Mixed Price Action Overnight but Euro Rallies on Lower Spanish Yields

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By Christopher Vecchio, DailyFX Currency Analyst

There was not much by way of important data or news out of Asia or Europe last night, and as such, markets around the globe have been relatively...boring. High beta currencies and risk-correlated assets are all intertwined - the Australian Dollar and the Japanese Yen are the two worst performing currencies while the New Zealand Dollar and the Swiss Franc are two of the top performing currencies. Our main focuses today are on the Spanish bailout and risk trends in general.

On Wednesday, after US equity markets closed for the cash session, Standard & Poor's downgraded Spain to one notch above 'junk' status. If there was any doubt that there is pressure on the government to accept a bailout via the European Stability Mechanism (ESM) that should be dispelled at this point. Initially, the market reacted as expected: the Euro depreciated and Spanish yields moved higher. But what's happened since the initial reaction has been quite the opposite - the Euro is rallying and Spanish yields, especially on the short-end of the yield curve, are falling. What does this mean? Market participants are positioning themselves for a Spanish bailout and for the European Central Bank to come into the market to buy Spanish debt via the OMTs, the unlimited sterilized bond-buying scheme designed to 'save the Euro.'

In terms of risk trends in general, as explained in further detail below, by no means is the S&P 500 looking bearish in the short-term, technically or fundamentally: there is a clear Bull Flag forming; and the Federal Reserve remains in the market, purchasing $40 billion in agency MBS per month. While I do think the S&P 500 is carving out a top, I don't think that this is the top we're looking for just yet - a push to 1500 shouldn't be ruled out so long as 1425 holds.

Taking a look at credit, peripheral European bond yields are lower, underpinning Euro strength - I think this is an early sign about the Spanish bailout. The Italian 2-year note yield has decreased to 2.130% (-7.4-bps) while the Spanish 2-year note yield has decreased to 3.027% (-11.8-bps). Likewise, the Italian 10-year note yield has decreased to 4.958% (-2.8-bps) while the Spanish 10-year note yield has decreased to 5.638% (-9.1-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:55 GMT

NZD: +0.33%

EUR:+0.26%

CHF:+0.25%

CAD:+0.11%

GBP:+0.10%

JPY:-0.11%

AUD: -0.17%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.01% (-0.10% past 5-days)

ECONOMIC CALENDAR

There are two major data releases on the calendar to round out the week, only out of the United States. At 08:30 EDT / 12:30 GMT, the USD Producer Price Index (SEP) will be released, and should show a moderation in inflation at the factory gate. At 09:55 EDT / 13:55 GMT, the USD U. of Michigan Consumer Confidence (OCT P) report is due, which should show that Americans' sentiment held near its most positive levels in 2012.

TECHNICAL OUTLOOK

EURUSD:

I remain neutral (but biased bullish) on the EURUSD as prices remain within our key levels. Resistance comes in at 1.3000, 1.3070/75 (October high), 1.3145, and 1.3165/75 (September high). Support comes in at 1.2930/35 (61.8% Fibo on February 2012 high to July 2012 low), 1.2900/05 (20-EMA), 1.2820/30 (200-DMA, late-April swing high), and 1.2760/70 (ascending trendline off of July 24 and August 2 lows, 50-EMA).

USDJPY:

No change from Monday: "Although price breached the 78.40/60 zone [on Friday], overhead resistance at 78.80/90 (100-DMA, descending trendline off of the April 20 and June 25 highs) proved too great to overcome. Thus, the downtrend from April remains. With the USDJPY holding near 78.10/20, this is the bull/bear line: a hold above gives scope for a rebound to 78.40/60, whereas a close below opens up room for a move towards 77.90, 77.65/70 (June 1 low), 77.40/45 (September 28 low), and 77.10/15 (September low)."

GBPUSD:

The GBPUSD has based in the near-term at 1.5975/95 (former channel resistance off of June 20 and August 23 highs, 50-EMA), allowing the pair to continue its modest rebound. However, price remains below the 20-EMA and the descending trendline off of April 2011 and August 2011 highs (confluence at 1.6100/20). Until the GBPUSD gets back above this trendline, we remain neutral. Support comes in at 1.5975/95 and 1.5770/85 (late-August swing lows). Resistance comes in at 1.6135, 1.6260 (the former April swing highs by close) and 1.6300 /10 (September high).

AUDUSD:

The short-term bottom is in place but for how long? The 100-DMA at 1.0265 has proven a daunting obstacle the past two-days, with failure to reach the 20-EMA at 1.0300/10 twice. Yesterday, it appeared that the pair had broken free of the congestion between 1.0150 and 1.0270 to the upside, but should we close back below the 100-DMA today, our bias is back to neutral. Resistance is at 1.0265, 1.0330, and 1.0405/25 (mid-August swing lows). Support comes in at 1.0200, 1.0160/75 (mid-July and early-September swing levels), 1.0145/50 (October low), 1.0100/10, and 1.0000.

SPX500:

Yesterday I wrote: "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." However, the SPX500 continues to hold below its 20-EMA, and the daily RSI has steadied below 50 - not a bullish development. A close above the 20-EMA today at 1443/45 would be very bullish (a sign bulls remain adamant). Support comes in at 1420/25 and 1400. Resistance comes in at 1443/45, 1460, 1470, and 1498/1504.

GOLD:

No change from yesterday: "The steep ascending trendline off of the August 15 and August 31 lows, at 1780, remains broken, though the 20-EMA at 1759/61 has held up as expected. As long as this soft support holds, a move back into the 1785/1805 zone can't be dismissed (advances rejected in November 2011, February 2012, and October 2012 thus far). Resistance lies there and at 1840. Support comes in at 1759/61, 1746/51, and 1735."

--- Written by Christopher Vecchio, DailyFX Currency Analyst

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