Back to the normal state of gloom on Wednesday, with the USD showing well bid across the board on more flight to safety buying. The USD had been bolstered just ahead of the US open following the news of the S&P downgrade of Ukraine, while the much weaker US existing home sales data has helped to accelerate the pace of the greenback’s gains. Fed chairman Bernanke is once again on the wires, with the repeated testimony failing to factor into price action. Germany and China have both come out with statements encouraging China to shift policy and open up on the trade side. The European Commission has paid the first installment of the financial assistance to Latvia. EU Almunia was on the wires earlier saying that some EU nations are seriously concerned with the elevated spreads on government bonds. ECB Ordonez has also been on the wires, saying that Spain's recession is of a "certain magnitude." On the flow side, Asian bids in EUR/USD reported ahead of 1.2700 into London fix. Canadian bids in Aussie. European bank has been a buyer of EUR/CAD. A German bank has been a buyer of USD/CAD. A US prime name has been an aggressive buyer of EUR/GBP.
GBP/JPY - Recent price action on the cross has been discouraging for bulls with the market pulling back sharply on Wednesday after failing to establish any momentum on the break to fresh yearly highs by 141.80. The previous high had been set in early January at 141.55 (7Jan high), and the sharp pullback now potentially opens the door for a resumption of the broader downtrend. It still too early to call for a reversal at this point, and we recommend watching 141.80 and 136.25 (24Feb low) closely over the coming sessions for directional bias. A daily higher is now in place by 136.25, and for the current rally to sustain itself, setbacks would need to be well propped ahead of the latter. It is also interesting to note that of all the yen crosses, GBP/JPY is the first cross rate to rally to fresh yearly highs. This, however, is more a function of the relative sterling strength over the past few weeks, but nevertheless is enlightening.
NOK/SEK - The cross has been rallying intensely since breaking out of the 1.2000 area in early February with the market exceeding the previous historic highs by 1.2815 (July 2002 highs) to 1.3060 on Tuesday ahead of the latest minor setbacks. The surge to 1.3060, however, has left daily technical readings dramatically overbought and reaching levels not seen since 2007. With the market now also finally having taken out the critical psychological barriers at 1.3000, scope exists for a potential short-term top by 1.3060 ahead of an even deeper corrective drop over the coming days. Tuesday’s daily close confirms with the formation of a shooting star-like candle, often indicative of topping.
Position: Short at 1.2850 for a 1.2300 objective, stop at 1.3110. Traders not comfortable with the crosses and more inclined to take positions through the respective components can exercise the short NOK/SEK trade by establishing concurrent short USD/SEK and long USD/NOK positions.
By Joel Kruger, technical currency analyst, DailyFX.com
