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John J Hardy
EURUSD has continued to fall this Thursday ahead of a key ECB meeting. Saxo's John Hardy isn't convinced we'll see parity, at least not yet.
Article / 04 February 2013 at 10:40 GMT

RBA up tonight – AUDUSD to get direction?

Head of FX Strategy / Saxo Bank
Denmark

AUDUSD performed its nineteenth nervous reversal on Friday, with a fake break below 1.0380 that was quickly reversed. Time for an RBA cut and a move through the 200-day moving average? 

The RBA is up in Asian hours overnight, with a reasonably large minority looking for a rate cut versus those looking for no move. I expect a cut eventually due to some very weak surveys out of Australia, where the economy is underperforming and the hopes for China may be overblown – especially in terms of real evidence on the ground in Australia, which can be considered a satellite of Chinese demand, especially now that the credit bubble days are over Down Under. A weaker than expected inflation figure also suggests increasingly likelihood of a rate cut. If we don’t get a rate cut tonight, we’re very likely to get one at the following meeting. Judging from recent moves at the front end of the yield curve in Australia, however, a rate cut tonight or even a move to suggest more likelihood of a rate cut soon, would be a considerable surprise.

Chart: AUDUSD
Friday saw another failed sell-off attempt for the AUDUSD pair keeps the 1.0340-1.0600 range of the last two and a half months or so intact. Although there has been much discussion of the risk on/risk off trade fading, I still believe that the only salvation for the Aussie as priced in this pair has been the enthusiasm for the carry trade and a general risk on environment. The future from here will be determined by whether the RBA either cuts or signals a cut and whether a new month brings new caution to asset markets or a continued melt-up (watch for those all-time high in Dow Jones industrials headlines in the coming days – we’re very close). To the downside, even if we break below the 1.0345 area low indicated, we’ve still got to work through the 200-day moving average just above 1.0300 to open up for a test of the 1.0150-ish longer term range low stretching all the way back to last summer (!). And the USD will likely need to put up a show of resistance against the Euro as well for a chunky downside move. The upside argument is a bit tough, but if the ECB signals an easier stance (and thus cools the EURAUD rally), risk appetite jumps further from current nosebleed levels, and the RBA signals no interest in changing its policy for now, we may be in for the melt-up scenario. Technically, the danger of the latter notches higher if 1.0500 gives way, but 1.0600 is the real key as it has thrice served as a key range resistance level.

AUDUSD

JGB’s and Japanese pension fund holdings
An interesting article over at Bloomberg discusses the possibility the Government Pension Investment Fund of Japan could consider a reweighting of its 67% historical weighting in Japanese government bonds. This as well as new highs for the cycle in US treasuries has helped drive USDJPY to a new high for the cycle above 93.00. The Japanese Government Bond 10-yr yield jumped to attention again overnight, with a (by JGB standards) significant rise of 3.5 bps. Can Abe tame the bond dragon once it is fully unleashed?

Looking ahead
Besides the RBA tonight, we have world services PMI data tomorrow and the BoE and ECB up on Thursday. The ECB is the most hotly anticipated event of the week as we all watch for whether Draghi sends any kind of signal on Euro strength – merely “observing with interest” or some stronger hint that suggests he and the ECB understand that a global currency war has been unleashed and don’t worry, it will do what is necessary when the time comes if the recent rate of appreciation continues. (It is too soon to expect anything specific – for now, we can merely look for intent and resolve). Or will he merely be sounding the alarm on the latter behind the scenes to EU politicians in the hopes that they take up the baton? The stakes are getting quickly higher here after a 3-month, 25% (!!) move in EURJPY and with EURUSD fast nearing painful levels. That being said – EURJPY is still almost 5% below its 10-year moving average, so the question is whether the speed of the move is more important than the outright level of the EURJPY.

Economic Data Highlights

  • China Jan. Non-manufacturing PMI out at 56.2 vs. 56.1 in Dec.
  • Australia Dec. Building Approvals out at -4.4% MoM and +9.3% YoY vs. +1.0%/+14.9% expected, respectively, and vs. +14.1% YoY in Nov.
  • UK Jan. PMI Construction out at 48.7 vs. 49.2 expected and 48.7 in Dec.
  • Euro Zone Dec. PPI out at -0.2% MoM and +2.1% YoY as expected and vs. +2.1% YoY in Nov.

Upcoming Economic Calendar Highlights (all times GMT)

  • US Dec. Factory Orders (1500)
  • New Zealand Q4 Average Hourly Earnings (2145)
  • Australia Jan. AiG Performance of Services Index (2230)
  • UK Jan. BRC Sales Like-for-Like (0001)
  • Australia Dec. Trade Balance (0030)
  • Australia Q4 House Price Index (0030)
  • China Jan. HSBC Services PMI (0145)
  • Australia RBA Cash Target (0330)

 

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