EURO - Where next ?

I'm a bit tired, a bit poorer and slightly 'worse for wear' this morning, following a great day at the races yesterday. --- However, it served as a nice little reminder to me that form does not always count, no matter how strong a favourite a horse may be, even when running under ideal conditions. - I can apply that little metaphor to the market at the moment. Yesterday morning, having seen the spread widening of the previous day in Spain v Germany, and the Greek downgrade, followed by further huge spread widening, I was adamant that the Euro was going to get hit again. However, it found surprising strength, and I guess I should have put a little more faith in my own analysis of a couple of days ago, when I suggested that breaking above the short-term resistance at 1.2150 and closing over the 15-day moving average (1.2170), would provide a boost to the Euro. -- Hence I now find myself at somewhat of a juxtaposition. On one hand the spread widening of Greece, Spain, Portugal and Ireland has restarted with vigour over the past 2/3 days, but Italy has thus far been immune from this latest bout of worries, as have the core countries of France and Belgium. --- On the other hand, the technical break over 1.2150, and the hold of the re-test of this level yesterday favour further gains towards the 40-day moving average, which is currently 1.2544 (though this is dropping sharply and will probably be in the mid 1.2400s in a few days time). Yet, countering this, I view the move higher in the Euro as a correction in an on-going downtrend, which will eventually take the Euro much lower... ---- which Horse shall I bet on ???? Decisions decisions. I think I'll sit this one out for now actually, although my view fwiw is that as long as the core spreads stay calm, then the Euro could make some further gains, though that could change if Spanish spreads go into overdrive ---

Below are charts showing how the Spread of Spain v Germany and Italy v Germany have diverged in recent days.

Risk on ???

The 'Inverse Cup & Handle' possibility which I mentioned yesterday looks dead in the water, although at one stage last night it did look a good possibility but now its dead... --- Moving swiftly on, this morning it seems that we are moving away from risk-off -- at least for the next few hours/days.... The 'risk-off ' trade of the past several weeks has been characterised by several key features in various asset markets: - Strong declines in major global stock markets, interbank lending rates (Libor) rising, strong USD, JPY and Gold + weak EUR, German and US bonds making strong gains, spreads of Non-German European Bonds widening v German Bond Yields, to name but a few... - However, it appears this morning that a number of these features have turned/ or are turning / or are threatening to turn... Below is somewhat of a chart-fest highlighting these various markets.

Firstly - The USD Index - this has seen very strong gains in recent weeks, however it is running into a major resistance line. - In the bigger picture this is the Neckline of a huge multi-year Inverse Head & Shoulders pattern, in the shorter term however it is major resistance. - Additionally, there is significant divergence between gains in recent weeks and momentum as measured by the RSI and MacD indicator. Taken together this warns of potential reversal or consolidation.The EURJPY has been watched very closely as this has had a very strong correlation with the move lower on the S&P. At first glance this is showing less sign of reversing than some of the other markets, the downtrend is still strong, however RSI and MacD is diverging from this price action. - In addition Monday's low at 108.08 was an exact Fibonacci 76.4% correction of the entire entire rally from 2000-2008, and was also .06 ticks shy of 1.618x the move from Oct 2009 to the intermediate low in Feb 2010.

Pressure on Interbank lending seems to have eased over the past couple of weeks, the rise in Libor has been minimal or stopped altogether in the past few days, whilst Libor futures which had been moving in synch with equities until late May, has seen strong gains since then. This can be seen in the following chart.
Also note how spreads within Euroland v Germany have started to sharply contract. The following 2 charts show Spain and Italy 10 year yields v German 10 year yields.Finally equities. First is the IBEX. this has been particularly badly hit in recent weeks. However, there are signs signs that this may (and I re-iterate the word 'may') be turning. The recent low was within a whisker of the 2/3rd retracement of the March 2009 - Jan 2010 rally, momentum is bullishly diverging, and thus far the breakout of the descending triangle pattern is showing signs of a failure, which could see a reversal. Today and by the latest tomorrow, should shed some further light on whether or not this is a failed breakout. - If it is a failure, this should see the Ibex making some decent gains.

The next chart is the AUSUSD v the SP500 since late April. Yesterday I highlighted how the AUDUSD spot seems to have been leading the Sp500, if this is still the case and the AUDUSD manages to hold onto its strong gains of the past 24 hours, then this would favour a strong move higher in the S&P.


In conclusion. The above charts are posted as evidence that the risk-off episode we have been within over recent weeks may be due to correct. I am not going to commit myself to saying this will happen, only there is a lot of evidence piling up against it. I also do not say this as the end of the overall risk-off trade, only that we may see a few days or even a few weeks whereby the market is able to gain some stability. I will also point out some caveats; the moves of the past 24/48 hours could be minor corrective moves which have or will soon have run their course, in addition most markets or risk assets still remain close to recent extremes. Also I would have liked to see the USDJPY perhaps moving a little higher towards the high 91s. Either way I think the markets face a couple of interesting days.