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USD Under Pressure But Should Find Renewed Bids; Sell Aussie 1.0630
Written by article default Wednesday, 17 August 2011 11:25
- Broad US Dollar selling resumes and could continue for a little more
- Gold remains well bid and contemplates establishment back above $1800
- Bank of England Minutes show unanimous 9-0 vote for current policy
- BOE hawks defect back to neutral territory
- UK employment data comes in softer than expected
- Usd/Jpy poised for break to fresh record lows
- Aud/Usd SELL recommendation issued
- Eurozone inflation data comes in slightly softer than expected
A day of minor reprieve for the US Dollar has now come and gone and Wednesday’s price action has brought with it a resumption of broad based selling on the Greenback. Price action on Wednesday thus far has however been somewhat more peculiar as correlations stand, with no real uptick in positive risk sentiment which might normally correlate to USD weakness. In fact, at the time of print, most major equity markets were tracking lower on the session, while gold was a good deal higher and threatening the establishment back above $1800.
Relative Performance Versus the USD on Wednesday (as of 10:20GMT)
- CHF +1.09%
- AUD +0.41%
- JPY +0.30%
- CAD +0.18%
- EUR +0.17%
- NZD +0.01%
- GBP -0.16%
Even the Pound has held up quite well against the buck despite a more dovish Bank of England Minutes which revealed a 9-0 vote in favor of currently monetary policy. Former hawks Dale and Weale were seen defecting back into the neutral camp after the prospect for rate hikes had been erased in recent weeks given the downturn in the local and global economy and a more contained inflation outlook. Employment data out of the UK on Wednesday also confirmed the more dovish policy outlook, with the data coming in on the whole weaker than expected and revealing a tick up in the unemployment rate. As far as expansion of the asset purchase program was concerned, while BOE Posen remained the sole member voting for expansion, it was clear that other members were starting to lean in that direction.
Moving on, it is certainly worth keeping a close eye on price action in Usd/Jpy which looks like it could finally be ready to take out the record lows from March by 76.25 and accelerate to the downside. However, given that the market is trading at uncomfortably low levels, we are not too confident that any additional declines will extend much below 75.00 with Japanese officials becoming quite vocal in recent weeks on the excessive appreciation in the Yen. The SNB has already taken some so far effective measures to prevent additional appreciation in the Franc, and should we see a drop into the 75.00’s in Usd/Jpy, we suspect that another round of intervention from the Bank of Japan will immediately follow.
While we do see risk for a little more USD depreciation over the coming sessions, we do not expect to see the Greenback slide much further before once again reasserting. Although the Fed is committed to leaving rates ultra accommodative until 2013, we also need to be reminded that there is a reason for this and the reason is that the US economy needs more time to be able to recover from the latest major downturn. This downturn has rippled into the entire global economy and promoted a broader flight to safety mentality that should ultimately benefit the US Dollar as an attractive safe-haven investment. Additionally, with the other two safe-haven currencies now becoming less attractive given central bank intervention efforts, the USD buying could very well accelerate.
As such, we see risk related currencies the most exposed going forward and will be looking to aggressively sell the Australian Dollar into a rally above 1.0600 over the coming sessions (see “Trade of Day” below). The Australian Dollar is the highest yielding of the major currencies, and is therefore the most exposed from a risk liquidation standpoint. This coupled with a downturn in the Australian economy, more dovish central bank, and fears of a slowdown in China make the trade all the more compelling.
Other data released in the overnight session included some slightly softer eurozone inflation readings which should be a welcome sign for a European Central Bank that would like to be able to avoid having to raise rates amidst a major European debt crisis. Looking ahead, US producer prices highlight the economic releases in North American trade, while on the official circuit, we will continue to get more color from Fed members with the hawkish and dissenting Fed Fisher scheduled to speak.
ECONOMIC CALENDAR
TRADE OF THE DAY
AUD/USD: The market is in the process of retracing the major drop off from the post-float record highs at 1.1080, with the price pushing back over the 50% fib retrace off of the 1.1080-0.9925 move by 1.0500 thus far. While there is certainly the possibility that gains will stall out somewhere in the 1.0500’s around the 50% fib, we suspect that the greater probability is for continued gains back towards a major confluence of resistance in the mid-1.0600’s, which comes in the form of the 20/50/100-Day SMAs and the 61.8% fib retrace off of the 1.1080-0.9925 move. Overall however we contend that any gains are corrective and would be looking for opportunities to sell in anticipation of the formation of a material lower top below 1.1080 ahead of the next major downside extension back below parity. STRATEGY: SELL @1.0630 FOR AN OPEN OBJECTIVE; STOP ONLY ON A DAILY CLOSE ABOVE 1.0800.
TECHNICAL OUTLOOK
EUR/USD: The market continues to adhere to a bearish sequence of lower tops since May, with a fresh lower top now in place by 1.4535 ahead of the next downside extension back towards and eventually below 1.4000. In the interim, look for any intraday rallies to be well capped ahead of 1.4500, while only back above 1.4535 negates. Short-term support now comes in by 1.4240 and a break back below should accelerate declines.
USD/JPY:Setbacks have stalled out just ahead of the 76.25 record lows from March, with the market dropping to 76.30 ahead of the latest reversal. Given that we are seeing the rate by record lows, we would not at all be surprised to see the formation of a material base in favor of significant upside back towards the 82.00 area over the coming sessions. However, the overall structure still remains bearish and it will take a break back above 80.00 to officially alleviate downside pressures and confirm reversal prospects. Short-term resistance comes in by 77.30 and a daily close above will encourage bullish reversal prospects. Below 76.25 negates.
GBP/USD: The market remains locked in a broader downtrend off of the April highs, and a fresh lower top is now sought out somewhere ahead of 1.6550 in favor of the next downside extension back towards the recent range lows at 1.5780. Ultimately, only a break back and close above 1.6550 would delay bearish outlook and give reason for pause, while back under the 200-Day SMA at 1.6090 should accelerate declines.
USD/CHF: The latest sharp reversal off of record lows just shy of 0.7000 is encouraging and could finally be starting to signal the formation for a major base. Weekly studies are also confirming with the formation of a very bullish bottom close. From here, look for an acceleration of gains back towards the 0.8500 area over the coming days with setbacks expected to be well supported above 0.7500 on a daily close basis.
Written by Joel Kruger, Technical Currency Strategist
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