Article / 19 August 2013 at 11:27 GMT

The penultimate summer doldrums week ahead

John J Hardy John J Hardy
Head of FX Strategy / Saxo Bank
Denmark

It’s the second-last week of what tends to be the slowest month of the year, with the Reserve Bank of Australia (RBA) meeting minutes tonight and those from the Federal Open Market Committee (FOMC) on Wednesday poised to keep us engaged near important support for the greenback.

This week is about whether the mean reversion theme holds here as we’re entering the final two weeks of the “summer doldrums” ahead of what should be a very eventful autumn and winter. The German election and the potential for the slowing of Fed accommodation are on the way next month, not to mention the anticipation of the nomination process for the new Fed chairman. The dollar has put in a miserable performance, but with so many uncertainties looming, one wonders whether any directional move can extend until we are on the other side of these key event risks.

The most impressive performance over the last ten days of my absence from the markets has to go to the Japanese yen. The currency has failed to set off any technical fireworks, but its relative resilience in the face of two-year highs in US long yields is impressive and one wonders at the potential for further strength should bonds find support and at the same time, if equities begin to more thoroughly digest the withdrawal of Fed accommodation and/or rising bond yields.

The Bundesbank was out in its monthly report today saying that the European Central Bank could raise rates if inflation pressure increases, triggering a fresh rally in Euro crosses as the amazingly tone-deaf German central bank seems happy to throw another log on the strong euro fire.

Chart: USDJPY
USDJPY is very much in the range at the moment, but the battle lines are fairly clearly drawn, particularly to the upside, where the Ichimoku daily cloud and the local descending trendline are conspiring to make things interest if the pair rallies through this area, though the larger descending trendline will take some time to get down to this area.

usdjpy


Looking ahead
The RBA is on tap tonight with its latest round of minutes. Market conditions have been fairly AUD-supportive of late as commodities have remained strong. However, there is potential for a pivot back lower on the minutes if they prove particularly dovish as we’ve seen a tendency of talking down the currency whenever the opportunity has been provided to RBA chief Glenn Stevens and company. Already today, we’ve seen a fresh attempt above 0.9200 in AUDUSD rejected, so the pair may already have played out its upside potential until proven otherwise.

Elsewhere, it’s a wait for the FOMC minutes, though I’m wondering what the market is looking for considering that it seems the September taper expectations are already priced into most discussions of the Fed’s intentions. It’s more important to ponder the uncertainty of a new Fed chairman, one would think. The Fed’s Jackson Hole conference is also due this week, though expectations are extremely low with few speakers of interest attending.

Technical and trading observations
EURUSD – the strong reversal last Thursday suggests the upside remains the side of least resistance until proven otherwise, but at the same time, we’ve got fairly hard overhead resistance looming in the 1.3400-20 area. Those looking to short might consider waiting for a test higher and a tactical reversal around that 1.3400 level or to sell if the 1.3250 area falls again and negates last week’s rally. Longs should be involved down to 1.3300 for a modest test higher.

GBPUSD – cable has become far too ambitious, but there is still room for a full test of the 1.5750 area highs from earlier this summer.

EURGBP – would expect a test of the 0.8455 area 200-day moving average, but watch out for consolidation potential ahead of or after the UK GDP data on Friday.

USDJPY – 98.75 is key Ichimoku resistance and a bit of a descending trend-line area, and we need to see a rally through there to trigger fresh long interesting. Meanwhile, sub-97.00 is needed to wake up the downside potential again. Looks very indecisive here locally and we may need to see the other side of the FOMC minutes for further developments.

USDCAD – looking for a rally out of the recent indecision. 1.0300-1.0250 is the important zone of support and we need an eventual move above 1.0450 to get out of the local range, though 1.0400+ would be a good start.

USDCHF – key support down to 0.9200. I strongly prefer for support to hold. At the same time, the chart looks fairly miserable structurally until the 0.9350-0.9400 area is taken out again.

Upcoming Economic Calendar Highlights (all times GMT)

  • Australia RBA Minutes (01:30)
  • Japan Jul. Nationwide Department Store Sales (05:30)

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