USD Index Painting A Different and More Calming Picture into Year End

http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/opening_comment/2010/12/30/USD_index_painting_a_different_and_more_calming_picture.html

Despite some aggressive and notable moves in certain currencies over the past few days to record and multi-year highs against the US Dollar, it is worth noting that the USD Index, which measures US Dollar performance against a basket of major currencies, has not drifted too far from familiar ranges. This should mitigate the latest price action somewhat and remind us that current market conditions are not ideal in the lightened end of year trade. The Australian Dollar and Swiss Franc remain very well bid on the whole, but have also failed to materially extend gains thus far. Meanwhile the Yen has actually taken the lead in recent trade to outperform all others on the back of what appears to be some short covering.

As far as any real or meaningful developments are concerned, all is very quiet on Wednesday thus far. Traders who are still on the desk are already thinking about the New Year’s weekend, and we do not see much in the way of any material moves in the FX markets from here into Friday. From a strategy standpoint, there is simply no good reason to be taking any positions in the extremely thin trade, and we would not expect to see normal market conditions return until the second week of January.

EUR/USD:The market has mostly been locked in a choppy consolidation over the past several days, but a lower top looks to have carved out by 1.3500, with a break back below 1.2970 over the coming sessions to confirm and open the next major downside extension towards the 1.2585 platform base from August 2010. As such, any intraday rallies towards the 1.3350 area should be used as formidable sell opportunities.

USD/JPY:The latest break and daily close back below the daily Ichimoku cloud and 82.00 handle is significant and certainly delays and hopes for recovery prospects. From here, the focus shifts back on the multi-year and near record lows just ahead of 80.00, with a break below to officially expose the all-time lows by 79.75 from 1995. Nevertheless, we do not recommend looking to sell at current levels given the very thin trade, and would instead favor looking to buy into dips given the longer-term cyclical lows and likelihood for a major bullish reversal into early 2011. For now, a daily close back above 82.00 will be required to relieve downside pressures.

GBP/USD:The market remains under pressure and now seems poised for a retest of the platform base from early September at 1.5295. Daily studies are in the process of unwinding from oversold levels, so we would not rule out the possibility for more of a bounce towards the 1.5700 area over the coming sessions from where a fresh lower top will be sought out ahead of an eventual drop to challenge and break 1.5295. In the interim, we remain sidelined and await a clearer signal.

USD/CHF: Despite the latest drop to fresh record lows, inability to establish a meaningful close below the previous record lows by 0.9460 keeps our basing bias intact and we continue to look for some major upside over the medium and longer-term. Cyclical studies are showing oversold and any additional declines below 0.9400 are not seen as sustainable. In the interim, look for a break back above 0.9670 to confirm and relieve immediate downside pressures, while only a close below 0.9400 gives reason for concern.

Looking ahead, all of the key data releases on the day come out of the US, with initial jobless claims (415k expected) and continuing claims (4084k expected) out at 13:30GMT, followed by Chicago PMI (61.0 expected) at 14:45GMT and pending home sales (2.0% expected) at 15:00GMT. Oil and gas inventory data then rounds things out at 16:00GMT. US equity futures and commodities prices are tracking marginally higher on the day.

Written by Joel Kruger, Technical Currency Strategist

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