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Monday, 19 Dec 2011
A Working Holiday Season
As the holiday season approaches liquidity in the FX markets typically dries up as trading desks operate on skeleton staffs. However, with the European debt crisis coming to a head, the last two weeks of the year may not allow traders to step away from their trading terminals. This past week's fall in the value of the EUR/USD below some important technical levels may hold the key.
USD - A Working Holiday Season
As the holiday season approaches liquidity in the FX markets typically dries up as trading desks operate on skeleton staffs. This year Christmas falls on a Sunday which may help to keep traders at their trading terminals during the week. With the European debt crisis coming to a head the last two weeks of the year may not allow traders to step away from their desks as market volatility continues despite the approaching holidays.
US data releases will be almost nonexistent over the next 2-weeks. This should be a negative for market sentiment as we have begun to see a turnaround in US economic data for the past 2-months. US economy data has been one of the few bright spots in the financial headlines. The strong Philly Fed Manufacturing Index highlights this run of positive data as the survey now stands at its highest level since April.
Last week's FOMC statement highlighted the positive economic numbers but the Fed kept its standard statement unchanged regarding additional steps to loosen monetary policy, “The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”
The reduced market liquidity may have the effect of pushing the current FX trends further. Given the EUR/USD has broken below the October low as well as 1.3050, the 61% retracement of the 2010 low to the 2011 high the pair could encounter additional selling towards the 2011 low of 1.2870.
EUR - EUR Struggling but Still Supported
Despite the first half of last week's across the board selling the EUR continues to garner support. However, this support may prove to be only temporary. The European economy is slowing as shown through weaker industrial production numbers and below 50 PMI surveys. It should be noted that German PMI numbers still remain robust. Given the push by European leaders to implement harsh austerity measures to battle the debt crisis (Italy is currently debating cuts up to EUR 33 bn), growth may slide further as the European economy slips into a recession. This will likely keep pressure on the ECB to further ease monetary policy in the near-term, a negative for the EUR.
The EUR/GBP has moved sharply lower and is currently testing a trend line from its 2008 and 2010 lows at 0.8390. A dive below this support could find additional support at the 2010 low of 0.8285.
JPY - No Relief for JPY
The USD/JPY has been trading in a tight range since the last government intervention while the EUR/JPY has been less cooperative. As the European debt crisis continues on without an end in sight, the JPY will likely garner additional safe haven status. With gold's 7% fall this week it shows the only real safe havens these days are the USD and the JPY. Thus the JPY could stay bid as risk appetite remains tepid.
While the USD/JPY could continue its move higher to its 2007 falling trend line on the back of USD strength, the EUR/JPY is inching towards its October low of 100.75.
Gold - Gold Prices Fall below 200-day Moving Average
The price of spot gold broke below its 200-day moving average for the first time since early 2009. The 200-day moving average is considered a significant technical indicator by chartists. There have been many who have called for an end to the long-term bullish trend only to have their claim rebuffed upon a renewal of USD weakness. While the short-term trend has stalled, any further bond buying from the Fed (QE3) will likely increase demand for gold while reducing demand for the USD.
On a weekly basis the EUR/USD broke some important technical barriers, closing below the rising trend line from the January and October lows. The weekly close 1.3045 was also in-line with the 61% Fibonacci retracement from the 2010-2011 bullish trend. While weekly stochastics are currently oversold the monthly stochastics may have room to run lower. The January low of 1.2870 is the near-term support with additional support coming in at 1.2665 from the monthly chart off of the 2008 and 2010 lows. Resistance is back at 1.3140 and the 20-day moving average of 1.3275, followed by the December high of 1.3550.
Sterling has consistently been sold at previous resistance levels and with falling weekly and monthly stochastics this strategy could remain intact. Initial support is found at Friday's high of 1.5560 and the pair may have scope back to the range between the 55-day moving average at 1.5740 and the late November high of 1.5775. Any rally could be capped at 1.5890 from the falling trend line off of the August and October highs. The test for sterling shorts will come at the October low of 1.5270. A break here may find support at the trend line stemming from the January 2009 low which is found at 1.5100.
The USD/JPY is encroaching on its trend line from the 2007 high which comes in at 78.30. Weekly and monthly stocahstics are both moving higher and a break above the trend would expose the post-intervention high of 79.50 and the August high of 80.20. A failure to make a significant close above the trend line could have the USD/JPY testing the December low of 77.50 and the November low of 76.55.
Last week's break above the 0.9330 resistance opens the door to this year's high of 0.9782 as well as the December high of 1.0065. The falling trend line from the 2003 trend line comes in at 1.1165 and makes for a long term resistance level. To the downside 0.9330 will now act as a support followed by the late November low of 0.9065 and the 200-day moving average at 0.8925.
The Wild Card
After multiple failed attempts to close above 1.3265, the 61% Fibonacci retracement from the March to August move, the AUD/NZD has tumbled and gapped lower to open the week. Forex traders should note that the first major support is found at the November low of 1.2930, followed by the September high of 1.2830.