Risk-Appetite Supported as German Court Declines Injunction on ECB

Text goes here

In this Issue...

Read what our Top Contributors are saying

By Christopher Vecchio, DailyFX Currency Analyst

By no means is the Euro leading this morning although it remains bolstered by a few key facts: despite chatter from both the Italian and Spanish prime ministers that suggest neither country will be agreeing to the European Central Bank's bond-buying scheme due to the conditionality, bond yields on the shorter-end of the curve haven't reacted violently, and instead have only leaked higher; and the German Constitutional Court has eased some concerns over the ECB's scheme by denying an injunction filed against the ECB's scheme yesterday.

Nevertheless, the German Constitutional Court will decide on the legality of the European Stability Mechanism (ESM) tomorrow, in what is expected to be a highly contentious decision. The Court is expected to ratify the decision, but not with a pure "YES" stamp of approval; instead, like all other measures with German involvement, a heavy helping of conditionality is to be expected. In turn, if the Court believes that the federal government (Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble) is overreaching its bounds (by abusing the Bundestag's and Bundesrat's legal right to control budget outlays), then it is likely that Germany will be forced to curb its charge forward as the head of Europe's bailout fund (ultimately, saving Europe from a fiscal standpoint lays with Germany).

Taking a look at credit, peripheral European bond yields are edging up, continuing the move from yesterday after Italian Prime Minister Mario Draghi's commentary about the country avoiding participation in the ECB bond-buying scheme. The Italian 2-year note yield has increased to 2.330% (+8.7-bps) while the Spanish 2-year note yield has increased to 2.800% (+6.5-bps). Similarly, the Italian 10-year note yield has increased to 5.128% (-3.3-bps) while the Spanish 10-year note yield has increased to 5.666% (+2.4-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:20 GMT

NZD: +0.54%

CAD:+0.40%

AUD:+0.37%

JPY:+0.35%

CHF:+0.31%

EUR:+0.27%

GBP: +0.16%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.29% (-1.15% past 5-days)

ECONOMIC CALENDAR

Another quiet day on the North American side of the economic docket, with only two releases due that could generate volatility ahead of the US cash equity open. At 08:15 EDT / 12:15 GMT, the CAD Housing Starts (AUG) will be released and the report is expected to show jobs growth above a monthly rate of +200.0K for the ninth consecutive month. At 08:30 EDT / 12:30 GMT, the USD Trade Balance (JUL) is due, and the stronger US Dollar during the first month of the third quarter, alongside declining consumption in Asian and Europe, are expected to have widened the deficit.

TECHNICAL OUTLOOK

EURUSD:

BB represents Bollinger Bands ®

Little has changed over the past 24-hours: "The EURUSD made a huge technical breakthrough on Friday by shattering a yearlong descending trendline off of the August 2011 and October 2011 highs. This now marks the potential for a long-term bottom at the 1.2040/45 low. Additionally, while our bias for a move towards 1.1500 by November 1 is negated, a weekly close back within the channel - back below 1.2620/35 (former yearly low set in January) - would suggest a false breakout has occurred. Near-term resistance comes in at 1.2820/25 (late-May swing highs) and 1.2980/1.3000. Support comes in at 1.2740/50, 1.2620/35, 1.2500/10, and 1.2460/80."

USDJPY:

The sell-off continues with price holding below the 78.10/20 level, with touches below 78.00 coming today. Nevertheless, 78.60 remains our line in the sand for bullish/bearish price action: a daily close above 78.60 suggests a move back towards 79.15/30 (100-DMA, 200-DMA, descending trendline off of the April 20 and June 25 highs); a daily close below 78.60 keeps 78.10/20 and 77.90 in focus, while penetration of the August low at 77.90 will likely result in a washout to new lows with the potential for 77.65/70 and 77.30.

GBPUSD:

The GBPUSD has started trading higher, breaking last week's high suggesting that the British Pound's trajectory is very much upwards for September (based on opening ranges). As such, our opinion holds: "As long as price on the daily chart is supported by 1.5930/40, there's reason to believe that a run up to 1.6120/40 is possible during September. Above 1.6120/40, the former April swing highs at 1.6260 (by close), 1.6300 (by high) are in focus; this would also represent a break of the descending trendline off of the April 2011 and August 2011 highs. Below 1.5930/40, near-term support comes in at 1.5860/75 (ascending trendline off of August 2 and August 31 lows), 1.5770/85 (late-August swing lows), and 1.5700."

AUDUSD:

The AUDUSD is back on the up and up, testing 1.0400, but falling short of the highs set on Friday. As such, interim resistance comes in at 1.0400 (September high), 1.0410/20 (mid-August swing lows), and 1.0435/45 (mid-July and early-August swings). The picture is clear: there's a lot of significant confluence (based on former support/resistance levels) in the airspace overhead. A breakdown eyes 1.0275/1.0300, 1.0210/25, and 1.0160/75 (weekly low).

--- Written by Christopher Vecchio, DailyFX Currency Analyst

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts. Any opinions, news, research, analyses, prices, or other information contained in this email are provided as general market commentary, and do not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. The content in this email is subject to change at any time without notice, and is provided for the sole purpose of assisting traders to make independent investment decisions. Dailyfx has taken reasonable measures to ensure the accuracy of the information, however, does not guarantee its accuracy, and will not accept liability for any loss or damage which may arise directly or indirectly from the content or your inability to access the content, for any delay in or failure of the transmission or the receipt of any instruction or notifications sent through this email. Please read the full disclosures here. Additionally, Dailyfx takes your privacy seriously. Please click here to read our privacy policy.

Valuable Resources