At this point, the fallout from the G20 has been anything but US Dollar positive, with the Greenback selling off across the board in reaction to the latest communiqué. In the end, despite some mild changes to language and some very vague agreements, the key takeaway only reinforces the status quo. The fact that no countries were singled out, and that there were no explicit calls for flexibility, were key developments in reinforcing this fact. Another point that we felt was very interesting with the language, was that the communiqué made reference to “competitive devaluation” rather than “competitive undervaluation.” The use of the term “competitive devaluation” suggests that the Group was not concerned with the possibility that certain countries may look to intervene in the near future on behalf of their currencies, and in fact, was arguably more of a disapproval message with current quantitative easing policy in the US. However, even this language was rather broad, and here too, the door was left wide open for the US to implement another round of quantitative easing and for Japan to come in and intervene in the future if necessary.
Technically, our view over the shorter-term has been USD bullish and this outlook is being threatened into the early week. The 1.4060 level in Eur/Usd will be the key level to watch in our opinion, as it represents the 78.6% fib retracement off of the latest 1.4160-1.3695 move. Should the market be able to sustain a break above 1.4060, then we could very well see a full retracement back to 1.4160 and then beyond. Clearly the next key upside target in the Euro comes in by the major falling trend-line resistance off of the record highs, which currently comes in by the 1.4500 figure. However, should gains seen in early Asia stall out by or ahead of 1.4160, then we could see yet another topside failure, which will help to once again encourage our short-term USD bullish bias. All other price action should be well correlated to moves in the Euro, and therefore we would recommend that market participants look no further than price action in the major for hints at future directional bias.
Interestingly enough, despite a communiqué that at a minimum would not be interpreted as Yen bullish, Usd/Jpy has dropped considerably since the Asian open, with the market looking like it wants to break a bearish consolidation and head down towards the record lows just below 80.00 from 1995. However, we continue to stress that any setbacks below 80.00 should be very well supported, with the greater likelihood for a major upside reversal over the medium and longer-term. Perhaps right now, the fact that Toyota has announced that it will cut its second half Usd/Jpy rate assumptions to 80.00, along with some trade data that has come in better than expected, has helped to bolster Yen gains in early trade. Elsewhere, the Australian Dollar is the strongest currency on the day thus far, with USD bearish price action and some higher than expected producer prices helping to drive the relative strength.
Looking ahead, the economic calendar in European trade is quite light with UK BBA loans for house purchases (31000 expected) due at 8:30GMT, followed by Eurozone industrial new orders (2.2% expected) at 9:00GMT. US equity futures and commodities are very well bid ahead of the European open, but we would take the price action with a grain of salt and allow more time for the markets to digest the weekend event risk.
Written by Joel Kruger, Technical Currency Strategist
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