- Markets return to fuller trade following US holiday
- Talk of IMF loan to Italy making rounds
- Moody's releases concerning Eurozone comments
- ICAP preparing for Greece exit and return to Drachma
- Risks for short-term correction in risk correlated assets
- US equity futures and commodities well bid
The markets will get back to fuller trade on Monday, with the US returning from the Thanksgiving holiday and set to digest this latest round of price action which has seen accelerated risk liquidation. While we continue to project broad based US Dollar strength, we would also not rule out the possibility for some healthy corrective selling in the buck in the early week. The key level to watch is the 1.3145 October low in EUR/USD, with a break of the level to officially negate the USD bearish price action seen in the month of October, and potentially open the next major downside extension into the 1.2000's.
Headlines over the weekend have not been Euro and currency supportive, and while there was some relief buying seen on rumors of an IMF Eur600B loan to Italy, these rumors were later denied. An article in a German publication said that the EFSF would not be able to leverage up to EUR1T, while market participants also remained focused on the ever widening Italian and peripheral Eurozone bond spreads. Moody's then came out and said that the rising severity of the Eurozone crisis threatened all EU sovereign debt ratings and that the probability for multiple defaults by Euro area countries was no longer negligible. Finally, news that ICAP was preparing its electronic trading systems for a potential exit by Greece from the Eurozone and a return to the Drachma, did not help the Euro's cause.
Looking ahead, the economic calendar for Monday is rather light, with only some secondary data due out in the European session. Things hardly pick up into North America, with the only key release coming in the form of US new home sales. Still, there are broader forces at play and we suspect that the larger global macro themes and developments will ultimately be what drive price action for the remainder of the day. US equity futures and commodities prices are tracking suspiciously higher in our opinion, with these markets all very well bid.
EUR/USD: The market remains under some intense pressure and is now fixated on a retest of the key October lows at 1.3145. Look for any rallies to be well capped below 1.3500 on a daily close basis, while ultimately, only back above 1.3870 would negate outlook. Once 1.3145 is taken out, it will negate the corrective October price action and should result in a more aggressive bout of selling into the 1.2000's. We continue to project weakness over the coming weeks into the lower 1.2000's as per the monthly chart.
USD/JPY:The market has managed to successfully hold above the bottom of the daily Ichimoku cloud to further strengthen our constructive outlook and we look for the formation of a inter-day higher low by 76.50 ahead of the next major upside extension back towards and eventually through the recent multi-day highs by 79.55. Ultimately, only a close back below the bottom of the Ichimoku cloud would negate outlook and give reason for pause.
GBP/USD: The latest daily close below 1.5625 further confirms our bearish outlook and should now open the door for a bearish resumption back towards the key October lows at 1.5270 over the coming days. Next key support comes in at 1.5400, while any intraday rallies are expected to be very well capped below 1.5800 on a daily close basis.
USD/CHF: The previous weekly break above the critical October highs at 0.9315 is significant and now opens the door for the next major upside extension over the coming weeks back towards parity. Daily studies are looking slightly stretched at current levels, so we would not rule out the potential for some corrective selling, but ultimately, look for any setbacks to be well supported in the 0.9000 area, where a fresh higher low is sought out.
--- Written by Joel Kruger, Technical Currency Strategist
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