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الخميس، 27 سبتمبر 2012
Euro and Risk Correlated Currencies Still Well Bid, But Not for Much Longer
Kiwi emerges as strongest currency post Fed
RBNZ warns of taking action to offset stronger NZD
Retail positioning still does not favor USD long positions
Fed offers no new insights from latest rate decision
US equities should be sold into rallies; deeper setbacks ahead
While we are not entirely surprised to see Kiwi find renewed bids on Thursday, in light of the broader currency strength in markets, we are taken with the outperformance in the commodity currency. The New Zealand Dollar is the strongest of the major currencies on the day, and this comes after the RBNZ left rates unchanged at 2.50% while also warning that the high Kiwi would lead to a reassessment of monetary policy. Yet, this statement from the central bank has not scared risk traders away, and the market has shot back above 0.8150. Still, we see the rally as corrective, and overall, our core bearish outlook for the NZD and currencies in general against the buck remains bearish.
However, as we highlighted in yesterday’s commentary, the prospects for a legitimate reversal back in favor of the buck are still on hold. Despite underlying fundamentals which we feel should support additional USD bids (shift in Fed policy, ongoing Eurozone uncertainty, threat of slowdown in China and correlated economies), market price action seems to still want to push the US Dollar lower. Our in-house sentiment index continues to show retail traders adding to USD longs, with the ratio of long USD against the Canadian Dollar at over 7:1, while the ratio against the Pound sits at around 6:1. Instead, we will wait until we see evidence of these ratios flattening out before dipping our toes back in the water. The strength in the Canadian Dollar is quite impressive, with USD/CAD dropping to back to levels not seen since September 2011. Meanwhile, the Pound has been just as prone to catching bids, with the currency easily shrugging off yesterday’s awful GDP reading to rally to its own multi-day highs against the buck.
Indeed, the Fed has left policy on hold as was widely expected, while also committing to keep rates ultra accommodative until 2014. This language offers no new real insights into the central bank’s outlook, and we think that Mr. Bernanke and co. will be waiting for more confirmation of sustained economic recovery before adopting a more hawkish stance. We have already seen a bit of a shift in recent weeks, with the prospects of QE3 diminishing significantly, but more time to show solid economic data performance will be required to inspire the next move towards reaffirming the reversal of monetary policy.
Tuesday and Wednesday’s recovery in global equity markets has also helped to inspire the currency bids and risk on trade, but here too we do not buy into the rally and instead continue to recommend selling equity strength in anticipation of a more substantial liquidation over the coming weeks. At the end of the day, we see US equities much lower, and the question over the short-term is whether we stall here and head lower, or whether we head back towards the 2012 highs from March before rolling over and triggering a more conventional bearish double top formation. As this outlook pertains to the S&P, we look for setbacks to extend below 1,300 over the coming weeks, with any upside well caped below 1,450. In short, our bottom line macro strategy is to wait a bit longer and then aggressively buy USDs across the board, while also selling global equities and other risk correlated assets. From a currency standpoint, those markets with higher interest rates should be most exposed going forward and most subject to relative underperformance.
EUR/USD: The latest round of setbacks have stalled ahead of some key multi-week support by 1.3000 and from here we still can not rule out risks for additional consolidation above 1.3000, before considering bearish resumption. Last Friday’s bullish close opens the door for additional gains over the coming sessions, but ultimately, any rallies towards 1.3400 should be well capped. A break and daily close back under 1.3000 is now required to put pressure back on downside and accelerate declines to the early 2012 lows at 1.2660.
USD/JPY: The latest pullback from the 2012, 84.20 highs is viewed as corrective and it looks as though the market has finally found some solid support ahead of 80.00. The setbacks have stalled by the top of the daily and weekly Ichimoku clouds and we look for the formation of a fresh medium-term higher low somewhere around 80.00, ahead of the next major upside extension back towards and eventually through 84.20. Overall, this is a market that has undergone a major structural shift in recent months and we now see the pair in the early stages of a longer-term up-trend. Ultimately, only a weekly close back under 78.00 would negate. Any dips towards 80.00 should therefore be used as formidable buy opportunities.
GBP/USD: The recent break back above 1.6000 now opens the door for fresh upside beyond the October 2011 peak at 1.6165. However, any additional gains beyond 1.6165 should prove hard to come by, and we once again see risks for a bearish reversal in favor of renewed weakness back down towards key support by 1.5800. A break and close below 1.5800 will then accelerate declines. Ultimately, only a weekly close above 1.6250 would negate underlying bearish bias.
USD/CHF: Our core constructive outlook remains well intact, with the latest setbacks very well supported by psychological barriers at 0.9000. It now seems as though the market could be looking to carve a fresh higher low, and we will be watching for additional upside back towards the recent range highs at 0.9335 over the coming sessions. Above 0.9335 should accelerate gains towards the 2012 highs by 0.9600 further up. Ultimately, only back under 0.9000 delays and gives reason for pause.