Australian Dollar Posts Fresh 2009 Highs; Sterling Weighed on Downbeat Inflation Report

MORNING SLICES

Fundys – Any favorable Sterling reaction to some initial broad based USD selling and a much better than expected claimant count, has been easily offset by a much more downbeat Bank of England Quarterly Inflation Report which ultimately still expresses great concern for the medium-term outlook of the UK economy. BoE Governor King has only exacerbated the Sterling deterioration after welcoming a weaker Pound to help with the economic recovery. This has collapsed Sterling into the weakest performing major currency slot on the day as investors look to pare back Sterling longs across the board. Elsewhere, the Australian Dollar has been generating some headlines after the single currency managed to surge to fresh 2009 highs on Wednesday. The market had been supported by some encouraging industrial output readings from China, record highs in gold and some early aggressive USD selling. However the pair has not been able to muster any significant momentum beyond 0.9330 and has since topped out just ahead of 0.9345. While industrial output figures were encouraging in China, the more subdued Chinese loan growth reading and a decline in Australian Westpac-MI consumer confidence could not be ignored and helped to keep the higher yielding currency at bay. Kiwi was also initially bid up on similar themes, but got whacked even harder, with the added weakness coming from the RBNZ Governor who said that the local currency was overvalued.
   
Relative Performance Versus USD on Wednesday (As of 11:15GMT) –

1)    CAD             +0.41%
2)    SWISSIE     +0.38%
3)    EURO           +0.35%
4)    AUSSIE        +0.16% (Fresh 2009 highs)       
5)    YEN               -0.16%
6)    KIWI              -0.24%   
7)    STERLING    -0.50%

It is also worth noting that the USD weakness on Wednesday has resulted in a fresh 2009 low for the USD Index which traded down into the 74.70’s thus far. However, if the buck can manage a recovery into the latter half of the day, this would set up the potential for a compelling bullish outside day, should the market be able to press higher and take out Tuesday’s high by 75.25. Elsewhere, Usd/Jpy dropped sharply to a daily low by 89.30 on reported selling from various Japanese and US names linked a USD42B bond redemption due on November 15. But the pair soon recovered back towards opening levels after failing to clear stops below 89.20. There are a flurry of stops built up above 1.5065 in Eur/Usd and we would not rule out the potential for dealers to look to take advantage of the lightened Veterans Day (Remembrance Day in Canada) holiday trade to gun these stops into the US session.

On the official front, Treasury Secretary Geithner has become a little more aggressive with his line on the USD after now saying that he “believes deeply” that the US will keep a strong Dollar. This is somewhat significant with the Treasury Secretary changing the more mainstream USD supportive government rhetoric that has done little to prop the USD over the past several years. Also seen out in support of the USD has been the World Bank’s Zoellick who says that the USD reserve currency status is secure for some time.

Looking ahead, with the exception of a very secondary release in the form of Bloomberg global confidence due at 12:00GMT, the calendar in North America is empty for the Veterans Day and Remembrance Day holidays. The bond markets are closed and this should make for a thin session of trade. Nevertheless, this does not suggest that things won’t be volatile, with plenty of room for choppy trade in light of the opened US equity markets. US equity futures point to a firm open, while commodities are also bid, led by record highs in gold.

Graphic Rewind -
 

Techs - EUR/USD The story here continues to be about the 50-Day SMA (1.4740) and its ability to prop any setbacks for a majority of the up-trend in 2009. The market has simply been unable to establish a close below the medium-term moving average to keep the bullish structure firmly intact. However, some stretched medium-term technical studies do warn of a major corrective pullback over the near-term and potential shift in the structure. While it is premature to get too aggressive at current levels, we have established a short on Monday by the 78.6% fib retrace off of the 1.5060-1.4625 move, in anticipation of a topside failure ahead of (or after just clearing) 1.5060 this week. For now, the key level to watch below comes in by 1.4940, with a break to potentially bring the 50-Day back into play. A close back above 1.5060 will delay outlook and threaten short trade. USD/JPY Difficult to determine whether we are undergoing some bearish consolidation within the broader underlying downtrend, or are in the process of carving out some form of a short-term base. We will stick to the latter for now with the market looking like it could be carving out an inverse head & shoulders base above 88.00. A break above 91.25 will help to reaffirm the prospects for the right shoulder, with a push back above the neckline by 92.50 ultimately required to confirm formation. A break above 92.50 should then open an h&s measured move upside extension towards 96.50. Back under 89.20 however will likely negate and shift focus back on downside and towards 87.15-88.00. GBP/USD Despite the latest surge, the market has been well confined to a prominent range that has defined price action for the past several months. Monday’s rally has stalled out shy of the 1.7040, 2009 highs, with the market being well capped by formidable internal range resistance in the 1.6800’s. Look for Tuesday’s reversal and break back below Monday’s 1.6610 lows to now potentially set up a resumption of setbacks towards a very well supported 1.6250 area over the coming days. Only a close back above 1.6745 negates.  USD/CHF We continue to retain a constructive outlook for the pair despite the underlying bearish trend with medium-term studies overextended and warning of a more meaningful corrective rally. While the 78.6% fib retrace off of the 1.0030-1.0335 move has now been overcome, this does not rule out the potential for a double bottom formation in the lower 1.0000’s to be confirmed on an eventual break back above 1.0335. For now, the market needs to initially hold above parity on a close basis and then break back above 1.0110 to get things going.      
 
Flows – Asian central bank and Middle Eastern bids in Cable on dips. Model accounts bidding Eur/Usd; Swiss private bank, EU semi-official and smart money on the offer. Central bank bids in gold.

Trade of the Day – Aud/Usd: Remains very well bid on any form of a dip with the underlying structure still grossly constructive. The market has most recently broken to fresh 2009 highs beyond 0.9330. However, given the overbought weekly studies, we are not entirely convinced of the current recovery rally and would not rule out the possibility for a major double top formation with the market failing to materially extend gains beyond 0.9330 and rolling back over through neckline support at 0.8905. The daily RSI has failed to confirm the latest bout of strength and we look for a break back below the current daily low at 0.9285 to confirm bias. STRATEGY: SELL @0.9280 (**Market currently above 0.9280; we are looking to sell downside break**) FOR AN OPEN OBJECTIVE; STOP 0.9410. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE ON WEDNESDAY. POSITION SIZE WILL BE 3X LEVERAGED.

P&L Update and Overview: Many of you have been asking for a way to better track trading results and open positions. In response to these requests and in an effort to be fully transparent, a simulated portfolio was created in June to track and mirror all recommendations and trades. Below is a return on equity curve since inception on June 1, 2009, along with an open and closed position tracker. I am hopeful that this will make things easier for you all.

Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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