US Dollar Rally Shadows Euro Declines

The euro paired its sharp losses versus the US dollar yesterday but judging from the recent price action momentum has shifted against the 17-nation currency.

Forex Market Trends

Daily Trend down down up up down down
Weekly Trend up up down down up no
Resistance 1.4405 1.6437 83.22 0.9000 1.0899 0.8832
1.4229 1.6292 82.50 0.8906 1.0722 0.8767
1.4138 1.6205 82.25 0.8871 1.0613 0.8739
Support 1.3962 1.6060 81.52 0.8777 1.0436 0.8674
1.3877 1.6000 81.06 0.8719 1.0368 0.8636
1.3701 1.5854 80.33 0.8625 1.0191 0.8570

Economic News

USD – Dollar Gains on Euro Losses

Yesterday’s gains in the US dollar were not so much a product of dollar strength but rather the result of anti-euro anything and the “risk-off” trade. Boosting appeal for the dollar was weaker than expected Chinese PMI numbers to start this week’s trading on a negative tone. Following the report Asian equities quickly sank into the red as did the Aussie and New Zealand dollar.

The “risk-off” environment carried over from the previous week multiple sovereign debt rating downgrades. On Friday Greece’s sovereign credit rating was cut multiple levels. Saturday saw Italy being moved to a negative watch from stable, and yesterday Belgium’s credit outlook was also moved to negative from stable.

USD fundamentals have not changed over the past month as the US still maintains an extremely loose monetary policy and is not expected to raise interest rates well into 2012. Given the current anti-euro sentiment and poor Chinese economic data the dollar was the natural benefactor from this type of trading environment and may continue to trade higher on the back of further rating downgrades in Europe.

The dollar gained as the euro sold off across the board with the EUR/USD moving as low as 1.3969, a level that coincides with the 100-day moving average. The pair has since come off its lows to trade at 1.4080 but momentum remains to the downside. The next major levels that come into play are between 1.3910 and 1.3860. The former is the 50% retracement level from the January to May move. The latter is a previous support level from mid-March.

EUR – Contagion Effect of Spain

A combination of events has driven the declines in the euro, ranging from slower than expected interest rate tightening to a renewal of the European debt crisis. Early in the month the euro saw sharp declines, coming off a 16-month high following the delay in raising European rates. The most recent declines have been a product of geopolitical events, a renewed flair up of the Greek debt crisis and possible contagion effects of Spain.

The debate continues to rage over how to handle the Greek debt crisis and no consensus has emerged. Reportedly Greece only has enough cash on hand to prevent a default until mid-July. This makes it the utmost importance that the indebted nation receives additional funding from previously negotiated agreements with the EU/IMF. The alternative is a restructuring/extension of Greek debt maturities. The objection to this idea by the ECB has been very vocal as the ECB holds roughly 50B euros of Greek debt.

Market focus has now shifted to Spain. Following the weekend losses in municipal Spanish elections by the incumbent Socialist Party the euro began to drop sharply versus the majors. The change in the power structure at the municipal level may cause regional Spanish governments to declare previously unknown financial obligations at the municipal level, thereby bringing the Spanish sovereign credit rating under further scrutiny and the threat of a downgrade.

Previously European regulators have succeeded in creating a fence around Spain as investors chose to focus on the debts of Greece, Ireland, and Portugal. However, yesterday Fitch revised Belgium’s rating outlook to negative from stable. This is one of the first non-peripheral nations to be put on watch by the rating agencies. The timing of the report coincided with the low for the day. Should Spain’s outlook be adjusted the euro will likely come under additional selling pressure.

JPY – Yen Continues to Ease

Despite yesterday’s “risk-off” trading environment the yen failed to make significant gains on the back of safe haven inflows. As tensions escalated in the forex markets and equities declined with the flair up in the European debt crisis the Japanese yen typically sees strong buying pressure as a result of safe have bids. However, yesterday the yen failed to hold a majority of its gains. This highlights the shifting trend in the yen as market forces focus more on Japanese fundamentals.

The USD/JPY fell to a low of 81.32 after beginning the day near the 82 level before closing down slightly at 81.79.

The failure of the yen to keep its safe haven gains shows a shift in the trend of the strengthening yen following deteriorating economic fundamentals. Yesterday the BoJ issued a negative economic assessment. The report for the month of May shows production has fallen and domestic private demand continues to weaken following the earthquake and tsunami on March 11. The Japanese economy contracted by 3.7% on an annualized basis in Q1.

As traders continue to focus on Japanese economic fundamentals and not safe haven inflows the yen could continue to weaken from its early May high. Further USD/JPY targets may be retracement levels from the April to May move at 82.50 followed by 83.25.

Oil – Crude Oil Lower On Chinese Economic Data

The price of spot crude oil fell after weaker than expected Chinese PMI data and a flair up in the European debt crisis. Both events had the same effect of switching to a “risk-off” mode as higher yielding assets such as equities and the Australian dollar traded lower on the day. Spot crude oil traded as low as $96.35 before settling at $98.22.

The HSBC China Manufacturing Purchasing Managers Index dropped to a 10-month low at 51.1 in May from 51.8 in April. The weaker than expected data combined with the increased tensions in Europe helped to drag crude oil prices below the psychological $100 price level.

Crude oil prices have slid from their May highs near $115 but have consolidated in a range between $95 and $104.50. A break below $95 could trigger declines to $93.00 followed by $83. A move higher would test $110 followed by the May high.

Technical News

Momentum continues to shift to the downside weekly stochastics falling sharply. Initial support was found at the 100-day moving average and the next major levels that come into play are between 1.3910 and 1.3860. The former is the 50% retracement level from the January to May move. The latter is a previous support level from mid-March. A breach here would target 1.3675 where the 200-day moving average and the 61.8% retracement levels coincide. Resistance comes in at Monday’s high of 1.4150 followed by the 50-day moving average at 1.4340.
Cable continues to slide lower from its April high. Monthly stochastics have turned lower signaling further potential declines in the pair. Yesterday cable moved below the 100-day moving average and could target the 200-day moving average at 1.5935 which coincides with the March low. Initial resistance is found at 1.6300 followed by 1.6515.
The yen has continued to weaken since the pair put in a low in early May. Weekly stochastics are turning higher, indicating future appreciation in the pair. A move higher would targets the retracement levels from the April to May move at 82.50 followed by 83.25. Support comes in at 81.30 and the May low at 79.50
Yesterday’s high at 0.8890 coincided with the trend line falling off the February high. Traders may want to be cautious at this level as both momentum and stochastics on the daily chart indicate further potential gains. The pair could find resistance near the 50-day moving average at 0.8930. The last time the USD/CHF traded at this level was the beginning of the year. Support is found at 0.8745.

The Wild Card

Crude oil prices have slid from their May highs near $115 but have consolidated in a range between $95 and $104.50. Forex traders may wait for a break below $95 which could trigger declines to $93 followed by $83. A move higher outside the consolidation pattern would test $110 followed by the May high.

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