Financial Advisor

FX Update: EURUSD ready for 1.3700?

After consolidating for the balance of the week, will the USD finally will carry through on its rally bid? Key EURUSD resistance has so far held – what could drive the pair for a test of the 200-day MA?
Euro in hot water again
We’ve mentioned the creeping worsening in the Spanish/German yield spread in recent days, but today, a day after a relatively poorly received Spanish auction of long bonds, the 2-year spread jumped almost 20 bps wider today to trade close to 188 bps, the widest spread since February and a development that has opened a gash in most of the Euro crosses again. Nervousness about upcoming municipal elections in Spain this weekend may also be partly to blame for the Euro’s renewed slide, as the ruling socialist party’s support is likely to erode and there are large demonstrations planned to protest corruption. (See more on the protest issue in this NYT article) . The risk for Spain is that new incoming administrations open up the books in all of the cities and uncover extensive debt that has been so far hidden.
After pounding on the 55-day moving average resistance for the last few days, and even teasing above it a few times, the negative momentum for EURUSD suddenly reappeared in today’s session as the growing nervousness in the peripheral EuroZone bond spreads seems to be at fault. ECB expectations are falling in sympathy as well. But for EURUSD to work below recent support, we will need to see supportive development outside of the “pain from Spain”, like a fresh sell-off in commodities and equities as we’ve said before, the USD can only perform well as the flipside of misery/risk aversion.
Chart: EURGBP
After consolidating rather sharply back higher on the negative implications of the sit-on-their-hands BoE in the face of high inflation, EURGBP seems to be making a statement today as the negative developments for the Euro far outweighed the fading memories of poor GBP performance from earlier this week. A close at current levels or lower puts in a rather emphatic resistance level and resumes the focus on the big 0.8675 support area next week. Note that yesterday’s doji close was right on the 0.382 Fibonacci retracement for the big wave from the recent high above 0.90.
JPY and the usual suspects
Bounds were in a consolidating mood yesterday heading into the start of trading, then were further administered the boot by a stronger than expected US jobless claims number. But later in the day, the terrible Philly Fed reading supported the market anew and the long end managed to post a slightly lower yield on the day as a whole. The JPY – which just like the bond market to which it is so correlated yesterday gave everyone severe whiplash – bounced sharply off yesterday’s lows and will continue look for direction off the bond markets.
 US treasuries are doing a nervous two-way dance ahead of the US open. The US 10-year benchmark is trading several bps off its recent 3.09% low in yield, a confrontation with the 3.0% level would likely see USDJPY testing the waters below 3.0% again, while 3.25% is the obvious cap after being tested twice over the last two weeks. European Bunds, for their part, are perched right at the lows since January just above 3.05%, which is also a kind of neckline. A plunge below 3.0% together with a firm shorter end of the curve is a focus for EURJPY.
The Bank of Japan voted unanimously last night to hold its current course with no changes, a nominally JPY-bullish development, since we so accustomed lately to hearing about layer on layer of new easing efforts.
Chart: EURJPY
We’ve showed the EURUSD chart a few times, as the price there has interacted with the 55-day moving average for the balance of the week. Today we have a look at the EURJPY chart, where we also find the 55-day moving average (red line) providing resistance, which also lies in an area that was a zone of interest on the previous consolidation lower back in April. 
Weak data out of Canada
Today saw two negative data developments from Canada – a lower than expected headling CPI reading and a very weak March Retail Sales number relative to expectations, as the less Autos data actually came in slightly negative rather than robustly positive. USDCAD was teetering on the edge of final short term support over the last couple of sessions near the 55-day moving average, but the weak data today offered more emphatic support for the pair. If risk and crude remain off here, the pair may be set for that test of parity. If not, the weak data may not be enough to prevent the pair from packing it back toward 0.9500.
Looking ahead
Next week, we’ll have the US Congress back in session and continuing the budget debate. A glance at the solid comeback in the US bond market since yesterday’s lows suggests that this is not weighing particularly heavily on sentiment at the moment. Next week, it appears the treasury will forge ahead with plans to sell 2-,5-, and 7-year notes next week, creating more debt despite the “debt ceiling”.
Next week’s economic calendar’s highlights include the European preliminary manufacturing and services PMIs for May, Germany May IFO, US Apr. Durable Goods Orders, US jobless claims data and PCE inflation data on Friday. A very quiet week on the calendar, but don’t forget the local elections up in Spain over the weekend.
Let’s see how we close what has so far been a rather inconclusive week – we’ll update all of the latest action in a weekly wrap video later today.
Have a great weekend.
Economic Data Highlights
  • New Zealand Apr. Credit Card Spending rose +1.6% MoM and +6.0% YoY vs. +1.6% YoY in Mar.
  • Japan BoJ left rates unchanged at 0.10% as expected
  • Japan Mar. All Industry Activity Index fell -6.3% MoM vs. -6.1% expected
  • Germany Apr. Producer Prices rose +1.0% MoM and +6.4% YoY vs. +0.6%/+6.0% expected, respectively and vs. +6.2% YoY in Mar.
  • Japan Apr. Convenience Store Sales rose +1.6% YoY vs. +7.7% in Mar.
  • EuroZone Mar. Current Account out at -4.7B vs. -6.5B in Feb.
  • Canada Apr. Consumer Price Index out at +0.3% MoM and +3.3% YoY vs. +0.5%/+3.4% expected, respectively and vs. +3.3% YoY in Mar.
  • Canada Apr. Core CPI out at +0.2% MoM and +1.6% YoY, as expected and vs. +1.7% YoY in Mar.
Upcoming Economic Calendar Highlights (all time GMT)
  • EuroZone May Consumer Confidence (1400)
  • China May HSBC Flash China Manufacturing PMI (Mon 0230)
  • Japan Apr. Supermarket Sales (Mon 0500)



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