Yen Leads but Risk Makes Comeback as PBoC Announces Intervention

ASIA/EUROPE FOREX NEWS WRAP

One of the more under the radar themes the past few weeks, no doubt overshadowed by the Federal Reserve’s policy meeting last Wednesday, has been the Chinese credit crunch. Last week, the overnight interbank lending rate spiked to as high as 25.0%, a sign that cash reserves were low, typically a sign of stress in the financial system. Accordingly, with less capital to lend, we’ve witnessed how a deterioration in Chinese growth prospects has weighed on the commodity currency complex.

Accordingly, the Australian and New Zealand Dollars have benefited over the past two hours, after it was announced that the People’s Bank of China had intervened in the market and distributed cash to banks in order to ease tight lending conditions. On the surface, these measures are soothing; but they are in reaction to a financial system currently in a state of disequilibrium, not one that is healthy. Any near-term rallies in the commodity currency bloc should look to be sold as a result.

It is worth mentioning that the Chinese credit crunch isn’t necessarily organic; that is, the PBOC has intentionally kept its lending standards tight despite slowed growth prospects. The main reason for this is the goal by the new government to weed out the shadow banking system. These efforts have been signaled well in advance, and we should thus not expect any significant progress to be made on the credit side in China. Rather, the measures today to provide liquidity are merely a patch up job, not an elegant solution. Alongside the Fed’s taper talk, this is the most important theme in the market right now.

Taking a look at European credit, have rebounded slightly today, although prices remain significantly depressed from their pre-FOMC levels. The Italian 2-year note yield has increased to 2.230% (+1.5-bps) while the Spanish 2-year note yield is flat at 2.473%. Similarly, the Italian 10-year note yield has decreased to 4.804% (-2.1-bps) while the Spanish 10-year note yield has decreased to 5.027% (-6.9-bps); lower yields imply high prices.

RELATIVE PERFORMANCE (versus USD): 10:40 GMT

JPY: +0.28%

CAD: +0.25%

AUD: +0.12%

GBP:+0.09%

EUR:+0.03%

CHF:-0.14%

NZD:-0.15%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.01% (+1.69%prior 5-days)

ECONOMIC CALENDAR

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators. Want the forecasts to appear right on your charts? Download the DailyFX News App.

TECHNICAL ANALYSIS OUTLOOK

EURUSD: The past few weeks week I’ve been suggesting that a Right Shoulder on a Head & Shoulders formation, dating back to September 2013, might be forming with implications for a retest of the June 2010 low near $1.1875. The FOMC decision provided the necessary catalyst for a turn near 1.3400. The EURUSD now finds itself below the formerly key 1.3185/45 zone, which produced highs in mid-April and late-May, before breaking in the first week of June. Support has been found at 1.3070/75, the 200-SMA and the 38.2% Fibonacci retracement (July 2012 low to February 2013 high). I continue to favor shorts, as  

 evidence of a return of the Euro-zone crisis is building.

USDJPY: Although price has maintained the 38.2% Fibonacci retracement (May 22 high to June 7 low) at ¥97.58, constructive price action into 99.25/35 has yet to develop as a number of the JPY-crosses have seen Inverted Hammers or Dojis (topping candles) form on daily timeframes. Undoubtedly, this is a result of the global shift to safety; the USDJPY typically struggles when US equity markets do. Until global equity markets stabilize and US yields begin to rally further, it is too early to declare the reaction in risk assets finished, and therefore, it is too early to declare the USDJPY’s slide since late-May complete either. At this juncture, only a break of 99.25/35, the June high and the 50% retracement of the May 22/June 7 high/low, will negate the bearish bias in the pair. Until said level is broken, shorts are eyed into 95.25/35, 93.75/85, and 92.55 (pre-BoJ QE announcement low in April).

GBPUSD: The GBPUSD has traded in a slight ascending channel off of the March 14 and May 29 lows (parallel to May 1 high), and the conflux of the 200-SMA and said channel resistance just under $1.5750 provoked a pushback midweek. Now, price finds itself at the 50% Fibonacci retracement of the February high to the March low at 1.5354, as well as underneath the 38.2% Fibo of the yearly high/low at 1.5405/10. With US yields rallying, the USD component of this pair looks well-supported, and any rallies seen in the coming days are viewed as selling opportunities. 1.5230 is the first big support lower.

AUDUSD: No change: “Fresh selling has provoked an even steeper decline in the AUDUSD, with the pair falling towards the 38.2% Fibonacci retracement off the 2008 low to the 2011 high at $0.9141. While fundamentally I am long-term bearish, it is worth noting that the most readily available data shows COT positioning remains extremely short Aussie.”

S&P 500: The 2013 uptrend off of the December 28, 2012 and April 18, 2013 lows gave way on Thursday, and with a sustained break by the end of the week, the technical bias is for a deeper pullback in the near-term. The 61.8% Fibonacci retracement of the Feb low/May high serves as near-term support at 1561, followed by mid-April swing lows near 1535. A bearish bias is appropriate unless 1605/08 is broken.

GOLD: No change: “If the US Dollar turns around, however (as many of the techs are starting to point to), then Gold will have a difficult gaining momentum higher. Indeed this has been the case, with Gold failing to reclaim the 61.8% Fibonacci retracement of the April meltdown at $1487.65, only peaking above it by 35 cents for a moment a few weeks ago.” This has played out, with fresh yearly lows at 1269.45 last week, and pressure remains biased for a move lower so long as US yields remain elevated.

By Ilesanmi Ogooluwa 

Email: iogooluwa@gmail.com

 

Price & Time: AUD/USD Testing A Major Level

This publication attempts to further explore the concept that mass movements of human psychology, as represented by the financial markets, are subject to the mathematical laws of nature and through the use of various geometric, arithmetic, statistical and cyclical techniques a better understanding of markets and their corresponding movements can be achieved.

Foreign Exchange Price & Time at a Glance:

EUR/USD:

Charts Created using Marketscope – Prepared by Kristian Kerr

-EUR/USD failed last week just below the 6th square root progression of the year-to-date low and has since come under steady downside pressure

-Our trend bias is now lower, but a clear breach of the 1.3030 area (convergence of 2x1 Gann angle line of year’s low & 61.8% retracement May to June advance) is required to set off a more important decline

-Near-term focused cycle studies suggest a minor turn window is in effect over the next day or two

-The 2x1 Gann angle line from the year-to-date high near 1.3200 is immediate resistance

-However, only clear strength above 1.3335 turns us positive on the single currency

Strategy: Like adding to short positions on the expected strength over the next couple of days.

AUD/USD:

Charts Created using Marketscope – Prepared by Kristian Kerr

-AUD/USD traded to its lowest level since 3Q2010 on Monday before rebonding just ahead of the 38% retracment of the advance from the 2008 low to the 2011 high in the .9135 area

-Our trend bias is lower in the Aussie, but extreme caution is required around .9135 as such long-term retracement levels have a greater propensity to spark changes in trend

-A longer-term turn window is in effect this week in the Aussie

-The 12th square root progression of the year-to-date high in the .9295 area is immediate resistance

-However, only strength over .9425 confirms a more important shift in trend

Strategy: Like being flat around the big support level. May look to get long if the rate can muster a close above .9295.

EUR/GBP:

Charts Created using Marketscope – Prepared by Kristian Kerr

-EUR/GBP failed again last week at the 78.6% retracement of the April range in the .8585 area

-Our trend bias is now lower, but weakness below the .8440 4th square root progression of the year-to-date high is really needed to suggest that a more important decline is underway

-The range in the cross has muddled the cycle outook, near-term counts seem to favor strength over the next couple of days

-The .8585 area remains an important resistance

-However, strength over the 2nd square root progression of the year-to-date high at .8625 is needed to trigger a more important trend shift

Strategy: Until the range is eclipsed we have little directional conviction.

Focus Chart of the Day: S&P 500

There is good symmetry in the S&P 500 at 1565 as this marks a convergence of the 3rd square root progression from the year-to-date high and the 100% projection of the May decline. Monday’s aboutface from just under this key support level during the cycle turn window suggests this may have been the reversal we have been looking for. Continued strength over 1592 and then 1605 will be further confirmation of a bottom. Fibonacci symmetry also exists around 1542 and with Tuesday being the final day of the turn window we cannot completely rule out a final move lower to test it - though it does look unlikely. We should note that any new cycle lows beyond Tuesday would be very negative for stocks from a cyclical perspective and signal a more important change in trend is afoot.

--- Written by Kristian Kerr, Senior Currency Strategist for DailyFX.com

Looking for a way to pinpoint sentiment extremes in the SPX in real time? Try the Speculative Sentiment Index.