Saxobank: EUR/USD break 1,2070 - GBP/USD 1,8300

MARKET RECAP:    Europe    -  May 25

-     Asian stocks fell after oil futures closed at a record, renewing concern higher energy costs will slow economic growth globally. Samsung Electronics Co. and Matsushita Electric Industrial Co. paced declines.    The Morgan Stanley Capital International Asia-Pacific Index, which tracks more than 850 stocks in the region, slipped 0.9 percent to 86.07 at 10:45 a.m. in Tokyo. Japan's Nikkei 225 Stock Average fell 0.9 percent and South Korea's Kospi index lost 1.7 percent.    All benchmarks in markets open in Asia declined, except those in Australia, Taiwan, Malaysia and the Philippines.


-     The yen erased losses against the dollar in Asia after Standard & Poor's said it may raise the credit ratings of major Japanese banks because of progress in cutting bad loans and improving earnings.   Against the dollar, the yen was at 112.76 at 10:58 a.m. in Tokyo, after falling as far as 113.33. The Japanese currency was at 112.93 per dollar late yesterday in New York. 


-     Inflation in three German states accelerated to the fastest pace in more than two years in May after the price of oil surged to a record this month. Consumer prices in Hesse, Saxony and North Rhine-Westphalia, the first of six states to report May inflation, rose 1.9 percent from a year ago, the state's statistics offices said. Economists expect a report tomorrow to show Germany's inflation rate climbed to a two-year high of 2 percent, according to the median of a survey.


-   Crude oil futures gained on concern that a promised Saudi Arabian production rise and any Organization of Petroleum Exporting Countries quota increase at a meeting next week won't meet rising demand.   Saudi Arabia assured the U.S. it will boost output to 9 million barrels a day in June. The kingdom also urged OPEC to increase output quotas. Limited U.S. refining capacity and fighting in Iraq pushed prices to records this month.  Crude oil for July delivery was up $1.74, or 4.4 percent, at $41.67 a barrel at 12:41 p.m. on the NYME.




FX Market Summary   -     

The dollar was mixed in currency trading.  The greenback jumped 0.6% vs. the Japanese yen, but lost almost 0.2% against both the Canadian dollar and the euro.   The dollar fell vs. its European counterparts but climbed from two-week yen lows as resurgent oil prices deflated blue-chip U.S. stocks.

Against this backdrop, the dollar fell 0.3 percent against Europe's shared currency, with the euro drawing 1.2010. The dollar reversed course, erasing earlier weakness to score a gain against its Japanese counterpart of 0.3 percent in late U.S. trading, at 112.73 yen per dollar.  The greenback fell 0.1 percent vs. the British pound, with sterling fetching 1.7912. The U.S. currency fell 0.4 percent against its Swiss counterpart, at 1.2775 francs per dollar.

If eye-popping energy bills sap consumer spending, the Fed could be less inclined to raise U.S. interest rates. The dollar has gained for much of this year on expectations for a rate increase.  Nonetheless, higher energy prices might raise global inflation levels, which could prove supportive for the dollar. 

The dollar continues to be underpinned, against the euro in particular, on prospects for rising interest rates this year. But the market needs new confirmation from data or Fed comments that any U.S. rate hikes will come sooner rather than later. Higher rates would narrow the interest-rate differential between the Fed's 1 percent target and the ECB's 2 percent target, boosting the allure of dollar-denominated assets.

ECB President Jean-Claude Trichet repeated that the regional central bank's interest-rate policy remains at "exceptionally" accommodative levels, giving the bank little room to maneuver to further aid the economic recovery.

With little new to drive trading against the yen and euro, some focus was put on U.S.-Canadian foreign exchange, although Canadian markets are closed for Victoria Day.  The U.S. dollar was trading down 0.2 percent against its Canadian counterpart, at C$1.3703.

There are two reasons to expect new interest in the Canadian dollar: an election scheduled for nearly a month from now and Canadian oil producer conversion from U.S. dollars to the home currency.  Prime Minister Paul Martin has set June 28 as the election date.  The stability of leadership is seen supporting the Canadian currency.   Also, Tuesday is "oil day" for Canadian exporters, the day when they sell their U.S. dollar holdings (global oil sales are priced in the U.S. currency) and buy the home currency.




Forex Technicals:

-     EUR/USD  -   the currency pushed through 1.1990 swing level and comes within striking distance of the 1.2070 top. The rally should eventually  push through 1.2070 down the road, an accomplishment  which would put the uptrend back on track.   The positive longer-term view is unchanged  --   a new rally may yet carry the currency pair to the 1.2180 area.  And if 1.2200 is taken out, then we start focusing at 1.2450 as the initial destination of a new uptrend which may eventually carry the common currency all the way to 1.2900 and beyond. There is a good chance that we have seen a significant trough at 1.1780 last week.


-     GBP/USD  -  the currency continues to rise and is just whiskers away from the 1.7950 top --  the uptrend is about to make a breakout.   The rally should break through the 1.7950 top and  set the currency off towards a third wave type appreciation.  The current upmove has  1.8050 as the next resistance, and further out, we focus at 1.8300.


-     USD/JPY -     the recovery extended further than the 113.10 ideal target.   But the bearish scenario is unchanged nonetheless, as indications show the greenback likely to weaken further, so we now focus at the 111.00 immediate target, then at 108.00 chart support.


-    USD/CHF  -    Resistance did firm up at 1.2880, and has been sharply lower, anf ound support at 1.2760. But the sell-off should continue and the currency  should decline again towards the 1.2700 support.  The chart support there will probably give way later in the week, which would bring on 1.2500 as the next downside objective.


-     USD/CAD  --  the recovery did peak at  1.3775 -- the sharp sell-off finding support thereafter and rising back to the mid-1.3700s.  Nevertheless, the currency should fall again and should break through 1.3650.   The next downside target may be the area of 1.3550, then to 1.3425 further out.


 -     AUD/USD  -     the currency did complete the downside correction at .6945 and has gone to .7000. The rally should accelerate after a break of the .7030 top.   A breakthrough should be followed by further bull run to .7220 - ,7250 objectives.


 -     NZD/USD  -   the currency completed the correction at .6065  and has initiated a new run towards the .6153 top. A breakthrough  will likely be followed by further moves to the .6280 - .6300 area short term objectives.


-     EUR/JPY  -   the cross changed tenor,  and has been sharply higher and has been to 136.00 -- this may signal the end of the corrective decline. If support firms up at 135.20 in European session today, then we renew the call for further appreciation to 1.37.80 again.


-     EUR/CHF  -   no change in the view as the cross continues to be range-bound -- this is actually a favorable scenario as the base grows larger, the more energy it will take to push the cross lower. Support at 1.5320 will likely hold the cross above 1.5300. The risk here is that we see the stock markets falling further for a few days which suggests that resistance at 1.5400 may keep the cross depressed. This keeps the scenario of 1.5300 alive.   Further out, we need a rally through 1.5460 to dispel further1.5300 declines.


-    EUR/GBP  -    the cross should fall further -- a small recovery from .6677to perhaps .6720 nothwithstanding.   The sell-off may yet proceed further to  .6640 from there.

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MARKET RECAP:    New York    -  May 24

-     Saudi Arabia, the world's largest oil exporter, is going ahead with plans to boost oil production in a bid to lower record-high prices, after other members of the Organization of Petroleum Exporting Countries deferred a decision on increasing the group's output quota.   Saudi Arabia yesterday assured the U.S. that its request for increased oil supplies will be met, Energy Secretary Spencer Abraham said at a three-day forum of oil-producing and consuming nations in Amsterdam that ends today. OPEC plans to decide in less than two weeks whether to raise its production target.   July futures fell as much as 1.2 percent in electronic trading on the New York Mercantile Exchange. They were down 16 cents at $39.77 a barrel at 11:50 a.m. London time.




Indications in the FX Market :    

The dollar gained against the yen and the euro in New York in Monday’s session.

The lack of economic data on the calendar today has left markets focused on oil prices. Over the weekend, the Saudi oil minister pledged to increase oil production and called on other OPEC nations to do the same. As a result, the dollar received a boost on the news . Also over the weekend, the G7 meeting discussed the implications of high oil prices on the global recovery. There was no mention of exchange rates, which may not be out of the ordinary considering central bankers were not in attendance.

Against the euro, the dollar gained to 1.1960. Until the issue of oil production is resolved, and the market can gain a better perspective on its assessment of when the Fed will hike rates, EUR/USD will likely continue to trade in tight range, although a breakout to the upside is expected later in the week. The only data of significance was German construction orders which fell 3.6% in March (year-on-year). Orders for infrastructure projects and buildings also fell.

The Yen was stronger in Asian session on the back of an overall improved sentiment in Asian equity markets. Since early May, key regional indices have posted impressive gains. The yen strength has also recently been boosted by the better than expected Q1 GDP, plus easing fears about a Chinese hard landing. However, one major downside risk is the possibility of high oil prices. Japanese Finance Minister Tanigaki noted that high oil prices will stymie the Japanese recovery, since Japan is a net oil importer. Key data this week is Friday’s release of Japanese industrial production, which is expected to post a fairly robust gain. The dollar was trading at 112.60 against the yen in early New York trading.

The Canadian government called an election for June 28.  PM Martin’s stronghold has been eroding since the beginning of the year, when the Liberal party was tainted by scandal. Thus, according to recent polls, it is looking increasingly likely that the Liberals may not secure a majority government and would have to form an alliance with another party. The element of political risk should not impact the Canadian dollar long-term, but in an otherwise quiet day (markets are off for Victoria Day), it could compel further losses in the currency against the dollar. The loonie was trading at 1.3700 against US funds.




Forex Technicals:

-     EUR/USD  -   no change to the short-term view --  the currency found resistance at the 1.2060 top and pulls back towards the 1.1920 support area anew. Nonetheless, it will probably  push through 1.2060 down the road, an accomplishment  which would put the uptrend back on track.  A rally above 1.1990 from here (1.1970) strongly suggests that the downwards correction is over. The positive longer-term view is unchanged  --   a new rally may yet carry the currency pair to the 1.2180 area.  And if 1.2200 is taken out, then we start focusing at 1.2450 as the initial destination of a new uptrend which may eventually carry the common currency all the way to 1.2900 and beyond. There is a good chance that we have seen a significant trough at 1.1780 last week.


-     GBP/USD  -  the currency has done the correction and there's little chance of further pullback towards 1.7800 -- the uptrend is about to make a breakout.   The rally should break through the 1.7950 top and  set the currency off towards a third wave type appreciation.  The current upmove has  1.8050 as the next resistance, and further out, we focus at 1.8300.


-     USD/JPY -     no change in view --  the recovery may extend further towards 113.10.  The bearish scenario is unchanged nonetheless, as indications show the greenback likely to weaken further, so we now focus at the 111.00 immediate target, then at 108.00 chart support.


-    USD/CHF  -    the currency has rallied back to 1.2870 so far. Resistance may firm up at 1.2880, and should decline again towards the 1.2700 support.  The chart support there will probably give way later in the day, which would bring on 1.2500 as the next downside objective.


-     USD/CAD  --  the small recovery may have peaked at  1.3775 -- the sell-off may have started.   The next downside target may be the area of 1.3550, then to 1.3425 further out.


 -     AUD/USD  -     the currency has probably completed the downside correction at .6945. The initial rally should accelerate after a break of the .7030 top.

A breakthrough should be followed by further bull run to .7220 - ,7250 objectives.


 -     NZD/USD  -   the currency corrected back further towards .6065  and may have initiated a new run towards the .6153 top. A breakthrough  will likely be followed by further moves to the .6280 - .6300 area short term objectives.


-     EUR/JPY  -   the cross trades sideways, no change in tenor,  and should continue to drift lower --  further declines towards the 133.40 area awaits later in the week. 
 

-     EUR/CHF  -   no change in the view as the cross continues to be range-bound -- this is actually a favorable scenario as the base grows larger, the more energy it will take to push the cross lower. Support at 1.5320 will likely hold the cross above 1.5300. The risk here is that we see the stock markets falling further for a few days which suggests that resistance at 1.5400 may keep the cross depressed. This keeps the scenario of 1.5300 alive.   Further out, we need a rally through 1.5460 to dispel further1.5300 declines.


-    EUR/GBP  -    the downtrend  continues to dominate, and the cross should fall further.   The sell-off may yet proceed further to  .6670 from here, and if the level is taken out, extend the target lower, to .6640.

News, data, references and commentaries compiled from Bloomberg, Reuters, CBSMarketWatch, Briefing.com, and Economy.com

USD/JPY -     the recovery extended further than the 113.10 ideal target.   But the bearish scenario is unchanged nonetheless, as indications show the greenback likely to weaken further, so we now focus at the 111.00 immediate target, then at 108.00 chart support.

Stand aside.