Japanese Yen Leads as Aussie and Kiwi Diverge After Key Data

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By Christopher Vecchio, DailyFX Currency Analyst

The majors are mixed this morning after the beginning of the European trading session following an overall mixed and mediocre batch of data in the overnight. The Australian labor market got back on track in July as its Unemployment Rate dropped by one-tenth of one percent, while the very comparable New Zealand economy saw its Unemployment Rate spike by three-tenths of one percent, perhaps a sign of burgeoning weakness in the region. Supporting this notion was the soft round of Chinese data for July. The Chinese Consumer Price Index fell below a yearly pace of +2.0% for the first time since January 2012, while the Producer Price Index is showing its steepest rate of deflation since November 2009. When considering the relationship between inflation and growth in China (inflation is among the best leading indicators), one can't afford to ignore stumbling Asian titan any longer.

Looking into Southern Europe, data was unsupportive as well, as the Greek Unemployment Rate ticked higher to 23.1%, while the youth rate moved to 54.9% in May. Accordingly, we believe that further social upheaval in Greece will result in new elections over the coming months, which represents a forgotten roadblock on the road to solving the European sovereign debt crisis.

Amid the 'calm' that has developed the past week, it appears that market participants have become somewhat complacent. With no new measures or hints of new measures being set forth by any of the major supranational European bodies, yields in the periphery have started to rise once again (the profit taking period is over; selling pressure is building). The Italian 2-year note yield has risen to 3.263% (+10.3-bps) while the Spanish 2-year note yield has moved higher to 3.799% (+6.2-bps). Similarly, the Italian 10-year note yield has climbed to 5.858% (+1.3-bps) while the Spanish 10-year note yield has risen to 6.818% (+41.6-bps); higher yields imply lower prices.

RELATIVE PERFORMANCE (versus USD): 10:45 GMT

JPY: +0.09%

AUD:+0.06%

CAD:+0.02%

GBP:-0.08%

CHF:-0.38%

EUR:-0.39%

NZD: -0.45%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.07 (-0.67% past 5-days)

ECONOMIC CALENDAR

The newswires will pick back up today as there are three data releases of significance due ahead of the US cash equity open. At 08:30 EDT / 12:30 GMT, CAD Housing Starts(JUL) are due, and the report is expected to show that starts remained above the +200.0K level for the eighth straight month. Also due at that time is the weekly USD Initial Jobless Claims (AUG 4) report, which should show that claims remained low but at the three-week moving average of 370.0K. Rounding out the important data for the day is the USD Trade Balance (JUN), due at 08:30 EDT / 12:30 GMT, and a smaller deficit is expected.

TECHNICAL OUTLOOK

EURUSD:

The break of the weekly low yesterday has led to a move towards support at 1.2310/30 today; a break should see some interest around 1.2300 but ultimately we find that the next level lower of buying interest isn't until 1.2200/20 (former swing levels, ascending trendline off of July 24 and August 2 lows). Nevertheless, there remains scope for a bullish outcome, for the time being. The recent failure above 1.2400 is critical, considering the potential for an Inverse Head & Shoulders off the bottom. With the Head at 1.2040/45 and the Neckline at 1.2400/05, the measured move for this potential reversal would be 1.2760. We will respect this on a daily close above 1.2400/05. A break of 1.2200/20 takes this formation off the table temporarily. Near-term resistance comes in at 1.2400/05, 1.2440/45, and 1.2495/1.2505. Daily support comes in at 1.2310/30, 1.2200/20, and 1.2155/70.

USDJPY:

A pattern long in the making, the USDJPY Inverse Head & Shoulder formation that has been in wait-and-see mode remains valid so long as the Head at 77.60/70 holds. Indeed, it has, and after the Fed meeting and the July Nonfarm Payrolls last week, the USDJPY is constructive in the neat-term, fundamentally. Accordingly, with the Head at 77.60/70, this suggests a measured move towards 83.60/70 once initiated. Near-term resistance comes in at 79.10/15 (200-DMA). Price action to remain range bound as long as advances are capped by 80.60/70. On the hourly charts, it appears a rounded bottom is forming, and we are thus biased higher for now.

GBPUSD:

Tight ranges this week have led to little alteration of our outlook for the GBPUSD. Price action has been sideways for the past four-days, leaving our outlook unchanged from Monday. With the ascending trendline off of the July 12 and July 25 lows holding, our bias is neutral. A daily close below 1.5575/80 (50-DMA) would be bearish, whereas a close below 1.5490/1.5520 would be very bearish (as it would represent a break of the channel as well as last week's lows). Daily resistance is 1.5600/05 (10-DMA), and 1.5625/40. Near-term support is 1.5575/80, 1.5490/1.5520 then 1.5450/60 (July 25 low).

AUDUSD:

The AUDUSD continues to push its ascending channel trendline, moving as high as 1.0613 today; bullish price action remains intact with fresh weekly highs set. However, prices broke to the downside yesterday and the weekly lows set on Monday have been broken; the mixed signal this offers suggests sticky price action through the end of the week. Worth noting: the 4-hour RSI found support 50, suggesting that the uptrend is very much still intact; any further declines will need a fundamental catalyst; this is very plausible with significant Australian and Chinese event risk out of the way, the catalyst will likely come from Europe. Near-term resistance comes in at 1.0580, 1.0600/15 and 1.0630. Support comes in at 1.0535/45 (former swing highs), 1.0480, 1.0435/45, and 1.0380/85.

--- Written by Christopher Vecchio, DailyFX Currency Analyst

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