FX - Hawkish Fed Comments Having Less of an Influence on Commodity Bloc

There appears to be one major price action theme into Wednesday trade, and that has been the outperformance in the commodity bloc currencies despite some weakness in the major currencies against the buck. The Euro and Pound have been finding offers on a wave of hawkish comments out from various Fed officials including; Plosser, Bullard and Fisher, while the Yen and Franc have also been well offered from their respective record highs against the buck. However, the commodity bloc remains intent on driving higher irrespective of these potentially USD bullish developments, with the Australian Dollar leading the way and breaking to yet another multi-year post float record high beyond 1.0315.

We continue to be quite taken with the surge in the Australian Dollar and despite what we believe to be some softer fundamentals and a less hawkish monetary policy, market participants refuse to give up on buying the currency. While it is true that commodities prices trade by record levels and multi-month highs, we also see risk for a pullback in both oil and gold prices which are looking quite stretched to us (at least on a short-term basis). It seems as though these currencies continue to ultimately be driven by an ongoing reserve manager diversification away from the US Dollar. With the other major economies now looking less attractive, reserve managers could be looking to add more exposure to the baby majors through the purchase of the Australian Dollar, and Canadian Dollar. Still, we are less attracted to the fundamentals in Australia specifically, and feel that the economy and currency are at risk for a material pullback over the coming weeks and months. Unfortunately, as always, it is a question of timing.

We would cite the recent relative weakness in the Swiss Franc as some form of a potential proof for a warning of a reversal in the Australian Dollar. Despite their very different qualities and attractions, both currencies were highly correlated in 2010, standing out as the top performing major currencies against the buck. It therefore could stand to reason that as one currency starts to show signs of weakness, as we have been seeing with the Franc (and Yen), the other could very well follow suit. More specifically, the softer economic data out of Australia, a less aggressive central bank, tighter China monetary policy, uncertain outlook on the global recovery, and signs of a Fed policy reversal, should all in theory weigh on the antipodean. But for the time being, it seems as though the reserve diversification and attractive yield differentials are what continue to drive this market higher.

Looking ahead, Eurozone consumer confidence, Swiss KOF and UK CBI reported sales highlight the economic releases in the European session, but broader macro themes and developments are expected to have a more significant influence on price action. US equity futures are tracking moderately higher into the European session while oil is lower and gold trades flat.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: A closer look at the weekly chart shows the market failing ahead of some key resistance from November 2010 at 1.4280 and reversing to confirm a bearish weekly close and break of a sequence of 5 consecutive weekly higher lows. This certainly warns of the potential for deeper setbacks ahead, and we initially will look for a daily close back below 1.4050 to provide further confirmation for reversal prospects. The 1.4050 level loosely coincides with some rising trend-line support off the 2011 lows and a daily close below this level could accelerate declines towards next key support by 1.3750 further down. Back above 1.4250 delays.

USD/JPY: The latest violent drop-ff to fresh record lows by 76.35 has been intense, with the market threatening a fresh longer-term downside extension below 80.00. However, given the nature of the move, we would not at this point categorize the downside break as anything significant that alters the medium-term outlook. For now, the sidelines are the best place to be and we will look to see where the market closes this week to gain a clearer perspective. A weekly close below 79.75 might open a retest of the 76.35 spike lows, but any additional declines below 76.00 are seen limited. A weekly close back above 81.20 on the other hand, would take the immediate pressure off of the downside.

GBP/USD: The 1.6300 handle continues to be a difficult obstacle for bulls, with the market unable to hold above the figure for any meaningful period of time. As we had warned in the previous daily analysis, the market has once again rejected trading above the figure to set up a bearish reversal exposing deeper setbacks into the 1.5700 area over the coming sessions. Ultimately, only back above 1.6300 delays.

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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