This text is from blog famous currency strategist Joel Kruger .
WEDNESDAY, AUGUST 8, 2012 – ARE YOU KIDDING ME? – Woa…look out..S&P has downgraded their outlook of Greece to negative! Cmon…the idea that this should have any meaningful impact on the Euro is absurd. The only surprise here is just how late to the game the rating agency is with their action. Maybe tomorrow they will issue warnings on Lehman Brothers and Bear Stearns. The more pressing issue right now is just how quickly the European Central Bank will back up their recent talk and respond with a clear and actionable plan to help further stabilize the Eurozone economy. I believe Mr. Draghi and co. will indeed step up.
KEEP AN EYE ON THAT 1.2600 LEVEL – Technically, there is still a good deal of room for the Euro to correct before considering a bearish resumption. As highlighted in recent commentary, I see EUR/USD well supported above 1.2200 in favor of a test of some key resistance by 1.2600 over the coming sessions. The 1.2600 barrier represents both the 38.2% fib retrace off of the yearly high-low move and the 78.6% fib retrace off of the most recent June-July high-low move. The fundamental catalyst for the next upside extension could very well come from the ECB, with an announcement of an actionable plan finding favor with market participants.
POUND STANDING OUT – Elsewhere, the Pound has emerged as an outperformer on the day, with the currency finding fresh bids after the Bank of England delivered not as bad revisions to GDP and inflation projections. Also seen suspiciously driving bids, were comments from Mr. King against further rate cuts, “as they would damage some financial institutions and be partly counterproductive.” I say “suspiciously” because I am skeptical of any currency rally that comes from concerning central banker comments, despite what impact they might have on yield differentials.
NEW WORLD OF INVERSE CORRELATION BETWEEN YIELD AND CURRENCY – If we have learned anything from the current global macro environment, it is that yield differentials become much less important. In fact, calls for additional accommodation from a central bank have even shown to help local currency on the basis that it will help stimulate the respective local economy. So anyone who says the King comments were GBP bullish, is in my opinion, flawed with their assessment. Moreover, it is failure of a central bank to react and move to more aggressive accommodation that has proved to really strain economies throughout the crisis. This is precisely why the Eurozone has struggled so mightily in recent years. The central bank had been far too resistant to the idea of prioritizing short-term crisis over longer-term inflationary threats. But now the ECB is finally coming around and this should help to stabilize both the region and the single currency.
TIME TO WAKE UP AND SMELL THE COFFEE – Moving on, we are starting to see renewed concerns from Australians over the strength in the local currency, and I believe that these concerns are well founded. The Reserve Bank of Australia is another central bank that does not have its head screwed on right. The RBA continues to ignore the very real threat of an intensified slowdown in China, and the severe impact this will have on the local economy. While I do believe that rates should still be a good deal lower already, I can not fully blame Mr. Stevens for his failure to accommodate further to this point. The basis for my view is really more about the need for additional accommodation because of the threats that have yet to hit the Australian economy.
PAINTING A MISLEADING PICTURE – But I am critical of just how upbeat the central banker has been throughout the crisis. Mr. Swan over at the Treasury has also exuded a similar optimism that is simply irresponsible. Oh and by the way, the RBA and Treasury have already been proven wrong several times throughout the crisis, with the RBA needing to accommodate after they felt they wouldn’t need to do so. So why is it so hard to believe that they once again will be proven wrong? The crisis will intensify in China, and Australia will be forced to respond. By that time, the market reaction (Aussie liquidation) will be far from orderly. Perhaps Mr. Stevens really does realize how bad things might get but simply does not want to own up to it at this point.
CONSTRUCTIVE…BUT AT A SNAIL’S PACE – Finally, the Yen continues to chop, although it is worth noting that Tuesday’s daily close was the strongest close since mid-July. Still, for my constructive outlook to be reaffirmed, we need to see a break and close back over last Friday’s high at 78.80 to relieve immediate downside pressures and open the door for a bullish acceleration towards 79.50-80.00. Critical short-term resistance then comes in at 80.60, with a break required to really get things going, while only back below 77.00 would negate the medium and longer-term basing outlook.