9516	1.0509	1.0054	0.7671	102.87	122.41
Resist. 2	1.3144	1.5629	78.58	0.9480	1.0477	1.0013	0.7640	102.51	122.05
Resist. 1	1.3095	1.5586	78.40	0.9445	1.0445	0.9972	0.7609	102.15	121.68
Spot	1.2998	1.5500	78.04	0.9374	1.0381	0.9891	0.7547	101.43	120.96
Support 1	1.2901	1.5414	77.68	0.9303	1.0317	0.9810	0.7485	100.71	120.23
Support 2	1.2852	1.5371	77.50	0.9268	1.0285	0.9769	0.7454	100.35	119.86
Support 3	1.2803	1.5328	77.32	0.9232	1.0253	0.9728	0.7423	99.99	119.50

v