FX - Aussie Showing Signs of Weakness But We Have Heard That Story Before

The Australian Dollar has been the biggest mover on the day thus far, and although the day is still young, this market could remain under pressure into the Tuesday New York close. While the big event risk for the day had come in the form of an as expected RBA rate decision, with the central bank leaving rates on hold at 4.75%, the antipodean was already showing some relative weakness earlier in Asia on the back of a much weaker than expected trade balance that also produced downward revisions to the previous print. The accompanying RBA monetary policy statement was almost the same as the previous one, although there were hints of dovishness after saying that “employment had moderated and the housing sector continued to be cautious.”

In our opinion, the Australian Dollar should be at risk for significant depreciation going forward with the market trading by longer-term cyclical highs and the local economy showing signs of slowing. While rate differentials are still quite attractive in favor of the Australian Dollar, we continue to see a narrowing in yield differentials away from the single currency as other major central banks turn more hawkish. Nevertheless, the overall trend remains quite bullish for now, and we would need to see a break back below 1.0200 at a minimum to encourage bearish reversal prospects.

Elsewhere, New Zealand data was far from impressive overnight with the NZIER business opinion survey producing a very ugly result. Business confidence dropped by a significant 35 points and it was no surprise to see that the earthquake hit region had suffered the most economically. The New Zealand Dollar has also been relatively well bid of late on similar correlations to the Australian Dollar, and could also be at risk going forward should market participants focus more on local data and developments rather than current yield differentials.

Moving on, the Euro remains very well bid but has stalled ahead of the November 2010, 1.4280 highs for now. However, this market remains constructive, and only a break back below 1.4020 would negate short-term bullish structure and potentially open a short-term reversal. Some market participants have been keying in on the latest Fed Chair comments after Mr. Bernanke said that the Fed needs to monitor inflation “extremely closely.” These comments could very well be helping to prop the buck a bit on Tuesday, with the Fed Chair remarks following a slew of more hawkish Fed comments in recent days. Eurozone periphery bond spreads are also being watched closely, and although a rate hike has all but been priced in this week, the troubles on the peripheral are once again garnering some negative attention that could weigh more heavily on the single currency.

Looking ahead, German, Eurozone and UK services PMIs are the key releases in European trade, while Eurozone retail sales data should also be watched closely. US equity futures and oil prices are tracking slightly lower on the day thus far, while gold is marginally bid. We would however note that oil is looking quite toppish after trading to fresh multi-month highs and stalling just shy of $109, and a break back below $107.50 would confirm bearish bias and accelerate declines.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The market remains well bid for now and is in the process of contemplating the establishment above critical medium-term resistance in the form of the November 2010 peak at 1.4280. Daily studies still show room to run and once above 1.4280, and there is very little in the way of any meaningful obstacles until the 2010 high at 1.4580. Still, there is the possibility that the market stalls out once the 1.4280 level is tested, but a break back below 1.4020 will ultimately be required to take the immediate pressure off of the topside.

USD/JPY: It has been quite a ride in this pair, with the market initially collapsing to fresh record lows by 76.30, before reversing sharply back above 80.00, and then ultimately racing higher to break a multi-week range on the topside and potentially opening the door for a meaningful longer-term reversal. The latest break back above 84.50 is significant and could pave the way for additional gains ahead, although daily studies are starting to near overbought levels and buying on dips back towards the daily Ichimoku cloud top (82.70) would be the preferred strategy.

GBP/USD: The market appears to be comfortable trading in a loosely defined range between 1.6000 and 1.6300. Any dips below 1.6000 have been very well supported in recent days, while rallies above 1.6300 remain very well offered. For now therefore, the best strategy is to play the range and look to sell on rallies above 1.6300 and buy on dips below 1.6000. Meanwhile, a weekly close above 1.6300 or below 1.6000 will potentially warn of a break of the range.

USD/CHF: The latest break to fresh record lows below 0.9000 (0.8910) is certainly concerning and threatens our longer-term recovery outlook. Still, we do not see setbacks extending much further and continue to favor the formation of some form of a material base over the coming weeks for an eventual break back above parity. Look for the market to hold above 0.9100 on a daily close basis, while back above 0.9370 will officially confirm reversal prospects and accelerate gains. Only a break and weekly close below the recent record spike lows at 0.8910 ultimately delays outlook.

Written by Joel Kruger, Technical Currency Strategist

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