Amongst all the mayhem of last week which saw the VIX index hit 46.35, and forex market volatility doubling on many currencies, such as the Australian dollar and Korean Won, it has been the increasing Libor spread which is beginning to sound some very alarming bells. The significance of Libor and when the spread widens is that it shows how difficult and expensive it is becoming for banks to find money and how difficult it may become for bank customers to obtain loans. It is, perhaps, the closest there is to a global credit yardstick and are we could now be looking at yet another credit crisis. The reasons given for the jump in spreads are, of course, the problems with sovereign debt as well as the fear that many European banks have been hiding the extent of their toxic debts. The news at the weekend that the Bank of Spain was forced to rescue CajaSur which has 486 branches and 1.5bn euros of problem loans simply confirmed these market fears.
With the spotlight moving to Spain it is hardly surprising that markets have been reacting with heavy falls in both equities and commodities as investors flee risky assets. The resulting stampede has seen major inflows back into gold and quality paper, such as Treasuries. In addition there have been record inflows into the Swiss Franc by German investors who helped to push the yield on the 10 year Conf to a new record low of 1.519% following Angela Merkel’s unilateral ban on short selling a number of German financial institutions. Apart from confirming to the wider market he names of the most vulnerable firms, she probably did more to alienate the very bankers needed to fund a good chunk of the various budget deficits.
This week’s economic releases are almost irrelevant as traders and investors need to hope for the best and prepare for the worst. The worst of this financial crisis is far from over as more bail outs are no longer an option because in the words of the outgoing the UK’s Treasury Secretary Liam Byrne “I’m afraid to tell you the money’s run out”. Only those countries with healthy savings and good credit histories will eventually win out.
EURUSD
Following the recent short squeeze the euro dollar has re-established its longer term bearish momentum once again, with yesterday’s candle breaking below all four moving averages and further reinforced by today’s downward’s price action. In the short term the key level is now firmly established at USD1.2141 – the mid way point between its highest and lowest point, and indeed this price area has been tested once again in trading today with the market bouncing off USD1.2177. I cannot stress too strongly how important this level remains and we are now waiting for this to be breached which will signal a much deeper move for the euro dollar in due course. However, repeated failed attempts to break lower could signal the formation of a base in the USD1.21 area so caution is now required for any longer term trading to the downside.
As mentioned above items of fundamental news releases are taking second place to the wider political and economic problems in the Eurozone . There is very little in Europe this week and the main items in the US include core durable goods orders tomorrow along with new home sales, preliminary GDP on Thursday which is forecast at 3.5% against a previous of 3.2%, followed by the unemployment claim which are expected to show a small fall.
USDJPY
The dollar yen continues to behave in an erratic, volatile and largely unpredictable way and is therefore a pair to avoid at present. Trading is currently limited to a range between 88.50 and 94.50 and until we see clear evidence of a breakout and a trend developing then trading this pair will be pure guesswork.
The only item of significant news for Japan this is the trade balance figures which are expected to come in at 0.69t against a forecast of 0.67t and whilst there is a raft of data on Friday all of this news is of second tier status.
USDCHF
Thankfully the dollar swiss appears to be correlating once again with the eurodollar as it climbs steadily towards USD1.16 and above fully supported by all four moving averages and mirroring the decline in the euro vs dollar. The weekly chart confirms this view and for eurodollar watchers the key number here is in the USD1.18 region. Should this be breached then expect the dollar swiss to continue higher, possibly even to re-test the recent high of late 2008 at USD1.2250 and should this occur (and their inverse correlation hold) then expect the euro dollar to test the USD1.17 region as a result.
The main fundamental news for the Swiss Franc comes on Friday with the KOF economic barometer forecast at 2.04, improving slightly on last month’s figure of 1.99.
GBPUSD
The pound dollar continues to hold position in the USD1.43 price region as it attempts to form a platform of support at USD1.4250. Today’s price action has once again evidenced this view with the low of the day bouncing off this price point once again. However, immediately above are all four moving averages with both the 9 and 14 presenting stubborn barriers to any short term rebound. Much like the eurodollar this current price level is becoming key and a break below USD1.4250 should see cable dive lower as a result and continue the recent bearish momentum.
Fundamental news for sterling started today with revised GDP which came in at 03% which was on forecast and the only other significant news this week for the pound comes on Thursday with the Nationwide housing data alongside the CBI sales figures. The first of these is expected to show a fall in demand to 0.5% whilst the second is expected to be positive at 14, marginally higher than last month’s 13.
USDCAD
The bullish momentum for the dollar cad now seems firmly established with prices having broken above the 200 day moving average coupled with today’s price action which has breached the critical 1.07 price handle. Having broken through this upper level of resistance we can expect the short term bullish momentum to develop into a longer term trend, particularly given the fact that the 9 day moving average is now crossing the 200 day for a bull cross signal. In addition both the 9 and 14 are providing excellent support to the upwards move.
There is very little fundamental news of any great significance for Canada this week so expect trading to be driven by technical & political factors.
GBPCHF
The pound swiss continues to behave in an erratic and volatile manner and in many ways mirrors the chart for the dollar yen. There is no clear trend at present with prices bouncing between 1.70 and 1.59.
GBPJPY
The bearish momentum in the pound yen continues, with added pressure being applied from the 9 and 14 day moving averages. The longer term target for the pair still remains a test of support at the 120 price point so plenty of trading opportunities to the downside as we probe lower in due course. The weekly chart reinforces this analysis and with plenty of stubborn resistance above should provide protection to any short term rally.
AUDUSD
The recent market panic is clearly reflected in the Aussie dollar which has crashed through the 200 week moving average to trade marginally above the defined support area at 0.80. Given the sharp and sudden sell off over the last few weeks we can expect to see a minor pullback in due course but at present the bearish momentum remains firmly in play with all four moving averages pointing sharply lower on both the daily and weekly charts.
The important number for Australia this week is that for private capital expenditure due on Thursday and expected to come in at 2.6% against a previous of 5.5%.
AUDJPY
As risk appetite fled the markets so the Aussie Yen plunged and breaking below the potential support at 76.60 and thereafter testing support in the 72 price area. The weekly confirms this very bearish picture with 70 and below now looking increasingly likely. The 9 week moving average is crossing below the 14 week giving us a bearish signal and with such sustained resistance now sitting above it is going take a monumental effort for the aussie yen to rebound.
CADJPY
Just as the oil price has continued to slide lower so too the Cad yen has fallen, correlating positively once again as the pair now test support in the 82.40 price area. A break below this price point could suggest a re-test of 81 and should this fail then 78 becomes a real possibility for the pair. With prices now well below all four moving averages on the daily chart, and the 9 day about to cross the 200 day the outlook remains bearish. The weekly chart reinforces this analysis.
NZDJPY
The chart for this pair mirrors that of the Aussie Yen as both pairs are uber sensitive to risk sentiment in the wider market. Having broken below the psychological 60 level the pair now looks set to continue their downwards path in due course with 57.50 the next logical level. The weekly chart confirms this analysis.
EURGBP
The daily chart for the euro pound continues to exhibit unstable tendencies as we continue to hover between 84.50 and 88 to the upside. Attempts to rise have run into resistance from the 40 day moving average and Friday’s long legged doji was a signal that the market was set to reverse once again which was duly validated yesterday. The current price action could be the first stages in the creation of a pennant pattern with a consequent breakout but it is too early to confirm this at this stage so expect further sideways price consolidation.
EURCHF
As mentioned above inflows into the Swiss Franc by worried German investors resulted in a major uplift in the pair which saw the price move from 1.4 to 1.46 in the space of three day. This was followed by a subsequent pullback to 1.42 once the SNB had intervened. Until the panic in the wider markets and, in particular the Eurozone, subside then expect to see move of this type of price action in this pair.
EURJPY
The euro yen has blasted through our initial target at 115 and is currently trading in the 110 area at time of writing. With all four moving averages pointing sharply lower on the daily chart and with both the 9 and 14 weighing heavily expect this bearish momentum to continue for some time.
VIX
The VIX continues to press higher, trading marginally below yesterday’s high of 45.20 and continuing to advance in a series of upwards steps. Looking back over a 10 year period we are still some way below the high of October 2008 where the VIX achieved 59.89 for a short period . With sustained support now on the daily chart the current move is looking ominous with further potential falls in equities and other assets. However, as we close in towards the high of 2008 this could potentially signal the bottom of the current downwards trend in equities with buying opportunities as a result. As of the time of writing the fear indicator is at 39.55, having risen 3% on the day so far.
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