Draghi Helps To Undo The EURUSD Rally He Created

 | Mar 14, 2014 07:00AM ET

An ugly risk-off day today finally saw a measure of the greenback’s safe-haven potential kicking in, especially as one of the drivers of the market nervousness remains the situation in Ukraine. This has finally started wearing on the euro’s credibility as a safe-haven currency as the EURUSD super-major reversed course. The strongest of all, of course, was the Japanese yen, which raged stronger across the board and cut through critical support levels in the most important USDJPY cross.

The EURUSD rally was looking a bit unsure of itself yesterday after blasting to new highs for the cycle above 1.3950 and then European Central Bank president Mario Draghi came out and helped to reverse the very rally he triggered by indicating that the strong euro exchange rate is becoming increasingly relevant in the ECB’s assessment of price stability. It seems the market wants the potentially dovish words from the president himself rather than other ECB members, who have been out trying — intentionally or not — to talk the single currency back lower with talk of quantitative easing, etc…

Elsewhere, the G10 smalls were the high beta bets at all times yesterday, whipped back to the downside after earlier noteworthy strength on the day. As I noted in yesterday’s FX Board on the AUDUSD, the “bounce, while impressive, needs another day or two of action for confirmation as one-day bounces on big data surprises are always to be taken with a grain of salt.” Grain of salt indeed: with AUDUSD pushing back toward 0.9000 after pulling above 0.9100 yesterday, yesterday is just beginning to look like one last short squeeze before a continuation lower, but as usual, we need to see an extension lower as we’re still stuck in the range.

The newswires are reporting confrontations between pro-Russian and pro-Ukrainian forces in the Ukrainian city of Donetsk, an industrial town in the east with a metropolitan area population of some 2 million, according to Wikipedia. The fear from this kind of situation is, of course, that Russia could use it as a pretext to cross the border to “protect ethnic Russians”.

Chart: EURUSD

This is a textbook bearish reversal — strong new highs that are immediately and strongly rejected — that suggests the big, round 1.40 level will remain unbroken for now as long as we get a bit of follow through lower today. The big focus lower is the 1.3800/75 area, and if this is taken out on high momentum, we may be able to suggest that the highs are in for the cycle. But let’s see how things develop through next week’s Federal Open Market Committee meeting.