Euro at September High, Yen at September Low as Euro-zone Summit Starts

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By Christopher Vecchio, DailyFX Currency Analyst

The third week of October hasn't been kind to the US Dollar, which had been appreciating against its major counterparts ever since the Federal Reserve announced QE3, unlimited open-ended agency mortgage-backed securities (MBS) purchases, in mid-September. But as commented on yesterday in the DailyFX Real Time News feed, the Fed's balance sheet is at its lowest level since June 2011, which means the $40 billion per month in QE3 hasn't even begun.

As investors now prepare for the inevitable dilution of the US Dollar, risk-appetite has firmed on some improvements out of Asia and Europe. Chinese third quarter growth came in at its expected +7.4% y/y rate earlier today, boosting the commodity currencies but mainly the Australian Dollar. As noted below, this could market a near-term top (a few days maximum) in the AUDUSD, which is at a two-week high, now that the bullish catalysts are out of the system. Meanwhile, as political pressure builds on the Bank of Japan to implement more easing to help the economy spur inflation, the USDJPY has rebounded to its mid-September high near 79.20, providing a further boost to risk-appetite.

Elsewhere, as investors grapple with headlines out of Europe in regards to another Greek bailout and the first (of many) Spanish bailouts, the Euro has returned to its post-QE3 high at 1.3170/75 against the US Dollar. A Spanish bailout request this week, especially at the Euro-zone Summit, would be a major step forward for leaders and could mark a decisive shift in the crisis. Thus far, this has yet to happen, but we expect sentiment over the coming days to revolve largely around developments in this story.

Taking a look at credit, peripheral European bond yields are mixed, adding to the Euro's indecision on the day. The Italian 2-year note yield has increased to 2.078% (+13.0-bps) while the Spanish 2-year note yield has decreased to 2.672% (-3.1-bps). Likewise, the Italian 10-year note yield has increased to 4.766% (+1.9-bps) while the Spanish 10-year note yield has decreased to 5.363% (-6.0-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:17 GMT

AUD: +0.16%

NZD:+0.09%

GBP:+0.04%

CAD:+0.03%

CHF:+0.01%

EUR:-0.05%

JPY: -0.40%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.06% (-0.56% past 5-days)

ECONOMIC CALENDAR

There are four events on the docket today that draw our interest. At 08:30 EDT / 12:30 GMT, the CAD Wholesale Sales (AUG) will be released, and only a slight uptick is expected. Also due then is the USD Initial Jobless Claims (OCT 13) report, which will be extremely important this week following the incredible print last week. At 10:00 EDT / 14:00 GMT, the USD Philadelphia Fed Index (OCT) will be published, which should show the first positive reading since April. Also due then is the USD Leading Indicators (SEP) reading, which should show a rebound in activity that would have offset the losses in August.

TECHNICAL OUTLOOK

EURUSD:

The EURUSD has traded into a near-term top at 1.3145 (76.4% Fibo on February 2012 high to July 2012 low), right below September highs. Overextension on short-term charts might warrant a pullback first before the next drive higher. Resistance comes in at 1.3145 and 1.3165/75 (September high). Support comes in at 1.3070/75 (October high), 1.3000, and 1.2930/40 (61.8% Fibo on February 2012 high to July 2012 low).

USDJPY:

The pair continues to charge higher, trading into mid-September highs at 79.20, just below the 200-DMA at 79.35/40. There's also some bearish RSI divergence forming, suggesting that there could be a pullback before the next move higher towards 80.60/65. Resistance comes in at 79.35/40, 79.60/70, and 80.60/65 (former mid-year swing highs). Support is79.20, 78.40/60, 78.10/20, 77.90, and 77.65/70 (June 1 low).

GBPUSD:

Our bias switched back to bullish following the break of 1.6100/20 (the descending trendline off of April 2011 and August 2011 highs), but we caution that a pullback could occur. We are thus watching the steep uptrend of the past few sessions. Support comes in at 1.6135, 1.6120, 1.6080/85, and 1.5975/95. Continuation higher forces us to look back to the April and September 2012 highs as a major upside hurdle. Resistance comes in at 1.6260 (the former April swing highs by close) and 1.6300.

AUDUSD:

The AUDUSD rally has pushed us up to key resistance at 1.0405/25 (mid-August swing lows, ascending trendline off of June 1 and September 5 lows, daily pivot R1). We are thus looking for a pullback but remain bullish above the 100-DMA at 1.0285/90 (the 200-DMA has been inconsequential). Resistance is there and at 1.0500/15. Support comes in at 1.0320/45 (daily pivot), 1.0285/90, 1.0230/35, and 1.0200/15.

SPX500:

No change from Monday: "Crucial support at 1420/25 (the 61.8% Fibo retracement on June 2012 low to September 2012 high, ascending trendline off of the June 4 and July 24 lows, 50-EMA) held, and upon further examination, it appears a Bull Flag off of the September 14 and October 5 highs may be forming; a break above 1470 could signal a move to 1500." Support comes in at 1460, 1446/47 (20-EMA), 1420/25 and 1400. Resistance comes in at 1470 and 1498/1504.

GOLD:

No change from Tuesday: "Gold held our first big test level of 1735 and with burgeoning US Dollar weakness, precious metals could rebound. It is worth noting that there is massive developing RSI divergence (the last time RSI was this low price was below 1600), which portends to a bullish outcome." Resistance is 1755/58 and 1785/1805. If the US Dollar strengthens, we look lower towards 1735 and 1715/22 (former swing levels, 50-EMA).

--- Written by Christopher Vecchio, DailyFX Currency Analyst

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