(By Mike Kulej) Last week showed the EU summit euphoria was short lived. The common currency lost all of its gains and even dropped below the pre-summit low of 1.2406. At first, markets were reacting to a vocal opposition from some European countries (Finland, Holland) to using EFM funds for purchases of Spanish bonds. Later in the week, the European Central Bank cut its key interest rate by a quarter percentage point, to a record low 0.75% to try to help ease Europe's financial crisis and boost its sagging economy. This move was expected. However, in a more surprising move, the ECB cut the interest rate it pays banks on overnight deposits by 0.25% – to zero. This pushes banks to lend the money, rather than keep it on deposit with the central bank. In addition, the marginal lending rate was lowered from 1.75% to 1.50%. The Euro swiftly dropped to 1.2364, losing over 150 pips. On Friday, the slump continued following employment numbers from the USA, pulling the EUR-USD down to 1.2259 before closing at 1.2285.
Interestingly, the commodity currencies fared much better. They spent most of the week consolidating, before a weakness set in on Friday. Still, this behavior so far is different from what happened back in May, whey suffered as much, if not more, as the Euro did. Something is different now, although probably not for much longer. If the Euro continues to fall, the commodity currencies will probably turn lower as well. The employment data from Australia later in the week may very well decide the issue. Weak numbers could easily send the entire sector down sharply, possibly starting a more significant selloff."
Couple of weeks ago, I was looking at a buy set up in the CAD-CHF. This pair had been in consolidation for a long time, trying to make a bullish breakout. After a long wait, it finally materialized and the progress itself was swift. The trade only lasted two days, bringing 142 pips, with exit just before the close on Friday. The CAD-CHF should move a little higher still, but I did not want to risk possible change of sentiment over the weekend or sitting through another consolidation. As far as I am concerned, this is a good result especially considering its short duration.|
Back to the commodity currencies, with the NZD-JPY as an example (most other pairs have a similar look). In the past few days, it formed a possible rounded top on the intermediate term chart, which could lead to more downside. On the 4H chart, the key level to watch is the previous low of 62.23. If the price drops under it, the weakness is for real, with a strong chance for a real selloff.
Zooming in, we can see that the NZD-JPY has already taken first few steps towards a larger reversal. On the hourly chart, the price dropped under first two support levels of 63.83 and 63.56 respectively. It established a new one at 63.33, which now becomes the new, active support. I would expect a consolidation here for a while, perhaps several hours after the open, perhaps a day. However, if the price makes another bearish move and breaks through the support, I want to be in at 63.27, with objective of 75 pips, comfortably before the pivot point of 62.25. Of course, opening gaps are always possible, something to look for in early trading. Have a great trading week!
Mike K.