Dollar, Yen Lead as Euro Snaps Back to Reality; EUR/USD Under $1.3200

ASIA/EUROPE FOREX NEWS WRAP

The past 24-hours have been nothing short of exciting. Yesterday started off with the Bank of England and the Reserve Bank of New Zealand entering the fray by talking down their respective currencies (truly, a perfect example of mob mentality), only to be trumped by the Federal Reserve signaling the exact opposite – that monetary policy may be too loose, and that it might be time to consider potential exit policies in order to limit systemic risk.

The Fed’s January meeting Minutes came at a curious time: European data has been getting worse; immeasurable Italian elections are in the next few days, which could very-well see Silvio Berlusconi return to power; China is starting to signal tightening as the housing sector overheats; and the US budget sequester is scheduled to hit in eight days. So while any signs that the Fed may be winding down its ultra-loose monetary policy is generally viewed as a confirmation of US economic strength, with investor sentiment at an inflection point (for the reasons just listed), it has generally provoked a shift away from high beta currencies and risk-correlated assets.

As the US Dollar has strengthened, it has benefited the most against the Euro, while the Japanese Yen has rallied hard. This, to me, is a clear sign of fear starting to set in: US Treasury yields are starting to compress (the 2s10s spread is narrowing) despite the Fed saying it is moving towards a tighter policy stance. Perhaps it is thus the time to look towards the Yen as the preferred safe haven vehicle rather than the US Dollar – Japan is limiting its loosening options, while the next major Yen-negative catalyst won’t likely arrive until after Japanese Prime Minister Shinzo Abe returns from his visit to the US, at which point he should name a new Bank of Japan leader (Governor Masaaki Shirakawa steps down on March 19).

Taking a look at European credit, peripheral yields have leapt higher today, weighing on the Euro on Thursday. The Italian 2-year note yield has increased to 1.674% (+7.3-bps) while the Spanish 2-year note yield has increased to 2.527% (+3.7-bps). Similarly, the Italian 10-year note yield has increased to 4.480% (+6.3-bps) while the Spanish 10-year note yield has increased to 5.165% (+0.1-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 11:30 GMT

JPY: +0.60%

GBP: +0.05%

AUD: -0.10%

NZD:-0.18%

CAD:-0.28%

CHF:-0.54%

EUR:-0.77%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.01% (+0.94% past 5-days)

ECONOMIC CALENDAR

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See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

TECHNICAL ANALYSIS OUTLOOK

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EURUSD: The move below 1.3280 has been swift, and while the initial thought was to look to buy weakness, it seems that there are two significant uptrends on the verge of breaking: the ascending trendline off of the December and January lows at 1.3240; and the ascending TL off of the July and November lows at 1.3190. Additionally, the weekly RSI uptrend since mid-July has broken lower. 1.3050/70 is support, followed by 1.3000 and 1.2870/90. Resistance is 1.3280/300.

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USDJPY: No change: “Further bullish price action as US Treasury yields strengthen and speculation over BoJ policy arises again.” Resistance comes in at 93.40/45 (monthly R1), 93.85 (weekly R1) and 94.00/10. Support comes in at 92.90/95 (weekly pivot), and 91.75/95 (weekly S1). Recent price action may be a top or a Bull Flag; waiting for confirmation above 95.00 or below 92.00.

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GBPUSD: Yesterday I said: “Selling persists on further bad data from the UK and dovish commentary from the BoE, setting up for a test of the significant June 1 low at 1.5265/70. With technical conditions extremely oversold on shorter-term timeframes (1H and 4H) and longer-term views moving to extremes as well, a rebound at such a significant level wouldn’t be surprising. Support comes in there and 1.5000. Resistance is 1.5425/50, 1.5560/80, and 1.5660/80.” Now, a massive daily Hammer is forming – it appears the rebound may be finding footing.

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AUDUSD:No change: “The bounce from the 1.0265/90 area may have completed, with the rally halted at the 200-DMA at 1.0305/10. The pair is sitting at the 100% extension at 1.0265 now, and a break implies a deeper setback towards 1.0135/75, early-September and –October swing lows, as well as the 161.8% extension. Although there was an overshoot into 1.0360, former support, failure has occurred, signaling further downside is possible. Price has struggled further to overcome this level. I’m still looking for a move into 1.0135/75.”

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S&P 500: A week ago I said: “The 100% Fibonacci extension on the fiscal cliff rally and flag comes in at 1530. Bottom line: I’m expecting a significant setback (-10%) in the S&P 500 unless volumes accelerate rapidly, given the disconnect from reality.” The setback has started, with the S&P 500 reversing sharply off of 1530, and putting in a daily Bearish Key Reversal yesterday. Time to start looking lower. Support comes in at 1500 and 1475. Resistance is 1520 and 1530.

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GOLD: No change: “Gold broke below trendline support off of the January 2011 and May 2012 lows at 1650 last week, prompting a sharp sell-off into 1600, where price broke out in mid-August before a rally into the post-QE3 high at 1785/1805. However, with oversold conditions persisting on the 4H and daily timeframes, a rebound should not be ruled out; each of the past two daily RSI oversold readings has produced a rally in short order. Resistance is 1625 and 1645/50. Support is 1585 and 1555/60.” It should be noted that Gold has entered a major support zone from the past 18-months from 1520 to 1575.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

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