JPY is again benefitting from risk aversion over last few days
Per-Erik Karlsson from Avantage Financial GMBH at 02/05/10
Market Comment
How to price Sovereign debt? That is the big question today. S&P 500 futures trade with low volume yesterday and it still has the weakness in the background from the high volume sell off over the last weeks. Really has to make a daily close above 1103 to open for any rally, while below this level it looks more like a sell on rallies for a test of 1066 level. We also note that Gold once again bounced off the 1075 Friday, which is a strong support level. We expect a rally in Gold near term as it bounced very strongly off this 1075 level for a second time over the last 2 month, which signals that gold is a buy on dips above this level for the moment. The debt problems continue to weigh on the market and Euro is of course center stage with Greece and potential more problems in Portugal. Risk off is central stage for today and would not be surprised to see this theme continue for some time as traders are nervous about potential sovereign debt defaults. Repeating from yesterday’s report: “There is a real problem for the Euro zone as Greece is probably not the last country to need financial aid to survive. The question is how long the healthy countries like Germany and France are willing to bail out the weak members? Should the failing states be omitted from the Euro? If Greece is bailed out, why should not Portugal, Spain or Italy be bailed out as well if they would face the same problem. Suddenly there is a fair amount of problems to solve, which if everything goes terribly wrong simply threaten the future of the Euro.” Yesterday’s rally in the Euro managed to briefly break above 1.40, but quickly reversed lower and trading to a new 2010 low this morning and testing 1.3800 at the time of writing. We note that the 50% Fibonacci retracement of the March 09 to Nov 09 rally is right around 1.38. From yesterday’s report: EMU is facing challenges with member states in different economic cycles and the problem is of course that the countries have no way to adjust the monetary policy to the country’s need and problems. So it all ends up with a big compromise that really is not perfect for anyone, which is of course not optimal. We have debated for years that the Euro currency viability and limitations would be tested once the first recession hit the Euro zone, which is now. So now is the time for the Euro to really prove it can be a serious alternative to the reserve currency status of the USD. We expect the debt burden among nations will become more of focus going forward and would not be surprised to see the high debt currencies to struggle going forward as the risk of facing higher funding costs could hurt the budget.”
JPY is again benefitting from risk aversion over last few days, however as you all know we expect JPY to weaken at least against USD and we also think it will struggle vs. most G-10 currencies as the weak fundamentals of Japan gets more reflected in the exchange rate when the dust settles after the latest round of risk reduction. So probably a bit early to sell JPY now, but we look to get involved at more attractive levels.
Terrible employment data from New Zealand overnight, actually worst since 1999, bearish for NZD.
Crude oil tested the 78 USD per barrel yesterday morning, but resistance held and it traded quite a bit lower since and it is below 75 level at the time of writing. The supply is still high in Crude that limits the ability to get any stronger rally going and of course risk off is also weighing on price.
VIX is spiking up 2 USD in the February futures contract, bit movement to the upside and above 24 level now and most likely heading towards the 26 level.
EURJPY vs. S&P 500 futures, see how the correlation has been totally off the last few months, but returned last week or so. Looking at the EURJPY vs. S&P 500 chart is looks like every time there has been a longer time of very low correlation it has been followed by a longer directional move.
| ATM | 1w | 1m | 3m | |||
| put | call | put | call | put | call | |
| EURUSD | 9,79% | 9,79% | 10,10% | 10,10% | 10,95% | 10,95% |
| GBPUSD | 9,90% | 9,90% | 10,36% | 10,36% | 11,37% | 11,37% |
| USDJPY | 12,00% | 12,00% | 11,89% | 11,89% | 12,59% | 12,59% |
| USDCHF | 9,52% | 9,52% | 9,67% | 9,67% | 10,60% | 10,60% |
| AUDUSD | 13,69% | 13,69% | 13,14% | 13,14% | 13,99% | 13,99% |
| USDCAD | 10,50% | 10,50% | 11,11% | 11,11% | 12,54% | 12,54% |
| EURJPY | 13,24% | 13,24% | 13,07% | 13,07% | 13,53% | 13,53% |
| GBPJPY | 13,72% | 13,72% | 13,85% | 13,85% | 15,06% | 15,06% |
| AUDJPY | 17,92% | 17,92% | 17,92% | 17,92% | 18,11% | 18,11% |
| NZDJPY | 19,13% | 19,13% | 19,24% | 19,24% | 18,11% | 18,11% |
| EURNOK | 7,49% | 7,49% | 7,27% | 7,27% | 7,55% | 7,55% |
Technical’s
Euro: New 2010 low today after break 1.38. We note that the 50% Fibonacci retracement of March09 to November 09 really is just around 1.38. The next Fibonacci level, 61.80% retracement is at 1.3488. Looks like sell on rallies until the stock market get some upside momentum.
Cable: Was rejected above 1.64 level last week, but seems well supported down at the 1.5700 level. Former triangle support (now resistance) coming in at 1.6123 today that should cap the upside for now.
USDJPY: Took out the reaction low of 89.13 and that is bearish price action. We still favor getting long when the current debt crisis nerves diminish, but that could take a few days. Longer term we still expect JPY to underperform due to high public debt, weak demographics and tougher export markets due to slower growth going forward.
Swissy: Took out key 1.0590 resistance level and bullish above 1.0480 now. We note that key falling resistance from the October 2009 high is coming in at 1.0966, of course not in play at the moment, but something we like to have in mind.
AUDUSD: the 0.8733 key support taken out today, which opens for a run towards 0.8560 support next.
USDCAD: Back above 1.07 and key resistance is 1.0750 and the drop in Crude is also putting pressure on CAD along with risk off.
EURJPY: Break below 124 is basically enforcing the recent bearish momentum it has now broken out of the range seen since April 09 and next really strong support level is now 115.90
GBPJPY: Break below 143 today puts attention to the December 09 low at 139.26.
AUDJPY: Breaking out of the trend channel seen since 13th of July 2009 and the next real support level on longer term charts are down at 70.30 for now.
| Levels | Euro | Cable | USDJPY | Swissy | AUDUSD | USDCAD | EURJPY | GBPJPY | AUDJPY |
| Res2 | 1.4216 | 1.6290 | 93.70 | 1.0966 | 0.9405 | 1.0869 | 130.00 | 150.66 | 88.87 |
| Res1 | 1.4000 | 1.6123 | 91.00 | 1.0650 | 0.9320 | 1.0745 | 127.00 | 143.00 | 86.20 |
| Sup1 | 1.3725 | 1.5700 | 87.34 | 1.0480 | 0.8730 | 1.0400 | 122 | 139.25 | 75.00 |
| Sup2 | 1.3488 | 1.5372 | 84.83 | 1.0300 | 0.8560 | 1.0205 | 115.90 | 135.02 | 70.30 |
| Pair | Our strategy Today | Our medium term forecast |
| EURO | Sell rallies below 1.4030 | Correction to 1.4216 |
| Cable | 1.5700 is the key support to watch, any break below this level could see the market drop quickly | Weaker UK data last few day means we don’t see any test of 1.67 likely near term |
| USDJPY | Bearish near term, we stand aside | Test of 93.70 |
| USDCAD | Bearish below 1.0745, sell rallies | Our target of 1.07 hit and expect to move back down to 1.0450 |
| EURJPY | Weak below 125 | Test of 120 near term |
| AUDJPY | Stand aside | Looking to get long at lower levels |
| GBPJPY | Bearish below 143 | Test of 137 within the next few weeks |
| AUDUSD | Our downside target of 0.8730 was hit and extended. Bearish as long as the risk off theme is on. |
