Clues After The Dust Settles

This week was an important one to assess how the market is reacting to last week’s shaker. The fundamental front is dominated by EU woes but the market is also starting to realize greater structural implications globally. The discussion now is whether this current crisis will derail the recovery in Europe and the US.

Intermarket Analysis
The US is plagued by realization of structural faults too as the market now all knows that the major US banks did not have one losing day trading in the Q1 2010. This eerily reminds me of Madoff’s equity curve, which was incredibly and improbably consistent. That type of consistency should call for attention, yet the banks slipped under the radar until Goldman Sachs was brought under criminal investigation.

The worrying sign here is that there appears to be no real improvement. The structure of our finance system has clearly remained unchanged, and possibly even encouraged by bailouts. The market’s confidence in the Euro and Pound has been dropping, which has made the Greenback pretty. However, I suspect that we are going to continue a commodities rotation, evident by the persistent surge in oil and gold. If structural changes are to come, the market may even accelerate this rotation process.

EUR/USD

• 4H: Looking at a short-term time-frame, we see that the Euro continues to be pressured. The market formed a negative RSI reversal this week suggesting a swing projection to 1.23, 1.2350. The RSI is in the oversold territory but reflects healthy bearish momentum.
• Monthly: The monthly is just a reminder of the bearish scenario. With a break below 1.2350, 1.23, we may see a drop to 1.15, 1.14.

USD/JPY To Test Opening Gap

• Weekly and Daily: The USD/JPY pair is waddling in the middle of last week’s “flash crash” induced decline. After a gap up to start the week, the market ranged between roughly 93.50 and 92.40. Friday’s sell-off in equities is reflected in the USD/JPY as it broke below the 92.40 low and is about to test the gap that opened from 91.40/91.50.
• A close below that  and below the 61.8% retracement level at the 91.20 area would suggest a further decline to test 90 to 88.80. This would also test a rising support line.
• The USD/JPY is very choppy and in the current consolidation mode, projections are limited in both direction until breaks of major lows.
• In this case, a break below 86.00 may be significant.  Otherwise we may be setting up for a long intermediate consolidation range between 86.00 and 95.00.

GBP/USD Retests 1.45 (Link)

USD/CAD Trying to Fill Gap Near 1.3950

• Daily and 4H: The USD/CAD declined to start the week, but has pared those losses, nearing the gap as the trading week comes to an end.
• In the 4H chart, we see the gap, near 1.03950, is also 61.8% retracement of the decline that started after last week’s spike.
• In the long-term, you know from my intro that I will remain bullish on the AUD and CAD for their correlation to gold and oil
• For now however the USD/CAD may hover above parity, but I would caution any bullish outlook to be in the short or near-term.
• For example, I would expect to see some topping action near 1.057 area to test a declining resistance as well as the previous high.
• However, if the market breaks above the high of last Thursday’s spike high at 1.075, we are looking at a more significant correction rally.

EUR/GBP to Test Support at 0.8440

• 4H and Weekly: The 4H chart is showing the consolidation this week may extend into next week with support at 0.8440 and resistance at 0.8600.
• RSI readings and  price action suggest the market is likely to break below.
• If it does, looking at the weekly, it may test the 78.6% retracement leve near 0.8130, perhaps lower near 0.80 and the SMA 200.

AUD/USD Remains in Consolidation

• Daily and 4H: The daily time-frame shows the AUD/USD in long-intermediate term consolidation with support all the way down to 0.86 and resistance at 0.94. The market is about to make a ab=cd retracement to 0.8840.
• I think there isn’t much interesting going on with this pair until the test of those long-intermediate term support or resistance areas. We should start monitoring the decline if it approaches 0.87 next week. If risk aversion persists but a commodity rotation extends, the AUD/USD maybe still be supported. The commodity rotation would be supported if the euro and the gbp declines. The USD would also be pressured next and in this situation, the commodity currencies might stay firm.
• The AUD/USD’s 2009 rally was correlated to gold and also expansion in China as well as its own growth prospects. However, tightening policies may be affecting that and therefore stalling or negating its correlation to gold rotation.
• That is why I feel like nothing is really meaningful until the market breaks one 0.86 or 0.94. For the time being though, it may support the AUD/USD at the 0.86/0.87 area.

GBP/JPY:  Support Brings GBP/JPY back in Consolidation

• Weekly and 1H: The 1H chart shows that choppy action of the GBP/JPY this week as it consolidated. Thursday and Friday however saw the pair break below the gap it opened on near 135.50 and is heading now towards the 131-130 area. There might be some near-term pullback suggested by the RSI bullish divergence.
• The weekly time-frame shows the projection also towards 130 area near the 78.6% retracement and the area the GBP/JPY dropped to during the Thursday session “flash crash” in the stock markets.

Fan Yang
Currency Analyst
Commodity Trading Advisor
fyang@fxtimes.com

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