USD Bulls Need to Take a Stand on Friday in Order for Latest Rally to Gain Traction

An as to be expected session of trade  thus far with currencies mostly caught in some consolidation as the USD pulls back off of its Thursday highs. In fact, all major currencies are higher against the Greenback despite another round of comments from various officials in support of the USD. World Bank’s Zoellick has come out once again, while France’s Lagarde and New Zealand PM Key have also suggested that the USD should be higher.

MORNING SLICES

FUNDYS

An as to be expected session of trade  thus far with currencies mostly caught in some consolidation as the USD pulls back off of its Thursday highs. In fact, all major currencies are higher against the Greenback despite another round of comments from various officials in support of the USD. World Bank’s Zoellick has come out once again, while France’s Lagarde and New Zealand PM Key have also suggested that the USD should be higher. PM Key makes more of a reference to Kiwi and his concerns with the relative strength of the local currency and the strain it is having on exports. 

    

Relative Performance Versus USD on Friday (As of 9:50GMT) – 

1)    YEN               +0.60% 

2)    STERLING    +0.58%

3)    AUSSIE        +0.57%

4)    KIWI              +0.50%        

5)    CAD               +0.30%

6)    SWISSIE      +0.29%    

7)    EURO            +0.24%

The Yen and Sterling are the strongest currencies on the day, while the Euro and Swisse lag, despite still being firmer against the USD. On the data front, German GDP came in on the whole as expected with some upward revisions to the previous print offsetting the weaker than expected headline, while French GDP has disappointed, with the impact from the release being mitigated by earlier warnings from French Eco FinMin Lagarde. The German Wisemen did not help the Euro’s cause after painting a bleak picture for the local economy despite the consecutive quarters of positive growth. Finally,Eurozone GDP came in weaker than expected and helped to keep the lid on Euro rallies ahead of the US Open.

Elsewhere, in Switzerland, producer and import prices came in on the weaker side of expectation. In the UK, PM Brown is still pushing ahead with his unpopular Tobin Tax, while some of the relative strength in the Pound has been attributed to reports that a Korean fund is looking to purchase HSBC’s head office. In Japan consumer confidence was released and held steady at 40.5, but this hardly factored into price action, with more of the attention paid to some rumors of a Usd/Cny reval that opened a sizeable rally in the Yen into mid European trade. 

Other markets have also bounced on similar themes, with US equity futures pointing to a higher open, while commodities are also moderately bid. However, it is worth noting that gold did manage to put in a very compelling bearish outside day off of its record highs on Thursday. Major US equity indices also managed to put in some bearish reversal days, which could suggest that the current bounce in currencies will only be short-lived.

Looking ahead, the North American calendar is quite busy with US trade balance (-$31.8B expected) and import prices (1.0% expected) kicking things off at 13:30GMT, along with Canada international merchandise trade (-CAD1.7B expected) and new motor vehicle sales (0.0% expected). University of Michigan confidence (71.0 expected) is the final release for the week at 15:00GMT. On the official circuit, Fed Evans and Noyer are scheduled to speak on asset price bubbles in Paris at 16:30GMT. 

 

GRAPHIC REWIND

TECHS

 

   

EUR/USD - The story here continues to be about the 50-Day SMA (1.4765) and its ability to prop any setbacks for a majority of the up-trend in 2009. The market has simply been unable to establish a close below the medium-term moving average to keep the bullish structure firmly intact. However, some stretched medium-term technical studies do warn of a major corrective pullback over the near-term and potential shift in the structure. While it is premature to get too aggressive at current levels, we have established a short on Monday by the 78.6% fib retrace off of the 1.5060-1.4625 move, in anticipation of a topside failure ahead of 1.5060 which looks to be playing out. For now, the key level to watch below comes in by 1.4810, with a break to bring the 50-Day back into play. A close below the 50-Day SMA will then directly expose neckline support of a major double top formation at 1.4625 which if broken will force a material shift in the construct of the market and  open a medium-term retreat back into the lower 1.4000’s. Only a close back above 1.5060 will delay outlook and threaten short trade.  

USD/JPY – Difficult to determine whether we are undergoing some bearish consolidation within the broader underlying downtrend, or are in the process of carving out some form of a short-term base. We will stick to the latter for now with the market looking like it could be carving out an inverse head & shoulders base above 88.00. A break above 91.25 will help to reaffirm the prospects for the right shoulder, with a push back above the neckline by 92.50 ultimately required to confirm formation. Back under 89.20 however will likely negate and shift focus back on downside and towards 87.15-88.00.

GBP/USD - Despite the latest surge, the market has been well confined to a prominent range that has defined price action for the past several months. Monday’s rally has stalled out shy of the 1.7040, 2009 highs, with the market being well capped by formidable internal range resistance in the 1.6800’s. Look for the latest topside failure to now potentially set up a resumption of setbacks towards a very well supported 1.6250 area over the coming days. Any rallies should be well capped ahead of 1.6800.

USD/CHF - We continue to retain a constructive outlook for the pair despite the underlying bearish trend with medium-term studies overextended and warning of a more meaningful corrective rally. While the latest pullback has matched the recent 2009 lows by 1.0030, this does not rule out the potential for a double bottom formation to be confirmed on an eventual break back above 1.0335. Thursday’s strong bullish day strengthens double bottom prospects, with next short-term resistance now in sight by 1.0205. Ultimately, only back under 1.0030 would undermine our double bottom outlook and put pressure back on downside.       

FLOWS

CTAs selling Usd/Jpy on rumors of China reval. Exporter and system funds on the bid in Aussie. US prime name bidding Cablewhile Russian names on the offer. Solid sovereign bids on dips in Eur/Usd. French bank and UK clearer offers in Eur/Gbp. 

 

 TRADE OF THE DAY

No Trade: We are currently exposed to the USD through our short Euro and Aussie positions and will stay sidelined until these positions play out.

 PORTFOLIO OVERVIEW

 

P&L Update and Overview: Many of you have been asking for a way to better track trading results and open positions. In response to these requests and in an effort to be fully transparent, a simulated portfolio was created in June to track and mirror all recommendations and trades. Below is a return on equity curve since inception on June 1, 2009, along with an open and closed position tracker. I am hopeful that this will make things easier for you all.

Written by Joel Kruger, Technical Currency Strategist for DailyFX.com

If you wish to receive Joel's reports in a more timely fashion, e-mail jskruger@fxcm.com and you will be added to the"distribution" list.