Article / 06 March 2012 at 15:01 GMT

USD rally taking out important levels

Head of FX Strategy / Saxo Bank

The USD rally has taken back key levels against most of the other major currencies. The next step is how how the market treats the major event risks on Thursday and Friday.

Yesterday I warned of Aussie complacency, and although the RBA did very little to suggest that it was anything but happy to maintain a “wait and see” stance, the Aussie fell overnight as interest rate expectations for the RBA fell, and as Asia saw a very nasty session of risk-off in its equity markets, a development that carried through into European hours as well. The key phrase in the RBA statement after a long paragraph outlined the mildly sanguine outlook was “Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy."

The other factors affecting the Aussie outlook I covered in my update yesterday, and we also note Steen Jakobsen’s points on China in today’s macro update as possibly key in creating what may finally turn out to be the structural top in Aussie vs. the rest of the major currencies, something I’ve been crying wolf about for far too long (and been wrong on before due to the market’s continued embracing of achieving nirvana via the world's central bank printing presses.)

The kiwi was even weaker than the Aussie earlier today, though I’m not sure I understand why, as going forward, the RBA has far more beta to the market in terms of the potential delta in the interest rate outlook, though one can argue that the kiwi’s Achilles heel is its thin liquidity if the risk aversion in the markets deepens. It is interesting to note that the entire rally in AUDNZD from the Asian session was unwound today, which may suggest that the Aussie will remain the highest beta currency.

Forceful USD rally
The USD rally has become a far more convincing affair today, as key levels have been taken back nearly across the board (with the important exception of USDJPY as the JPY finally got over its swoon and has been by far the strongest currency this week, suggesting that when risk appetite sours sufficiently and bonds remain supported, the rebound potential of the JPY shouldn’t be written off). While we have a couple of important event risks coming up at the end of this week in the form of the ECB meeting Thursday and the US employment report Friday that could see the USD move consolidating after its vicious move here, we do not the following developments of note on the USD charts:

EURUSD plunged far deeper into the range today after only a very modest retracement to 1.3240 yesterday.

GBPUSD has taken out another support level just below 1.5800 and as the failed run above the 200-day moving average (1.5900) caps the action for now in that pair.

AUDUSD took out the 1.0600 level today and if it remains below that level, the focus may shift quickly to the 1.0400 200-day moving average.

USDCAD has fully eliminated the swoon below support to 0.9842 and is now challenging its 200-day moving average at close to parity and even above. The vehemence of the reversal shifts the view to the upside for now.

USDCAD squeezed all the way back up above the 200-day moving average and parity today, fully reversing the latest sell-off to below key 0.9900 area support and shifting the outlook back higher, even if the short term sees some consolidation. The next key objective is the old 1.0050/75 area that held all through FebruaryUSDCAD


USD/Scandies – today’s action suggests that when risk hits the skids, the Scandies aren’t ready to act as safe havens of note – USD/SEK and USD/NOK positively screamed higher on the day as the Scandies were the weakest currencies among the G-10.

Gold is getting absolutely creamed in what is perhaps a complacent positioning clear-out as the 200-day moving average fell (at 1680) intraday.

…except for against the JPY…
USDJPY has run in the opposite direction as the JPY consolidated sharply against the market, even taking back plenty of territory against the greenback while the latter is actually quite strong. The going for the JPY crosses may be rocky heading into the end of the Japanese financial year at the end of this month and in general, I would expect that as long as oil prices remain under control and interest rates fail to head sharply higher, the JPY may range trade at worst and take back further territory against especially the pro-risk currencies and Euro at best as we . For USDJPY, 80 is the first big psychological level to test, while there is more room for maneuver in some of the other crosses. Note the asymmetric volatility risk in JPY crosses – NZDJPY took out two weeks of gains in the space of two days. This is a typical pattern that has been seen before.

Looking ahead
Going into the US equity market open, the S&P futures were already down more than they were on any day (daily close to close, at least) in almost three months. This is the classic way for the grinding higher/no real retracement moves like the one we have seen since mid-December to consolidate. The two-way volatility is vicious in such markets, also for currencies, though there hasn’t been much of an uptick in implied vols in recent days. Still, traders beware.

Tonight we have a couple more data points out of Australia to put a further spin on how things stand, though the bigger focus is on the country’s employment report on Thursday’s employment report, as the jury is still out on whether an uptrend in the unemployment rate is unfolding or not. So far, it has appeared that the rate has stalled there after rising slightly last summer – though the easing lower in the rate since is largely a product of a lower participation rate rather than more jobs in the Australia economy. Considering the last terrible services survey data, we should expect the employment data to begin to go the wrong way.

The ECB is up Thursday as well, and despite articles like this one from the Telegraph’s Evans Pritchard (in which he discusses Spain’s defiance of the German disciplinary approach to the current situation because of the enormous pain being felt already in the Spanish economy), the ECB has done its part to suppress sovereign bond yields and is likely ready to take a step back and declare that from here on out, the situation is a one for the politicians to solve (which is true!). That is - with one important possible exception: the ECB interest rate. The market is predicting no ECB move to lower rates from the current 1.00% level – though there is certainly room for surprise in this area, as a solid minority, including ourselves, suspect that Mr. Draghi would be happy to pull the lever a couple more times to take the rate to 0.50% this year so no one can say that he didn’t try everything to bail out the economy.

Stay tuned and stay very careful out there.

Economic Data Highlights

  • Australia Q4 Current Account Balance out at -8374M vs. -8050M expected and -5824M in Q3
  • Australia RBA left Cash Target Rate unchanged at 4.25% as expected
  • Norway Q1 Consumer Confidence out at 15.5 vs. 9.8 expected and vs. 13.0 in Q4
  • UK Feb. Halifax House Prices out at -0.5% MoM and -1.9% YoY vs. +0.3%/-1.6% expected, respectively and vs. -1.8% YoY in Jan.
  • Euro Zone Q4 GDP out at -0.3% QoQ and +0.7% YoY as estimated in the preliminary estimates and vs. +1.3% YoY in Q3

Upcoming Economic Calendar Highlights (all times GMT)

  • Canada Feb. Ivey Purchasing Manager Index (1500)
  • Australia RBA’s Lowe to Speak (2130)
  • US Weekly API Crude Oil and Product Inventories (2130)
  • Austarlia Feb. AiG Performance of Construction Index (2230)
  • UK Feb. BRC Shop Price Index (0001)

Australia Q4 GDP (0030)


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