FX - US Dollar Starting to Gain Some Traction; More Gains Ahead for the Buck

Markets are well under pressure into Thursday, and the expected follow through from the previous weekly price action is starting to play out. At the end of last week, the US Dollar had mounted an impressive recovery rally across the board and was showing signs for additional gains into this week. Initially we had seen some consolidation in the early week, but things finally picked up again on Wednesday with risk aversion themes dominating trade and forcing a liquidation of currencies, equities and commodities. A combination of factors helped to propel US Dollar gains, with some concerning data out of China, a change in margin requirements by the CME, European sovereign debt woes, and hawkish rhetoric from Fed Kocherlakota all directing traffic towards the Greenback.

The Australian Dollar has been the hardest hit of the bunch, with the antipodean finding an additional wave of relative weakness early Thursday on the back of a much softer than expected employment report. The report showed a loss of 22.1k jobs versus forecasts for a 17k rise, while the participation rate was also lower than anticipated. While the data alone wouldn’t normally influence the RBA too much, surely the much softer employment along with weaker China data (and potential China rate hikes), and an escalation in risk aversion could get their attention. Any talk of imminent rate hikes at this point are seemingly off the table and we could very well see the Australian Dollar come under additional pressure over the coming days and weeks. Elsewhere, New Zealand manufacturing activity improved, while in Japan the current account slipped, with the effects of the quake attributed to the drop. Also out of Japan, the Nikkei reported that the MOF will likely slash its fiscal 2011 tax revenue.

Looking ahead, market participants will continue to focus on the broader macro themes, but some of the releases to look out for on Thursday include; the ECB monthly report, UK and Eurozone industrial production, US retail sales, producer prices and business inventories, and Canada housing data. On the official circuit, things are also quite busy with EU Juncker, ECB Gonzalez-Paramo, BOE Haldane, Fed Plosser and Fed Chair Bernanke al slated to speak. US equity futures and commodities prices are consolidating their latest declines.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: Setbacks have stalled for now ahead of critical support in the form of the higher low by 1.4155 from 18Apr. At this point, it is difficult to determine whether the market will look to consolidate the latest intense declines ahead of 1.4155 and possibly bounce a bit back towards the 1.4500 area, or will continue to decline and accelerate below 1.4155 to officially signal a shift in the medium-term structure in favor of the USD. Either way, the strategy from here should be to look to sell, with any rallies now seen well capped in the 1.4500 area. In the interim, we remain sidelined and await a clearer signal.

USD/JPY: After undergoing a fairly intense drop off from the 85.50 area several days back, the market looks to have finally found some support by the bottom of the daily Ichimoku cloud and could be in the process of carving out some form of a base. Look for setbacks to continue to be well supported in the 80.00’s with only a close back below 79.50 to give reason for concern. From here we see the risks for a fresh upside extension back towards the recent range highs at 85.50 over the coming days. Wednesday’s daily close back above 81.00 provides additional confirmation.

GBP/USD: Setbacks have stalled out by the 50-Day SMA for now and the market has since been locked in some consolidation between 1.6300-1.6500. At this point, it is difficult to establish a clear short-term directional bias, and we will look for a break back above 1.6500 or below the 50-Day SMA for clarity. Until then, we remain on the sidelines.

USD/CHF: Starting to show signs of basing off of the recently established record lows by 0.8550, with the market putting in a solid bullish close on the weekly and now breaking back above the previous weekly high to end a sequence of consecutive weekly lower tops. Next key resistance comes in by 0.9000 and a break above will further confirm recovery structure and open the door for a move back towards a medium-term lower top at 0.9340. Look for any intraday setbacks to be well supported above 0.8700 on a daily close basis. Ultimately, only a daily close back below 0.8700 delays and gives reason for concern.

Written by Joel Kruger, Technical Currency Strategist

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