Ugly Consolidation/Correction in FX Continues

The US dollar is broadly weaker today as the messy consolidation ahead of the Greek election continues.  The market positioning still appears stretched.   The price action seems to be more a result of market positioning and the failure to rebuild the downside momentum in the foreign currencies as last Friday's lows remained intact on the test.  This is a prerequisite for the continuation of the correction cum consolidation phase.   

Short-term market participants cannot be sure that the Greek election is the binary event it has been portrayed to be.  If Greece's Syriza wins, it does not mean that Greece is out of EMU the next day or week.  We continue to believe the election denotes the beginning of a new negotiating phase.  The key difference between Syriza and ND/PASOK is the importance of the current memorandum of understanding.  ND/PASOK say that it can serve as the template for a new agreement.  Syriza says it cannot.

The gains in the foreign currencies in seen in the European morning have left the short-term momentum indicator stretched and further strong follow though during the US session seems unlikely.  The euro is flirting with its 20-day moving average that comes in near $1.2548 today.  The euro has not closed above this average since May 1.  There is much talk of $1.25 option expiry in the NY session that may also come into play.  

Sterling has set a new high for the week and month today near $1.56.  Its 20-day moving average comes just below there, near $1.5585.  Support is seen near $1.5525. 

The dollar's 20-day moving average against the Swiss franc is seen near CHF0.9573.  The greenback has not closed below it since May 2.   Initially CHF0.9550 may offer support with stronger support near CHF0.9500.  

While we had noted that the 5 and 20-day moving averages would likely cross shortly, the Canadian dollar is the first to follow the Australian dollar, where the moving averages crossed at the end of last week.  Initial support for the US dollar is seen near CAD1.0240.

The Australian dollar itself is still knocking on parity ($1.00).   This is its third attempt (June 7 and 11).  The intraday momentum indicators warn that penetration, if it happens, may be shallow and brief.  

Soft US PPI data and disappointing retail sales data, coupled with the ongoing stresses from Europe, will keep investors concerned about the prospects of QE3 from the Fed next week.    It is not our base case.  We are more inclined to see some pushing out of forecasts of potential first hike and possibly a form of Operation Twist.  We see some talking about a cut in interest paid on excess reserves.  While we are sympathetic to that, it has not been discussed (in public), which would seem keep the odds of that at a low level.