ASIA/EUROPE FOREX NEWS WRAP

More of the same in FX markets as the Japanese Yen is sliding into the weekend, while the Euro maintains its gains after generally improved economic data out of Germany, as well as some interesting news from the European Central Bank. As today approached, the Euro’s main driver was speculation over how much capital Euro-zone banks would return to the ECB, after the central bank injected over €1 trillion ($1.33 trillion) via its longer-term refinancing operations (LTRO) between December 2011 and February 2012.

The results of the first LTRO repayment option are promising: €137.2 billion will be repaid; well-above the €100 billion “whisper” number that had been circulating the past few days. For now, this has lended to Euro strength; if Euro-zone banks are willing to repay borrowed funds from the peak of the financial-aspect part of the crisis, then it is assumed that the interbank market has to be healthy.

Likewise, these repayments represent a form of monetary tightening by the ECB: the balance sheet is shrinking. At a time when the Federal Reserve, the Bank of Japan, and the Swiss National Bank (the Bank of England soon as well) are all flooding the market with liquidity (expanding their balance sheets), any measures brought forth by the ECB that shrink the balance sheet are inherently Euro positive.

On the other hand, it should be noted that the money borrowed from the ECB early in 2012 was mainly used to help cover positions in peripheral bond markets. With bond yields compressed, thanks to ECB President’ Mario Draghi’s mid-summer pledge to do “whatever it takes” to save the Euro, it is possible that as these funds are returned to the ECB, short-term Italian and Spanish bond yields rise. Any near-term Euro weakness is an opportunity to get long, both fundamentally and technically (more below).

Taking a look at European credit, peripheral yields continue to edge lower amid the LTRO news, providing support for the Euro once again. The Italian 2-year note yield has decreased to 1.429% (-1.7-bps) while the Spanish 2-year note yield has decreased to 2.407% (-2.2-bps). Similarly, the Italian 10-year note yield has decreased to 4.088% (-6.4-bps) while the Spanish 10-year note yield has decreased to 5.152% (-6.3-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 11:45 GMT

CHF: +0.55%

EUR: +0.48%

NZD: -0.01%

GBP:-0.08%

AUD:-0.10%

CAD:-0.21%

JPY:-0.65%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.32% (+0.41% past 5-days)

ECONOMIC CALENDAR

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

TECHNICAL ANALYSIS OUTLOOK

EURUSD: This week I’ve said: “the RSI downtrend that was broken last week was the clue for further strength. Accordingly, I maintain that ‘focus is on buying dips.’ It now appears that a Bull Flag has formed on the daily chart, with a break above 1.3400/10 signaling a move towards 1.3485.” The Bull Flag has broken out to the topside today, with a measured move pointing towards 1.3635. Support comes in at 1.3380/85 (mid-March swing high, Bull Flag resistance), 1.3280/3310, and 1.3120/45. Resistance is 1.3485 (late-February swing high), 1.3545/50, and 1.3635.

USDJPY: Market positioning has eased and further dovish commentary from Japanese officials has lifted this pair towards 91.00. The focus remains on buying dips, and generally speaking, selling Yen strength (EURJPY, USDJPY preferred for gains; CADJPY, GBPJPY preferred for loses). Resistance comes at 90.90 (weekly R1), 91.75/90 (weekly R2), and 95.00 (monthly R3). Support comes in at 90.00 (monthly R2) and 89.10/40 (monthly R1, weekly S1, mid-January swing lows).

GBPUSD: Weak data and a breakout across all GBP-based pairs (but for GBJPY) has provoked the GBPUSD to settle near key support at 1.5750. As long as the daily RSI downtrend holds, it is possible for a move lower. With a new low set after the UK 4Q’12 GDP this morning, a daily close above 1.5851 would mark a Bullish Key Reversal and warrant a switch in bias. Support is 1.5750 and 1.5700. Resistance comes in at 1.5825, 1.5900/10, and 1.6000/10.

AUDUSD:No change: “The pair has broken the December highs and a break signals a push towards 1.0605/25. However, it’s worth noting that the daily RSI hasn’t pushed into overbought territory on any rally since February 2012. Accordingly, we’ll either see a move to new highs and with RSI confirming the breakout; or further consolidation/pullback is in order before the next leg higher. Support is at 1.0530/50 (weekly pivot, monthly R1), 1.0465/70 (weekly S1), and 1.0400/05 (weekly S2). Resistance is 1.0530/85 and 1.0605/25 (August and September highs).” It should be added that a weekly close below 1.0530 could signal a deeper retracement towards 1.0350/400.

S&P 500: Earlier last week I said: “The S&P 500is back above a very significant zone of 1445/50 (descending trendline off of September and October highs, 100% Fibonacci extension off of the November 16 low, the November 23 high, and the November 28 low extension), and a move higher necessarily points to 1470/75…Bull Flag is potentially forming on lower timeframes (1H, 4H).” With these levels to the upside breaking, a move above the September highs points to resistance at the 161.8% Fibonacci extension at 1492, 1500 and 1520/25 (December 2007 high). Support comes in at 1470/75, 1450/55, 1425, and 1400.

GOLD: The past few weeks I’ve maintained: "When considering the move off of the September highs, a measured A-B=C-D (as expressed on the Daily) suggests that a bottom could be in place at [1630/40].” The rebound has ensued, with the alternative safe haven rallying up to 1690 today. A daily close above 1700 points towards 1722/25 and 1755. Support is 1675 (20-EMA) and 1640/45.

--- Written by Christopher Vecchio, Currency Analyst

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

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