Euro Gains Despite Spanish Elections; Yen Falls Further on Speculation Bets

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By Christopher Vecchio, DailyFX Currency Analyst

The majors have been edging higher against the US Dollar throughout the European session (save the Japanese Yen) as investors digest the results of the regional elections in Spain over the weekend. Prime Minister Mariano Rajoy's People's Party, despite plummeting approval ratings, actually garnered a major victory in Galicia, although it suffered significant losses in the Basque region. This is a slightly better outcome than expected (the absolute majority in Galicia is encouraging).

In the wake of the elections, the Euro has moved higher and is, in fact, the best performing major on the day. However, Spanish bonds have sold off at a moderate clip (by no means showing signs of panic), suggesting that there are two different interpretations influencing markets. First, the election results mean that Spain will not see Prime Minister Rajoy leave office anytime soon. This means that Spain's future in the Euro is secure (at least the near-term horizon is less uncertain, if only marginally). This has proven positive thus far.

The other interpretation of the results is that the renewed support for the Spanish government means there is slightly less pressure to move towards a bailout. I would argue that this is the only reason why Spain did not seek assistance at last week's Euro-zone Summit - the election results were crucial, and they buy the government more time, meaning that yields will not be capped just yet.

Elsewhere, with political pressure mounting on the Bank of Japan to 'do more' to help the ailing Japanese economy, the Japanese Yen has fallen quite considerably, and is an outlier in terms of performance on the day. The Yen is the worst performing currency this month amid the hope for a massive easing package, having depreciated by -4.01% against the Euro and by -2.36% against the US Dollar.

With the European Central Bank's entrance into the bond market delayed, Spanish yields have started to creep up, though the Euro remains resilient. The Italian 2-year note yield has increased to 2.059% (+1.2-bps) while the Spanish 2-year note yield has increased to 2.749% (+8.4-bps). Likewise, the Italian 10-year note yield has decreased to 4.734% (-2.4-bps) while the Spanish 10-year note yield has increased to 5.361% (+3.5-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:35 GMT

EUR: +0.33%

NZD:+0.32%

CHF:+0.24%

GBP:+0.22%

CAD:+0.08%

AUD:-0.05%

JPY: -0.61%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.01% (+0.07% past 5-days)

ECONOMIC CALENDAR

There are no key events on the docket for the remainder of the day. See the DailyFX Economic Calendar for this week's data.

TECHNICAL OUTLOOK

EURUSD:

Thursday I said: "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." Friday I said: "I'm a buyer above 1.3000/20 (Symmetrical Triangle breakout), but recognize the potential for a slightly deeper retracement towards 1.2920/40." With an Inside Day forming at support, the pair could be basing for a move towards the September highs at 1.3165/75. Resistance comes in at 1.3070/75 (former October high), 1.3145, and 1.3165/75. Support comes in at 1.3000/20, 1.2920/40 (61.8% Fibo on February 2012 high to July 2012 low), and 1.2830/35 (200-DMA).

USDJPY:

The pair, after a brief reprieve near 78.35/40 (200-DMA), has continued to rally and has now cleared its former swing high of 79.65/70 on August 20. The USDJPY has also eliminated short-term bearish divergence, paving the way for the move higher. We are buyers on dips going forward for a move towards 80.60/65 (June highs). Resistance comes in there and is the biggest level above for now. Support is79.60/70, 79.35/40, 79.20, and 78.40/60.

GBPUSD:

The pair held 1.5975/95 (former channel resistance off of June 20 and August 23 highs, 50-EMA), which served as support as each of the past two weeks. With time passing, we've moved up this support to 1.6000/15. We note that the daily RSI hasn't dropped below 40 since July 12, a sign of a strong uptrend. If the pair closes above 1.6065/70, a daily key reversal has been made at support and our bias will be bullish. Support comes in at 1.6000/15, 1.5975/80, and 1.5770/85 (late-August swing lows). Resistance comes in at 1.6080/1.6100, 1.6170/80 (last week's highs), 1.6260 (the former April swing highs by close), and 1.6300.

AUDUSD:

On Friday I said: "The AUDUSD rally into key resistance at 1.0405/25 (mid-August swing lows, ascending trendline off of June 1 and September 5 lows) and subsequent failure suggests that a retest of the sharp uptrend that has supported the pair this week may be in order. We are thus looking for a pullback to 1.0350, but remain bullish through the rest of the month above the 100-DMA at 1.0285/90 (the 200-DMA has been inconsequential)." Indeed, the 100-DMA at 1.0295/1.0300 held today, and we're looking higher. Resistance is at 1.0330/45 (50-EMA, 200-DMA), 1.0405/25, and 1.0500/15. Support comes in at 1.0285/90, 1.0230/35, and 1.0200/15.

SPX500:

No change from last 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 1430/32 (50-EMA, ascending trendline off of the June 4 and July 24 lows), 1420/25 and 1400. Resistance comes in at 1443 (20-EMA), 1460, 1470, and 1498/1504.

GOLD:

Gold held 1715 (mid-September swing low), and with the daily RSI flirting with 40 (a key level in uptrends) alongside a Hammer forming as the daily candlestick, we're finally done looking for the pullback and are now looking higher. Resistance is 1735, 1755/58 and 1785/1805. Support is 1715/22 (former swing levels, 50-EMA) and 1690/95.

--- Written by Christopher Vecchio, DailyFX Currency Analyst

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