Australian Dollar Knocked Off Pedestal

MORNING SLICES

FUNDYS

The entire Asian session of trade has been centered around the Australian Dollar which has come under some intense pressure following the decision by the RBA to leave rates on hold at 3.75%. The markets have taken this as a net bearish signal, with the accompanying statement adding to the selling pressure in Aussie after the central bank expressed concerns over mortgage rates, China monetary policy tightening, and the escalation in sovereign debt issues. While the RBA did still maintain an upbeat outlook for the local economy with a hawkish tone going forward, the concerns expressed were enough to knock the higher yielding antipodean off its pedestal.

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

1)    CAD               +0.31%
2)    EURO            +0.06%
3)    SWISSIE       -0.01%
4)    YEN               -0.18%       
5)    KIWI              -0.21%
6)    STERLING    -0.21%   
7)    AUSSIE        -1.30%

The attractive yields in Australia have made the local currency an outperformer over the past several months, but this could be coming to an end given the more balanced approach in the latest statement from the RBA. Cross rates like Eur/Aud and Gbp/Aud have been getting a lot of attention in recent days with many already selling the Aussie against these major currencies, in addition to the very apparent selling that has gone on against the USD. Elsewhere, New Zealand FinMin English has been on the wires with some relatively upbeat comments. While the FinMin concedes that the economic recovery will be patchy in the near future, his outlook for the local economy is encouraging and he expects the unemployment rate will soon begin to roll over.

In European trade, the USD remained under some mild pressure. Data was currency supportive, with German retail sales matching expectations, while UK construction PMI showed improvement and Eurozone PPI was firmer. No significant developments out from Greece, but there was some chatter relating to G7, with France vocalizing expectations that currencies would be discussed.

Looking ahead, pending home sales (0.6% expected) due at 15:00GMT is the only key release in the North American session. US equity futures and commodities are both very well bid heading into the US open.

GRAPHIC REWIND

TECHS
 

EUR/USD The objective from the 1.4200-1.4600 consolidation break has now been reached, with the market dropping sharply into the 1.3800’s on Friday ahead of the latest minor bounce. While our core view continues to favor additional downside, short-term technical studies are now oversold and warrant a much needed and healthy corrective bounce. At a minimum, look for a push back towards the 10-Day SMA by 1.4025, before even considering the potential for bearish resumption. Key short-term resistance comes in at 1.3980, and a break above will open an acceleration to the 10-Day SMA. Inability to break back above 1.3980 will however keep the pressure on the downside. Next major support comes in by 1.3745, the June 2009 lows.

USD/JPY The measured move objective off of the double top triggered on the break below neckline support at 91.25 has now been reached and although the overall trend appears to be grossly bearish at present, shorter-term technicals are starting to look a little stretched and could potentially be warning of a more significant upside reversal over the coming sessions. Key short-term resistance comes in by 90.90 and look for a break above this level to confirm basing and open a push back towards 92.00. Back under 89.00 negates and opens fresh drop.

GBP/USD The latest bout of consolidation has been broken, with the market easily taking out 1.6085, to accelerate declines and expose a direct retest of key medium-term support by 1.5700 over the coming days. While we would not recommend buying at current levels, daily studies are looking stretched and the risks from here are for a potential bounce back towards 1.6100 before bearish resumption towards 1.5700.

USD/CHF The latest break back above 1.0500 suggests that the market has now carved out a major base that exposes some fresh medium-term upside towards 1.1000 over the coming weeks. However, given the intensity of the run-up over the past few days from 1.0200 to 1.0600, a short-term corrective pullback can not be ruled out. Nevertheless, we would look to use any dips into the 1.0350-1.0400 region as a formidable opportunity to build on existing longs in anticipation of a higher low.

FLOWS

Short-term specs on the bid in Eur/Usd. Buy-side shops selling Aussie. Leveraged accounts on the offer in Usd/Cad; local accounts bidding on dips. US investment house buying Usd/Jpy aggressively.

TRADE OF THE DAY

No Trade: Nothing too exciting at this point. We will send something out if anything develops.

PORTFOLIO OVERVIEW
 

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 has been created to track our results on a daily basis. We are pleased to announce that our model generated returns of 50% in 2009. The return on equity curve seen below has now been reset for 2010.
 

Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
If you wish to receive Joel's reports in a more timely fashion, e-mail jskruger@fxcm.com and you will be added to the "distribution" list.

If you wish to discus this topic or any other feel free to visit our Forum page