FX - Australian Dollar Should Continue to Relatively Underperform

Overall, currencies remain well bid against the USD, with the Euro once again looking to extend gains to fresh yearly highs beyond 1.3700 on Tuesday. A combination of hawkish comments from ECB President Trichet and improved sentiment towards the Eurozone, in light of what appears to be a comprehensive support package, have contributed to the relative strength. Technically, while we continue to look for opportunities to buy USD’s over the medium-term, there is certainly room for additional Euro gains from here, and we eye a potential move just shy of 1.4000 before the market once again looks to roll over in favor of broader USD gains.

Elsewhere, the Australian Dollar has been the big loser on the day thus far. Although the single currency is only marginally lower on the day against the buck at this point, we continue to see relative weakness ahead, with a combination of softer economic data and narrowing yield differentials in favor of other major currencies driving the relative weakness. The latest inflation data certainly does not help the antipodean’s cause, with a much softer CPI print earlier today, providing added support for the idea that the RBA will continue to remain on hold going forward. The Australian central bank has been in a period of transition, with the RBA moving away from a hawkish monetary policy to a more balanced policy. Meanwhile, other major central banks look to be on the verge of shifting away (if they have not done so already) from super accommodative policies.

Moving on, as was widely expected, the Bank of Japan came out and left rates unchanged with the overnight call rate holding at 0-1.10%. Meanwhile, the BOJ maintained its economic assessment with economic growth in 2011, 20112 and 2013 seen growing at 3.3%, 1.6% and 2.0% respectively. Also in Japan, MOF Noda said that the 2011 budget needed to be passed by the end of March to rid deflationary concerns, but there has been some resistance within the government and the passage of the budget may prove to be a difficult task with some speculating that PM Kan will have to make some serious personnel changes in order to achieve government goals re the budget.

On the strategy side, we have been looking for opportunities to buy USD/CAD on dips in recent days, and USD/CHF is now back on our radar, with a move towards the 0.9400 figure viewed as a potential counter-trend long opportunity. We will let you know as things progress throughout the day, but right now, it looks as though our next recommendation will be in one of these two currencies.

Looking ahead, the Swiss UBS consumption indicator is due at 7:00GMT, followed by the much more highly anticipated UK data due out at 9:30GMT. UK GDP (0.5% expected) is the key release, with public finances (16.3B),public sector net borrowing (20.0B expected) and index of services (0.8% expected) also out at the same time. US equity futures are tracking marginally higher on the day, while commodities have been mildly offered.

TECHNICAL OUTLOOK

EUR/USD:The recent break back above 1.3500 has signaled a shift in the short-term structure and now potentially opens the door for additional upside over the coming days back towards the 1.4000 area. Next key topside resistance comes in by 1.3745 (61.8% of Nov-Dec move, while above exposes the 78.6% fib retrace off of the same move at 1.3985. Overall however, our core bias remains net USD bullish and as such, rallies to 1.3985 this week will be aggressively sold. In the interim, a break and close back below 1.3540 will be required to relieve topside pressures.

USD/JPY: The market appears to be locked in some consolidation with clear directional bias not easily determined. The latest rally has stalled out by the Ichimoku cloud top to suggest that the pressure still remains on the downside for now. Back below 82.00 should accelerate declines and expose the multi-year lows from 2010 just ahead of 80.00, while back above 83.70 will relieve downside pressures and shift structure back to the topside. In the interim, we remain sidelined and await a clearer signal.

GBP/USD: The latest break back above 1.5910 delays bearish prospects for the time being and now opens the door for additional strength towards the key 78.6% fib retrace off of the October-November major move which comes in by 1.6090. Nevertheless, our core bias still remains bearish and any rallies into this fib retrace are viewed as a formidable sell opportunity in favor of some renewed downside pressures. Look for a break and close back below 1.5835 to officially confirm bearish bias and accelerate. A close above 1.6100 concerns.

USD/CHF: Overall price action is certainly concerning for our longer-term basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. Look for the current setbacks to be well supported on a close basis above 0.9400, with a fresh higher low sought out ahead of the next major upside extension beyond 0.9785.

Written by Joel Kruger, Technical Currency Strategist

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