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EURUSD breaks big 1.2700 support line

Tue, Feb 17 2009, 13:53 GMT
by John Hardy

Saxo Bank  |  View company's profile

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USDJPY can't sustain altitude on attempt above 92.50 as risk aversion reigns. Equities once again poised just above key support.

MAJOR HEADLINES – PREVIOUS SESSION

• Switzerland Dec. Retail Sales rose 3.6% YoY vs. -1.4% in Nov.

• UK Jan. CPI fell -0.7% MoM vs. -1.0% expected and core CPI rose 1.3% YoY vs. 1.0% expected

• UK Jan. RPI fell -1.3% vs. -1.4% expected

•  UK Dec. DCLG House Prices fell -10.2% vs. -10.1% expected

• Germany Feb. ZEW Survey rose to -5.8 vs. -25.0 expected and -31.0 in Jan.

• EuroZone Dec. Trade Balance out at -0.7B vs. -6.7B expected

• EuroZone ZEW Survey rose to -8.7 vs. -2.5 expected and -30.8 in Jan.

• US Feb. Empire Manufacturing out at -34.65 vs. -23.75 expected

THEMES TO WATCH – UPCOMING SESSION

Events Today:

• US Dec. Net Long-term TIC Flows (1400)

• US Feb. NAHB Housing Market Index (1800)

• US Fed's Bullard to Speak (1800)

• UK BoE's Besley to Speak (1830)

• US Weekly ABC Consumer Confidence (2200)

• Australia RBA's Edey to Speak (2220)

• Australia Dec. Westpac Leading Index (2330)

• Australia Q4 Retail Sales ex Inflation (0030)

• Australia Preliminary International Merchandise Imports (003

Market Comments

EURUSD broke down early in the Asian session overnight, and the fall through 1.2700 triggered latent stop orders. This takes EURUSD to new lows not seen since early December of last year. The USD was pushing stronger across the board, in fact, but risk aversion proved too strong to allow and attempt by USDJPY to maintain above the upside resistance around 92.40, as new highs in USDJPY since early January were rejected and the pair traded back down under 92.00. After a very extensive bout of range trading in recent weeks, it appears the pressure is building for a directional move here, and we're getting the first technical signals, with EURUSD's break, the decisive move above 1.2500 in USDCAD. AUD and NZD are also weakening against the greenback, which appears to be making a move once again. Looking across markets, we again note that the US S&P 500 support around 800 looks key for providing a tailwind for any further foray into risk aversion territory.

CAD finally weakened through the 1.2500 level in USDCAD and we look at 1.3000 as the next key resistance for that pair, as we have long mentioned the idea that the side of least resistance is to the upside while the pair has remained mysteriously rangebound. AUD also slid on the general risk aversion and the RBA minutes, which suggested that interest rate stimulus would have "only a modest effect on the near-term". This suggests that the bank is willing to take rates even lower.

JPY has managed to strengthen again on the risk aversion theme despite the multi-decade low in GDP growth data and the recent embarrassment of an apparently incapably intoxica ted Finance Minister Nakagawa during a public appearance. The Japanese government's popularity rating has dropped to critically low levels. The fact that the JPY has managed to overcome the tsunami of bad news is impressive as we wonder if there is room for it to strengthen. The fundamentals in Japan are so dire that we have a tough time building a case for a strong JPY, but as long as USDJPY remains capped below previous highs, we have to give it a chance.

The EUR weakness is aggravated by the weakness in Eastern European currencies, as the painfully open question of the ability of Eastern Europe to payback its massive loans from Western European banks taken out during the credit bubble days may require a wholesale bailout of the region. The issue becomes more glaring as the CEE currencies weaken. Already, the Hungarian forint and Polish zloty have lost about 20% since the beginning of the year. This issue is Western Europe's version of the US subprime debacle.

The greenback did not make any further headway against the pound sterling today, as the BoE's Bean was out with somewhat supportive rhetoric for the currency, saying that the overall direction for sterling was right, but suggesting that it was "overshooting". EURGBP was much lower on this rhetoric and we wonder if the pair will see another wave down if the 0.8800 area falls. At current levels around 0.8850, the pair has already taken back almost 10% from its lowest level late last year, though sterling is still off almost -20% from its 2008 lows. The inflation data out of England shows Retail prices barely positive on year-on-year comparisons - an absolutely jaw dropping turn around from 5% levels from September of last year. The RPI has gone from a 17-year high to a multi-generational low in the space of 5 months. Talk about deceleration....

Again, today looks like a key pivot point - something like the US Groundhog Day, in which the groundhog emerges and either predicts another six weeks of winter, or the imminent end of winter. The moves in the Asian session are either a harbinger of a bigger directional move developing here, or, if they are rejected in the coming session or two, a return to the frustrating winter (for the technical analyst, at least) of a continued struggle within the ranges. Be careful out there...

Chart: EURUSD

Key break for EURUSD here with the move below the shorter term flatline support at 1.2700 and the rising trendline from further back. The next clear target is the 1.2330 area low if this break holds.

Published on  Tue, Feb 17 2009, 14:10 GMT

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