Euro Leading the Way in Market Thin Rally; Commodity Bloc Underperforms

http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/opening_comment/2010/12/28/Euro_Leading_the_Way_in_Market_Thin_Rally.html

Currencies have managed to regain their bid tone over the past couple of sessions, with the USD being sold quite significantly across the board. Given the exceptionally lightened holiday trade, the price action does not carry with it as much meaning and it is actually quite common to see some broad based US Dollar selling into year end. The gains have been led by the Euro, which has easily tripped some buy stops above 1.3200 and now has it sights set on next key topside barriers by 1.3300. Still, while the market trades below 1.3500, we retain a negative outlook for the currency and prefer a sell on rallies approach.

The gains in the currency market also might be interpreted as somewhat counterintuitive given the latest slide in the Chinese markets, with the weekend rate hike weighing on local equities and sending a message that there is a very real possibility that growth will be notably compromised in the world’s fastest growing economy over the coming year. Any anticipated slowdown in growth out of China should also weigh on some of the major currencies which very much rely on the prosperity of the Chinese economy. We are however pleased to see that despite the broad based currency gains against the buck on Tuesday, the commodity bloc has been underperforming, which is comforting given the bloc’s higher correlation to Chinese performance. We are actually long the Eur/Aud cross from 1.3070; stop 1.2970, and see room for a great deal of upside over the coming days and weeks.

On the data front, we have seen a good amount out of Japan on Tuesday. Core nationwide inflation contracted for the 21st consecutive month, the unemployment rate held steady at 5.1%, while household spending, industrial production and retail sales all rebounded. Usd/Jpy has come under some decent pressure and is now testing the bottom of the daily Ichimoku cloud. We consider 82.00 to be the key level to watch below, with only a break and close below the figure to force a shift in our constructive outlook. Meanwhile, the Yen crosses seem to be finding some support by some key multi-day range lows and could very well be poised for some decent upside ahead.

Looking ahead, the markets are once again expected to be very light in European trade with no material data releases and the UK markets still officially closed. The North American economic calendar sees more action with the release of Case Shiller (-0.6% expected) at 14:00GMT, followed by consumer confidence (56.4 expected) and the Richmond Fed (11 expected) at 15:00GMT. US equity futures are marginally bid, while commodities are also tracking higher on the day.

Written by Joel Kruger, Technical Currency Strategist

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