Relative Aussie Strength Opens the Door for Questions

MORNING SLICES

FUNDYS

While most of the major currencies have continued to sell off overnight, the Australian Dollar continues to stand out as an outperformer (only marginally weaker against the buck), with the single currency stubbornly refusing to accept the renewed bout of USD strength. Aussie bulls have been very hard to defeat over the past several months and part of the reason undoubtedly stems from the economy’s ability to consistently produce economic data with better than expected results. The latest batch of consumer confidence (earlier in the week) is no exception with the better than consensus reading once again helping to prop the antipodean.

Relative Performance Versus USD on Thursday (As of 11:00GMT) –

1)    AUSSIE        -0.40%
2)    SWISSIE      -0.48%
3)    EURO            -0.50%
4)    CAD               -0.50%       
5)    YEN               -0.53%
6)    KIWI              -0.83%   
7)    STERLING    -0.96%

However, we often wonder how much of the strength of the Australian Dollar is driven by the ability for data to exceed expectations, rather than on the actual data itself. In the charts below, we try to make our point more clear with a side by side comparison of unemployment data out of Australia and the United States over the past several months. A closer look at US unemployment data shows that analyst estimates are closely aligned with actual results. However, in Australia, the results have been much more interesting and somewhat misleading. The unemployment data in Australia has either well exceeded or matched expectations over the past several months, without ever disappointing. As such, we have a hard time taking results in Australia as seriously, with analysts consistently producing estimates that are well off of the actual readings. This has set up an artificial environment in which the Australian Dollar is arguably always in a position to benefit from the data. While we do not dispute some of the relative outperformance in the Australian economy, we would also recommend that investors take the price action in Aussie with a grain of salt. After all, how realistic is it to see expectations consistently exceeded, and if this is the case, what can be said of those analysts producing these estimates?

Charts created by Bloomberg - prepared by Joel Kruger

The European session has seen some mixed data on Thursday, with Swiss money supply coming in softer, German PMI slightly better, and Eurozone PMI weaker. Meanwhile, UK data was also mixed with public net borrowing improving, while mortgage approvals and money supply were weaker. The ECB Monthly Bulletin was released but failed to materially factor into price action. But the blowout of EMU bond spreads, highlighted by Greece, has weighed heavily on the Euro and continues to do so into Thursday. Elsewhere, Swiss ZEW investor sentiment has edged higher to better expectations.

Looking ahead, Canada wholesale sales (0.4% expected) are due at 13:30GMT, along with US initial jobless claims (440k expected) and continuing claims (4600k expected).  The US RPX is then due at 14:00GMT, followed by leading indicators (0.7% expected) and the Philly Fed (18.4 expected) at 15:00GMT. The Bank of Canada senior loan officer survey and business outlook for future sales cap things off at 15:30GMT. US equity futures and commodity prices have turned around and now trade in the red.

GRAPHIC REWIND
 

TECHS
 

EUR/USD A multi-day bearish consolidation has been broken, and more importantly, the market has finally broken below the 200-Day SMA to highlight what we contend to be a significant shift in the broader structure, which now favors additional USD strength over the medium-term. The consolidation high-lows had been roughly defined between 1.4200-1.4600, and we therefore look for the current down-leg to extend into the 1.3800’s over the coming days. Any rallies are expected to be well capped ahead of 1.4400, with only a break back above 1.4580 negating outlook and giving reason for pause.

USD/JPY Despite the latest bounce to 93.75, the pair still remains confined to a very strong downtrend off the April 2009 highs and any rallies should be limited. Falling trend-line resistance off of the April 2009 highs has been adhered to on the latest rally and a medium-term lower top could be in the process of carving below 94.00. Recent price action seems to be suggesting that we could be headed for underlying bear trend resumption after the market triggered a double top, with the break below neckline support at 91.25. This now projects a measured move downside extension towards 89.00 over the coming days.

GBP/USD Gains have stalled out by 1.6455 on Tuesday, with the market looking like it is now ready for bear trend resumption after the formation of a bearish gravestone doji-like candle. Key short-term support comes in by 1.6215 and we will look for a break below this level to confirm our bearish outlook and accelerate declines back towards critical medium-term support by 1.57001 over the coming days. While our short entry was missed on Tuesday, aggressive players may want to consider establishing shorts at current levels in anticipation of a 1.5700 retest. Stops should be placed on a close basis above 1.6500. 

USD/CHF The market is in the process of carving out a major base since dipping down below parity in November 2009. A higher low is now confirmed by 1.0130 following the latest break back above 1.0500 and this should now open a fresh upside extension back towards next key resistance in the 1.0700 area over the coming days.

FLOWS

US custodial and investment house selling Aussie. UK clearers large sellers of Eur/Usd and Gbp/Usd. Local accounts continue to aggressively bid Usd/Cad.
 

TRADE OF THE DAY

No Trade: Stopped out of Eur/Aud on Tuesday and currently long Eur/Chf and Eur/Gbp. Not looking to increase exposure at this point.

PORTFOLIO OVERVIEW

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