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While it’s fair to say that the EUR and the USD experienced its fair share of intraday volatility, the net change by the end of business in NY sees the Aussie as the absolute dominator. It is being followed by the Sterling and the Kiwi, two currencies that have recently suffered, as the chart below illustrates, from its own hardships as it is the stuckness in the Brexit saga and the clear dovish tilt by the RBNZ earlier this month and subsequent re-pricing of the market. Meanwhile, the Euro and the US Dollar, both were hit by supply imbalances as the countries’ respective Central Bank left little doubt that more accommodative policies are coming. In the case of the ECB, in the form of a new round of TLTROs while the Fed is on its way to relax its policy by terminating QT even if we still need to clarify the future composition of the balance sheet. One thing is obvious, equity markets keep loving the prolonged patience the Fed has embarked upon. Somehow mixed in the middle we find the Yen, unable to hold onto its gains as one would expect when you have such a rampant S&P 500, retesting its year highs. Lastly, the Loonie keeps retracing its strong gains from 24h ago.
Notwithstanding the weakness in the Euro, which by default strengthens the US Dollar given the 60% weight as part of the DXY index, the dominant dynamics by the end of business in NY involve an environment characterized by broad-based USD weakness in a context of ‘risk on’. It is the rampant rise in US equities, with the S&P 500 forming a V-shaped reversal to test its recent highs, that acts as the main source of support to prevent the Yen from finding an excess of demand. The drop in the treasury yields is more a reflection of the tepid inflation read in the US, coupled with a neutral Fed, further strengthening the notion that an indefinite period of patience is needed. Surprisingly, our Yen index exhibits a bullish structure on the hourly, even if the present price action is more a function of dual weakness in the EUR and the USD than a reflection of ‘risk off’ flows. This prognosis is further anchored by the strong reversal in the VIX (vol index), down towards the 13.00 handle, but even more evidence originates by looking at credit markets, where junk bonds are flying vs investment-grade paper, a strong testament that the market is on a risk-seeing mode. The only two ratios not quite showing us the perfect picture for risk are Oil vs Gold and Copper vs Gold, both on a downward trend short-term, mainly due to the USD-induced Gold strength. Overall, we should consider the environment tentatively positive to keep supporting the likes of commodity currencies, while any further strength in the Japanese Yen should be relatively contained as per the current RORO analysis.
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EUR/USD: Bullish Price Action Post ECB & FOMC
The quick round trip towards the touch of a 3rd trendline was met with a vigorous rebound, which strengthens the idea that this is a market with ongoing bullish traits. Playing shorts around the resistance 1.1275-80 in light of the V-shaped bullish reversal becomes riskier in my view. Ever since the bottom found on April 2nd, the episodes of acceptance seen are occuring on the topside, with the latest action on the aftermath of the ECB and the FOMC anchoring this view, as the market failed to find any acceptance on the auction lower on Wednesday. If looking to play longs, 1.1250-55 remains the best level to lean against while sellers will look to exploit plays off 1.1275-80 ahead of 1.13.
AUD/USD: 100% Proj Target Hit To The Pip
The ongoing buy-side campaign in the Aussie came to an abrupt halt once the 100% proj target of 0.7175 got hit late in the NY session. From there, a pullback into the 0.7150-55 is to be expected before a cluster of bids looks to re-engage in the bullish momentum. Personally, the caveat is that we’ve completed a 3-legs push up, which tends to be followed by a period of distribution/consolidation in prices, but we should first wait and see if the current bullish structure has concluded or the market aims for an incomplete newly found 100% proj target at 0.7184. As long as the Aussie remains above its ascending trendline, and with intermarket flows strong positive, the path of least resistance should continue to be to the upside in the near term.
AUD/JPY: Pressure Builds On Major Daily Resistance
The strong demand towards the Aussie has led to a revisit of a daily level of resistance circa 79.60-65, where judging by the price action, an enormous number of offers are sitting. The current environment of broad–based USD weakness in a context of rising equities should still incentivize enough demand in the pair to think that the prospects of an eventual breakout would be justified. Until the resolution to the upside happens, if at all, this is a market that should be treated as what it is, that is, a range bound patte, with selling tops and buying bottoms the best way to play it. However, as intermarket flows stand, the current top play faces poor prospects of major rotations back down. If a breakout were to eventuate, 79.88, 80.00 and 80.15-80.20 are the sequence of targets to reach.
EUR/AUD: Breaks Long-Standing Range
The breakout of the range, conditioned to gather further momentum, opens up the doors to a new downside target of 1.5673, even if the round number 1.57 will represent a hindrance on the way. As technicals stand, the acceptance below the key support at 1.5750-55 makes a backside retest of the level an ideal area to reinstate shorts ahead of the round number 1.58 (alignment with today’s ADR topside limit). If this latter level is reached, it would really throw cold water into the hopes of a potentially downtrend extension to instead anticipate a mere widening of the range, with the new bottom found just ahead of 1.57, with coincides with the low registered on April 2nd.
EUR/JPY: Bearish Structure In Conflict W/ Intermarket Flows
I personally wouldn’t be placing too high hopes for the bearish trend to resume judging by the micro trends identified in our RORO model, where equities recovered in style as the USD sold across the board. These are not the dynamics that are going to favor a rish back to buying Yens, while the Euro should keep its demand fairly ample across the board as a function of USD weakness. Should the exchange rate break through the recently formed descending trendline, it would negate the short-term downtrend to instead bring the focus back into 125.55-60. On the contrary, a resumption of the sell-side action sees 125.00 as the next transition, with an eventual target in the area of 124.50-61.
USD/JPY: Critical Support Reached On 3 Legs Down
An important level of support on the 4-hour chart circa 110.85 has acted as the temporary bottom found by the pair, even if under the current dynamics of lower US yields and DXY, the demands towards this particular exchange rate should be limited. No doubt rising equities support the selling of Yens as portfolios seek riskier bets, but you will be hard-pressed to find time in which the pair can put on a solid recovery unless US yields start to move in congruence with equities. For now, the key technical level to the upside one must pay attention as the first real test of conviction to keep the bearish trend going is the intersection of a descending trendline. A break and hold above would increase the risk of a range developing, considering the current intermarket flows, where rising equities are negative the Yen while lower US yields/DXY add pressure to the DXY. Should the downtrend resume in case ‘risk off’ makes a comeback, a 100% proj target at 110.71 may be eyed.