Markets always have a way of heating up in Thanksgiving week and this year is no different, with currencies coming under some serious pressure over the past few sessions as risk aversion themes take hold. Clearly, the dominant and primary driver of price action has stemmed from the Eurozone, with market participants unable to ignore the threat and fear of contagion from Ireland into some of the other local economies. Comments from Germany’s Merkel did not help matters after saying that the Euro faced an exceptionally serious situation, while intensified pressures from the Irish opposition party on PM Cowen added more fuel to the fire to ultimately result in a major liquidation of Euro longs.
Geopolitics have also been playing a role, with the latest North Korean actions (in which the country shelled a South Korean island) prompting additional safe haven buying across the board. Global equities have been hit hard on these developments and it is also no surprise to see the higher yielding antipodean currencies stand out as relative underperformers. Although currencies have recovered a bit on Wednesday, with the Australian Dollar leading the way in early trade, it is well worth noting that Australian construction data came in significantly weaker than expected and given the current market environment, selling the Australian Dollar into rallies would be our preferred strategy. To add further strength to this bearish Aussie argument, we must also not forget another major theme in the markets right now which is efforts by China to rein in inflation by tightening policy. These actions will only act to slow down growth which will also have a negative impact on an Australian economy heavily reliant on China growth for its own prosperity. As such, we expected to see the Aud/Usd market very well offered on rallies into the 0.9850-0.9900 area.
Looking ahead, German IFO data (business climate – 107.5 expected, current assessment – 110.4 expected, expectations – 104.7 expected) is due at 9:00GMT, followed by UK GDP (0.8% expected) at 9:30GMT. Eurozone industrial new orders (-2.5% expected) cap things off for the session at 10:00GMT. US equity futures and commodity prices are recovering a bit into the European open, but at this point the price action can only be classed as corrective.
Written by Joel Kruger, Technical Currency Strategist
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