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Saturday, July 24, 2010
Daily Market Commentary
EUR/USD Consolidates after Release of Stress Test Results
The EUR/USD is merely consolidating following the release of stress test results. Although there was a spike in volume on the 4-hour, price action has been nothing out of the ordinary so far today. The EU decided to release the results after European markets closed for the weekend in order to limit volatility, and it looks like the tactic has worked out. That being said, we may need to wait until Monday in order to gauge the full market reaction to the stress tests results. The EU reported that 7/91 banks have insufficient capital to whether a debt shock. However, some analysts are not satisfied with the thoroughness of the test since it does not account for the impact of a sovereign default. Either way, it seems investors are taking the results rather well considering U.S. equity markets are up nearly 1% and the EUR/USD is still knocking on the door of 1.30. The EU did receive a bit of bad news today on account of Moody’s warning Hungary that the ratings agency may downgrade its debt in response to government officials walking out on talks with the IMF and EU. The Hungarian situation should be monitored carefully since EU banks do have notable exposure to Eastern European economies. The EU will be quiet on the data wire on Monday, leaving investors to focus on the European market reaction to stress test results along with U.S. new home sales. Meanwhile, the EUR/USD’s uptrend is still intact as the currency pair rides high above our medium-term uptrend running through 4/14 highs. Therefore, the EUR/USD could extend medium-term gains towards 1.35 if EU fundamentals continue to perform well and the union can avoid any further sovereign shocks.
Technically speaking, the EUR/USD faces technical barriers in the form of intraday and 7/20 highs along with the highly psychological 1.30 level. As for the downside, the EUR/USD has supports in the form of 7/20 and intraday lows.
Present Price: 1.2894
Resistances: 1.2918, 1.2948, 1.2973, 1.2990, 1.3020, 1.3040
Supports: 1.2877, 1.2856, 1.2836, 1.2816, 1.2785, 1.2767
GBP/USD Tests July Highs Following Impressive Prelim GDP Figure
The Cable is testing previous July highs as the currency pair reacts to a very strong UK prelim GDP figure. Both the services and manufacturing industries improved, placing more pressure on the BoE to turn hawkish should CPI stay above 3%. Today’s upbeat GDP number comes along with encouraging retail sales and mortgage approvals data, indicating the UK economy is improving despite sovereign problems in the EU. Speaking of which, there hasn’t been as large of a reaction to the EU stress test results as we anticipated since regulators released the results after EU equity markets closed for the week. So far investors have taken the stress test in stride, a positive development for the risk trade as a whole. However, we will have to gauge how the market as a whole reacts on Monday as investors and analysts digest the results over the weekend. Meanwhile, Moody’s warned that it is evaluating Hungary’s debt rating for a possible downgrade after Hungarian officials walked out of negotiations with the IMF and EU. The Hungarian situation should be monitored by all investors since it could boost austerity fears if the situation goes awry. Meanwhile, the Cable is trying to leave behind our medium-term downtrend line running through January highs. If the Cable can confirm by blowing past July and April highs then the currency pair could be on pace for 1.65 over the next couple months. The UK will be quiet on the data wire Monday, leaving investors to focus on the European reaction to the stress test results followed by U.S. new home sales data.
Technically speaking, the Cable has multiple uptrend lines serving as technical cushions along with 7/21 lows. Additionally, the highly psychological 1.50 level should serve as a solid technical cushion should it be reached. As for the topside, the Cable faces technical barriers in the form of intraday highs, 7/15, and 4/15 highs along with the psychological 1.55 level should it be tested.
Present Price: 1.5432
Resistances: 1.5450, 1.5471, 1.5505, 1.5520, 1.5543, 1.5573
Supports: 1.5409, 1.5382, 1.5350, 1.5319, 1.5295, 1.5274
Psychological: 1.55, 1.50
USD/JPY Climbs as Investors Digest EU Stress Test Results
The USD/JPY is climbing back towards weekly highs as investors digest the EU stress test results. Although the results have yielded limited response since they were released after European markets closed for the weekend, the response has been positive for the risk trade thus far. The EUR/USD, Cable and Aussie are also moving higher, indicating investors are pleased with the outcome. However, we will have to wait until Monday in order to gauge the full market response. If the risk trade continues to outperform this could help reinforce 7/16 lows as a bottom and allow the USD/JPY to rise back towards a more comfortable level. Meanwhile, we’ll have to keep an eye on U.S. fundamentals, for if U.S. data continues to disappoint this would weigh on the USD/JPY as the Yen wins out as a preferable safe haven asset. U.S. earnings season as gone relatively well thus far, easing some of the pressure off of fundamentals. However, fundamentals will come back into play beginning next week, so we will have to wait and see how they fare. Japan will be quiet on the data wire to start the week, leaving the data wire up to U.S. new home sales.
Technically speaking, the USD/JPY has technical supports in the form of intraday and 11/30/09 lows. Additionally, the psychological 85 level could serve as a solid cushion should it be tested. As for the topside, the USD/JPY faces technical barriers in the form of intraday and 7/16 highs.
Present Price: 87.40
Resistances: 87.49, 87.66, 87.82, 88.15, 88.27, 88.46
Supports: 87.30, 87.15, 86.98, 86.82, 86.72, 86.58
Psychological: 85, 90, November 2009 lows
Gold Deflected by $1200/oz Once Again
Gold was deflected from its highly psychological $1200/oz level for the second time this week and the precious metal is drifting back towards monthly lows as investors digest the news from the EU. So far the stress test results have been positive for the risk trade but negative for gold as investors unwinds some of their precious metal and safe-haven assets. However, the broad based market reaction has been somewhat mute considering investors have been waiting on the stress test results for quite some town now. That being said, we’ll have to see how markets behave on Monday since the test results weren’t delivered until EU markets had closed for the week. Although the reaction in gold has been to the downside, the precious metal is still trading above monthly low and important medium-term uptrend lines. Therefore, investors will have to keep a close eye on technical supports over the next few trading sessions. If our medium-term uptrend lines don’t hold then gold could be in for a more extensive downturn. Right now we are eyeing the $1175/oz level.
Technically speaking, gold still has medium-term uptrend lines in place and $1200/oz is serving as a solid technical barrier. Gold has technical supports in the form of intraday and 5/21 lows. As for the topside, gold faces technical barriers in the form of intraday and 7/15 highs.
Present Price: $1187.80/ oz
Resistances: $1189.65/oz, $1191.75/oz, $1194.67/oz, $1196.07/oz, $1197.89/oz, $1200.02/oz
Supports: $1187.52/oz, $1184.97/oz, $1182.63/oz, $1179.45/oz, $1177.12/oz, $1174.56/oz
Psychological: $1200/oz, July highs and lows
AUD/USD Looks to Test .90
The Aussie continues to set fresh July highs as the currency pair approaches an important test of its highly psychological .90 level. Meanwhile, the risk trade as a whole is reacting positively to the stress test results, an encouraging sign for the Aussie’s medium-term outlook. The RBA expresses that the EU stress test results will be a key gauge for setting monetary policy in August. If on Monday European markets confirm the positive reaction we’re seeing today in the U.S. and CPI comes in strong on Wednesday then the Aussie may price in another 25bp hike. Therefore, the next few trading sessions could prove to be very important for the Aussie’s medium-term projection. Australia will kick off next week with PPI followed by U.S. new home sales. If PPI comes in hot then investors may send the Aussie higher in anticipation of a solid CPI figure. Meanwhile, investors should continue to monitor condition in China since news leaked that 25% of outstanding loans may be non-performing. We’ll have to wait and see how the SCI reacts on Monday and whether negative news out of China will spoil Australia’s PPI report.
Technically speaking, the Aussie faces technical barriers in the form of intraday and 5/13 highs. Additionally, the highly psychological .90 level could serve as a sufficient barrier should it be tested. As for the downside, the Aussie has multiple near-term uptrend lines working in its favor along with intraday lows.
Resistances: .8975, .9001, .9025, .9044, .9073, .9097
Supports: .8940, .8919, .8893, .8867, .8850, .8832, .8819
Psychological: .90, .85, July highs and lows
S&P Futures Pops Above Medium-Term Downtrend Line and Tests 1100
The S&P futures have finally popped above our key downtrend line originating from April highs and connecting through June highs and the futures are now testing their highly psychological 1100 level. If the S&P futures can register a solid confirmation above 1100 next week then U.S. equities could be entering the beginning of a more extensive uptrend. Investors have reacted positively to EU stress test results thus far, sending the EUR/USD, Cable and Aussie higher while selling safe-haven assets such as gold and the Yen. However, the stress test results came after EU markets closed for the week, meaning we will have to wait until Monday to gauge the full market reaction. Either way, so far so good and with stress tests and key earnings reports out of the way investors may begin to focus on fundamentals once again. The U.S. will kick off the trading week with new home sales and the week will be highlighted by advance GDP on Friday. If U.S. fundamentals can manage to make a turn for the positive then U.S. may register the topside confirmation bulls seek. Meanwhile, there were a few developments today which slipped under the radar due to the emphasis placed on the stress test results. Moody’s announced that it is reviewing Hungary for a possible downgrade after Hungarian officials walked away from talks with the IMF and ECB regarding future emergency loans and planned austerity measures. We believe the Hungarian situation should be monitored closely since EU banks are known to have considerable exposure to Eastern European economies. In addition to news out of Hungary, news leaked from China that as much as 25% of outstanding loans at Chinese banks could be at risk. Such news out of China is certainly disconcerting and we will have to wait and see how Chinese equities react on Monday.
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