John J. Hardy, FX Consultant, Saxo Bank
FX Closing Note: Key reversal or just "profit taking"?
A quick reminder to see the rundown of next week's economic calendar highlights from our morning update .
It was more than a bit disappointing for the risk bulls to see the week close on a sour note, though optimists might try to write it off as profit-taking or odd behavior and/or profit taking from the triple witching phenomenon. Regardless, it created a number of interesting setups in the FX charts.
If we are simply to exercise some fundamental chart reading principles, however, then it appears something significant - or at least interesting - is going on here, especially in the commodity currencies, which together with EM currencies had enjoyed the most strength on the recent rally in global risk appetite. Next week will tell us whether this is just another one-off blip in risk willingness like the last one that only lasted three days in late February, or whether there is the risk of a further meltdown. Symbolically, the Dow Jones Industrial Average is trying to decide whether to close right on the support from the old high or just below it as we are writing this.
Chart: USDCAD
An outside day and potential key reversal today after CAD tried to challenge new levels vs. the greenback on very positive retail sales and CPI data. That positive data saw large scale profit taking when equities tumbled and then oil followed suit later in the day. Note the turn in the stochastics. Minimum upside follow through targets come in at the old 1.0225 low and then possible 1.0370. Still, this is so far just an upward blip in an onslaught of declines.
An outside day and potential key reversal today after CAD tried to challenge new levels vs. the greenback on very positive retail sales and CPI data. That positive data saw large scale profit taking when equities tumbled and then oil followed suit later in the day. Note the turn in the stochastics. Minimum upside follow through targets come in at the old 1.0225 low and then possible 1.0370. Still, this is so far just an upward blip in an onslaught of declines.
Chart: AUDUSD
AUDUSD was unable to maintain prices above 0.9200. That area now acts as resistance and we look for potential follow through lower if risk aversion continues. The strong swoon in commodities, especially gold is also worth nothing today. There are a cluster of support points in the 0.9085 to 0.9035 area that are the next major focus. A failure of those could lead to a test of the 200-day SMA now down below 0.8800.
AUDUSD was unable to maintain prices above 0.9200. That area now acts as resistance and we look for potential follow through lower if risk aversion continues. The strong swoon in commodities, especially gold is also worth nothing today. There are a cluster of support points in the 0.9085 to 0.9035 area that are the next major focus. A failure of those could lead to a test of the 200-day SMA now down below 0.8800.
Chart: EURGBP
A key follow up move to the upside after three steep days of declines that more thoroughly . This sets the focus higher again for the coming week for EURGBP. Today the Euro did relatively well, showing that broad risk aversion is far less damaging to the Euro than the commodity currencies, for example.
A key follow up move to the upside after three steep days of declines that more thoroughly . This sets the focus higher again for the coming week for EURGBP. Today the Euro did relatively well, showing that broad risk aversion is far less damaging to the Euro than the commodity currencies, for example.
Chart: NZDJPY
JPY crosses largely tracked USD crosses today, enjoying the risk aversion and a rally in bonds, though much of that rally was curiously unwound late in the US. Here we show NZDJPY as an example of the JPY crosses, all of which, outside of USDJPY, showed a bearish pattern reversal on the day. JPY bears will note the disappointment with the inability of this pair to hold above the previous salient highs in the 64.40 area more convincingly. Note the convergence of the price with the 55-day and 200-day moving averages here.
Chart: NZDJPY Ichimoku
There is an interesting Ichimoku angle to NZDJPY as well, as the cloud resistance appears to be holding after a recent break attempt. Technical impressions from the charts in these markets must be combined with the knowledge that the end of this month is the end of the Japanese financial year, as March and April are known for their volatility in the JPY crosses.
Looking ahead
The short end of the US yield curve has snapped higher for the last two days in a row, a rather interesting development considering the very weak inflation data for February. The March EuroDollar is about 14 pips lower from the highs of yesterday. Are Fed expectations stirring? And what will this mean for risk appetite - is the rally on built on low rates forever or is there a more solid foundation?
The short end of the US yield curve has snapped higher for the last two days in a row, a rather interesting development considering the very weak inflation data for February. The March EuroDollar is about 14 pips lower from the highs of yesterday. Are Fed expectations stirring? And what will this mean for risk appetite - is the rally on built on low rates forever or is there a more solid foundation?
Chart: March 2011 EuroDollar STIR
A steep sell-off over the last couple of days suggests some interest in pricing in a more hawkish Fed.
A steep sell-off over the last couple of days suggests some interest in pricing in a more hawkish Fed.
Be careful out there.
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