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EUR and GBP Unwind on Growing Concerns
The week started with a poor risk appetite as the unexpected Chinese tightening of the property measures added on the top of the UK’s credit rating downgrade, disappointing Italian elections and the US sequester. The Asian equities saw heavy sell-off, while the US and European futures retreated overnight.
On the currency markets, JPY extended gains versus its G10 counterparts, GBP traded at its lowest levels since July 2010, while EUR slipped under 1.30 on the poor LTRO repayments announced on Friday.
JPY Remained Bid
In Asia, JPY and its crosses fell overnight on the back of the risk-off trading and some repatriation flows ahead of the fiscal year-end in Japan. Even Kuroda’s dovish promises were not enough to push the Yen lower overnight. The new BoJ Governor Kuroda promised to do whatever he can to reach the 2% inflation target within two years. In his speech in the parliament last night, Kuroda also added that the current asset purchases were clearly not enough to fight deflation. On the back of the verbal promises, we believe that radical policy measures are to be introduced in Japan sooner than expected.
Technically, the 1-month implied volatility is at its highest since August 2011, while the momentum indicators are clearly bullish on USDJPY. We keep our bearish view on Yen, and place our first target to 94.77 - year-high, seen on February 25th.
Euro Around 1.30
Euro has hard time to recover last week’s heavy unwind. On Friday, the LTRO repayments surprised the markets to the downside, sending the EUR below 1.2967 before recovering over 1.30 on some short-covering in Asia. This morning, we witness a fragile EUR, struggling around 1.2980/1.30 zone.
This week will give a clearer direction to Euro as we will see PMI figures tomorrow, 4Q GDP numbers on Wednesday, and ECB meeting on Thursday.
Technically, EURUSD is clearly bearish, and the negative trend deepens. MACD 50-100 day indicator signals a solid downtrend. The CFTC data shows that the speculative EUR positions decreased last week. In our view, EUR has room to the downside, as the political instability is growing within the zone, especially after the Italian anti-austerity votes last week.
Today the European finance ministers meet in Brussels at 13:00 GMT to discuss on budget cuts to solve the debt crisis.
GBP Smashes on Weak PMIs
GBP weakness deepens on the back of the weak economic data announced between Friday and this morning. UK, which saw its credit rate downgraded last Monday, is further hit by disappointing manufacturing and construction PMIs registered in February. GBPUSD slid to 1.4985 on Friday and remains under heavy pressure this morning.
According to trend and momentum indicators, the bearish trend in GBPUSD further strengthens. We remain bearish on GBP, but see limited downside before the BoE meeting on Thursday. In our view, there will probably be a further policy action in UK, and more QE should pull the sterling to lower levels. While the recent GBP weakening is expected to boost the GDP growth by 1%, the concerns on inflation should surge in the coming months.
2013-03-04T14:45:00 USD Feb ISM New York, last 56.7
EURUSD has sold-off to 1.2966 low (after failing to rally above 1.3163) with little demand appearing to slow the decent. Momentum and trend indicators are solidly bearish and indicate further downside. A daily close below 1.3000 support would be a bearish signal (opportunity to reload on shorts) and indicate an extension of weakness to 1.2878. The next support is located at 1.2966 (1st Mar low), 1.2931 (11th Dec low), 1.2878 (7th Nov reaction high). The first level of resistance remains at 1.3250 (65d MA), 1.3460 (14th Feb high), 1.3578 (7th Feb high), 1.3690 / 1.3710 (27th Sept high) then 1.3868 (9th Dec high).
On Friday GBPUSD sold-off to a 1.4985 low and remains under pressure today. Currently indictors are slightly overstretched which could slow the sell-off, however any buying will likely be short lived. We remain bearish as indictors are negative and believe bearish trending condition will persist. Unlike the Fed, expectation for the BoE is more QE which should equal further erosion in GBP. The support levels from here are thin below with 1.4950 (8th July 10’ low), 1.4687 (9th July 2010 low), 1.4500 (9th Jun 2010 base) Watch for next resistance to come into play at 1.5056 (25th Feb low), 1.5527 (22nd Feb high), 1.5689 (13th Feb high), 1.5850 (8th Feb high), 1.5891 (200d MA & 21st Jan high), 1.6007 (18th Jan high), 1.5921 (200d MA), 1.6180 (10th Jan high), 1.6340 (2nd Jan high) and 1.6454 (29th Aug ’11 top).
USDJPY has furthered its recovery rally for the 4th straight day reaching 93.73. With the new dovish BoJ nominees and momentum indicators bullish cross we suspect that the pair will continue to recover. Resistance at 94.77 (Feb high) will prove the next real challenge to the current bullish trend. On the downside, support is eyed at 93.18 (21d MA), 90.93 (25th Feb low), 89.35 (11th Jan high), 88.10 (23rd Jan low), 87.60 (16th Jan low), 86.64 (27th Dec high), 85.54 (5th April high), 84.23 (15th March high) 81.50/69 (15th Nov. high & 28th Nov. low), 81.00 (16th April pivot), 79.06 (9th Nov low), then 78.75 (8th Oct high). Above us, minor resistance remains 94.77 (Feb high), 94.98 (6th May high) 95.00 (psychological level), 96.00 (11th June), then 97.75 (7th Aug high).
USDCHF last week finally broken above 0.9336 resistance (after 5 attempts) trading to a high of 0.9468. With trend and momentum indicators significantly bullish and the current violation of 200d MA, we expect to see our extension target at 0.9457 challenged in the near term. The next levels of resistance are located 0.9515 (13th Nov high & uptrend top), 0.9610 / 20 (26th Aug high), 0.9810 (10th Aug high & uptrend channel), 0.9900 (2nd Aug high), and 1.0000 (psychological resistance). The first levels of support remains at 0.9200 (21d MA), 0.9085 (20th Dec low) , 0.9041 (1st May low) then 0.8928 (Feb 12’ low).