Weak US Dollar Gives Way to Aussie, Euro Rebound; Gold Higher as Well

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By Christopher Vecchio, DailyFX Currency Analyst

European bond and equity markets are mixed but commodities and FX are signaling "risk-on" for Thursday, with the high beta currencies, the Australian, Canadian, and New Zealand Dollars leading the majors. Trailing the pack, as typical during trading sessions when investors are looking for yield, the Japanese Yen and the US Dollar are having their weakest days in a week. Accordingly, stocks in Europe are up and US equity market futures are pointing to a higher open, with precious metals rebounding modestly as well.

There were two major developments over the past 24-hours, one in Asia and one in Europe. Yesterday after US equity markets closed, Standard & Poor's announced that it had cut the Spanish sovereign debt rating to 'BBB-' from 'BBB+', bringing the nation to the brink of 'junk.' Yes, that's right: Spanish debt is still considered investment grade paper. Although the Euro reacted quite negatively to the news (a downgrade from Moody's Investors Service was expected, not from S&P), it has since rebounded on the sentiment that any additional bad tidings could force the government into seeking a bailout via the European Stability Mechanism (ESM), which came online Monday. This would also pull the European Central Bank into the market as a lender of last resort for Spain, given its unlimited sterilized bond-buying program.

In Asia, data showed that the Australian labor market made strides forward in September, despite a sizeable increase in the Unemployment Rate: jobs were added at a quicker pace than previously thought; and the participation rate, a gauge of the population in the labor pool, increased as well (hence the jump in the Unemployment Rate). Considering that Australia's largest sector is mining, this is a welcomed development for a nation whose fate is very much tied to the Chinese growth picture. It is of little coincidence that the Australian Dollar leads as more evidence gathers that fears of a Chinese "hard landing" are overblown in the near-term.

Taking a look at credit, peripheral European bond yields are mixed, holding back further intraday Euro strength. The Italian 2-year note yield has decreased to 2.294% (-0.3-bps) while the Spanish 2-year note yield has increased to 3.217% (+2.6-bps). Similarly, the Italian 10-year note yield has decreased to 5.059% (-2.8-bps) while the Spanish 10-year note yield has increased to 5.768% (+0.7-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:33 GMT

AUD: +0.54%

CHF:+0.37%

NZD:+0.32%

CAD:+0.29%

EUR:+0.23%

GBP:+0.17%

JPY: -0.06%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.21% (+0.26% past 5-days)

ECONOMIC CALENDAR

While there are numerous American and Canadian data releases this morning, there are only three that are worth paying attention to. At 08:30 EDT / 12:30 GMT, the weekly USD Initial Jobless Claims (OCT 6) report is due, with claims hovering near recent levels; at this rate, October jobs growth looks to be in the area of +105K to +125K per month. Also released then is the USD Trade Balance (AUG), which should show a wider deficit despite a weakening US Dollar throughout the month. Finally, in the second half of the North American trading session, the USD Monthly Budget Statement (SEP) is forecasted to show a surplus.

TECHNICAL OUTLOOK

EURUSD:

Although the EURUSD continues to find support at its 200-DMA, I remain neutral on the EURUSD as prices remain within our key levels. Resistance comes in at 1.2930/35 (61.8% Fibo on February 2012 high to July 2012 low), 1.3000, 1.3070/75 (October high), 1.3145, and 1.3165/75 (September high). Support comes in at 1.2895/1.2900 (20-EMA), 1.2820/30 (200-DMA, late-April swing high), and 1.2750/65 (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:

Support continue to hold at 1.5975/95 (former channel resistance off of June 20 and August 23 highs, 50-EMA), sending the GBPUSD higher so far today. Accordingly, 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 are neutral for the coming days. 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:

"Despite some muddling the past few days, the AUDUSD is carving out a short-term bottom." The pair has broken free of the congestion between 1.0150 and 1.0270 to the upside. It is crucial that the pair closes above 1.0215/25 today, the descending trendline off of the September 12, September 20, and September 26 lows. Resistance 1.0330, 1.0405/25 (mid-August swing lows), and 1.0470/85 (former intraday swing levels). Support comes in at 1.0260/70 (100-DMA, early-October swing highs), 1.0160/75 (mid-July and early-September swing levels), 1.0145/50 (October low), 1.0100/10, and 1.0000.

SPX500:

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. For the first time since early-August, the SPX500 has closed below the 20-EMA, and that over this time frame, the daily RSI has held below 50 for the first time. 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:

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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