EUR bears are out in full force. According to the most recent CFTC Commitment of Traders Report, speculators in the futures market have built their largest EUR short position since May 2010. The one sided positioning highlights the market’s pessimism against the EUR but also brings the possibility of a short squeeze. The risk is for a bout of short covering to shake out weak EUR shorts before another move lower.
Forex Market Trends
USD – Housing Continues to Weigh on GDP
The USD caught a bid following the death of North Korean dictator Kim Jong II and news of increased tensions on the Korean Peninsula. Today’s building permits and housing starts are forecasted to be flat which underscores the slow recovery in the US housing market. Wednesday’s existing home sales will also shed some light on a sector that has been a drag on US GDP. The USD may lose its recent appeal should we have better than expected hosing data which would contribute to an improved risk sentiment.
Liquidity is beginning to tighten as the Christmas holiday approaches with short term moves running a bit further. While the major FX pairs remain trading within their recent ranges, reduced liquidity has the possibility of triggering stops for those traders who look use tight protective stops.
EUR – EUR Pessimism Reaches a High
EUR bears are out in full force. According to the most recent CFTC Commitment of Traders report, speculators in the futures market have built their largest EUR short position since May 2010. As of last Tuesday speculators were holding -116k contracts short, up from -95k. The one sided positioning highlights the market’s pessimism against the EUR but also brings the possibility of a short squeeze. The risk is for a bout of short covering to shake out weak EUR shorts before another move lower.
European sovereign credit downgrade rumors have kept the pressure on the EUR and open discussion for a nation to leave the EU by ECB President Draghi did not support the 17-nation currency. Draghi told the Financial Times the exit of an EU member would face greater economic pain outside the EMU than if a nation stayed within the friendly confines. These comments were likely directed towards Greece.
The ECB continues to operate in the bond markets to support fiscally pressured nations with its SMP bond buying program which purchased EUR 3.361 bn last week, up from EUR 0.635 bn two weeks ago. The central bank has also provided almost unlimited liquidity to banks via the new Long Term Refinancing Operations (LTRO), though the ECB has stopped short of unlimited bond purchases.
It is notable that the US-German 2-year spread has now turned negative, setting a new record low. This means Germany can now borrow at a lower rate than the US for 2-years. The 2-year US Treasury Note/bund yield spread has done a good job of tracking the EUR/USD as the spread reached a peak of 134 bp on May 4th. Interestingly enough this was the same day the EUR peaked versus the USD at 1.4938. The 2-year spread currently stands at a record low of -2 bp while the EUR/USD is just above the 1.30 level. EUR/USD support is found at the 2011 low of 1.2870 while resistance is located at the October 4th low of 1.3140.
CAD – Economic Calendar Stacked with Canadian Data
In contrast to the US, this week’s economic calendar is stacked with Canadian data releases. Today will bring CPI data and the core data is expected to fall to 0.2% while the headline number should remain steady at 0.2%. On Wednesday we will get retail sales data while the highlight will come on Friday with monthly GDP. Canadian data for November was generally stronger, in-line with better US data. However, during the month of December the two nations’ data releases have diverged with the US continuing to post better numbers while Canada has disappointed on a number of points, most notably being employment and manufacturing data.
The USD/CAD continues to move higher and has resistance at 1.0460 from the trend line off of the October and November highs. Support is found at 1.0110 from the August uptrend. Versus the EUR the CAD has fared better as the EUR/CAD continues to test the September lows of 1.3400. A break here would expose this year’s low of 1.2985.
Crude Oil – Crude Oil Prices Flat On Korean News
Surprisingly, spot crude oil did not find a bid following the death of North Korean dictator Kim Jong II and news of increased tensions on the Korean Peninsula. The price of spot crude oil failed to reach above the $95. Perhaps the risk-off environment, the threat of additional European sovereign credit rating downgrades, and a stronger USD are weighing on the commodity. Spot crude oil prices have resistance at $95 from the November 25th low and may have made a tweezer bottom at $92.50.
On a weekly basis the EUR/USD broke some important technical barriers, closing below the rising trend line from the January and October lows. The weekly close 1.3045 was also in-line with the 61% Fibonacci retracement from the 2010-2011 bullish trend. While weekly stochastics are currently oversold the monthly stochastics may have room to run lower. The January low of 1.2870 is the near-term support with additional support coming in at 1.2665 from the monthly chart off of the 2008 and 2010 lows. Resistance is back at 1.3140 and the 20-day moving average of 1.3275, followed by the December high of 1.3550.
Sterling has consistently been sold at previous resistance levels and with falling weekly and monthly stochastics this strategy could remain intact. Initial support is found at Friday’s high of 1.5560 and the pair may have scope back to the range between the 55-day moving average at 1.5740 and the late November high of 1.5775. Any rally could be capped at 1.5890 from the falling trend line off of the August and October highs. The test for sterling shorts will come at the October low of 1.5270. A break here may find support at the trend line stemming from the January 2009 low which is found at 1.5100.
The USD/JPY is encroaching on its trend line from the 2007 high which comes in at 78.30. Weekly and monthly stocahstics are both moving higher and a break above the trend would expose the post-intervention high of 79.50 and the August high of 80.20. A failure to make a significant close above the trend line could have the USD/JPY testing the December low of 77.50 and the November low of 76.55.
Last week’s break above the 0.9330 resistance opens the door to this year’s high of 0.9782 as well as the December high of 1.0065. The falling trend line from the 2003 trend line comes in at 1.1165 and makes for a long term resistance level. To the downside 0.9330 will now act as a support followed by the late November low of 0.9065 and the 200-day moving average at 0.8925.
The Wild Card
Today the Riksbank is expected to lower interest rates by 25 bp. Surprisingly, the USD/SEK has been unable to sustain a bid above the September high near 7.0000. Forex traders should note the 50% Fibonacci retracement of the 2010 high to the 2011 low rests at 7.0500. Support is found back at the December low of 6.6890.
Written by Forexyard.com