Currency Consolidation in Majors Still the Name of the Game

MORNING SLICES

FUNDYS

Employment data for February, came in much worse than expected in Australia, and this has opened a round of profit taking with the single currency looking like it could be setting up now for some across the board weakness. Meanwhile, the RBNZ has come out with their decision, and as widely expected, the central bank has left rates on hold at 2.5%. However, it was a more dovish than expected statement that has been generating some Kiwi weakness, after policy makers said that the economic recovery would remain “subdued” and that policy tightening may be less aggressive than in prior cycles.

Relative Performance Versus USD on Thursday (As of 11:25GMT) –

1)    STERLING    +0.52%
2)    AUSSIE         +0.08%
3)    SWISSIE       +0.07%
4)    EURO            +0.04%       
5)    YEN                +0.02%
6)    KIWI               -0.16%   
7)    CAD               -0.18%

Nevertheless, even in light of these negative Aussie and Kiwi developments, the commodity currencies only track marginally lower on the day and we suspect that some solid data out from China has helped to mitigate any negative sentiment. There has been a very strong demand to buy these higher yielding currencies on any form of a dip, with the yield differentials simply too attractive to ignore in a recovering global economy. However, these traders should proceed with caution, as we contend that the Australian economy is at risk for some disappointment ahead. Today’s worse than expected employment data is significant in our opinion, as it is the first time in several months where this data has come in below expectation, to perhaps warn of some more weakness ahead.

Sterling is by far the strongest currency on the day even in the face of warnings from the FSA that banks could be unprepared for a meltdown in the commercial real estate market. The Pound has been beaten down badly of late and today’s price action could be more reflective of some profit taking rather than any underlying fundamental justification for the strength. There was talk circulating of London fix related demand for Sterling.

Elsewhere, Japanese GDP was released, and came in slightly softer than consensus estimates, while Swedish inflation data was slightly firmer. The European economic calendar left very little to trade on, although there was some movement in the NOK after the Norges Bank came out with a more downbeat assessment for the economy. The ECB Monthly Bulletin was released but didn’t have any impact on the market, with more attention given to comments from ECB Mersch who said that although the economic recovery has begun, it will be an uneven recovery.

Looking ahead, the SNB is out into to North American trade at 13:00GMT, with their decision on rates. It is widely expected that the central bank will leave rates on hold at 0.25%.  Canada capacity utilization (70% expected), international merchandise trade (0.2B expected), and new house price index (0.4% expected) are due out at 13:30GMT, along with the US trade balance (-$41B expected), initial jobless claims (460k expected), and continuing claims (4500k expected). On the official circuit, Fed Dudley speaks to London economists at 19:00GMT. US equity futures point to a lower open, while commodities trade flat.

GRAPHIC REWIND

 
TECHS

EUR/USD Setbacks have stalled for now ahead of  1.3400 (61.8% fib retrace of the 2008-2009 low-highs), and although the overall structure remains bearish, the market looks as though it may be attempting to carve out a short-term base.  However, it is still too difficult to call and the market could just as easily be in the process of a bearish consolidation ahead of the next major downside extension below 1.3440. A break back below 1.3440 will expose a test by next psychological barriers at 1.3000, while a close back above 1.3700 delays and opens the door for some additional short-term corrective upside.

USD/JPY Has been very well supported on dips towards 88.00, and we look for the most recent sharp rebound to open additional upside over the coming weeks back above critical medium-term resistance at 93.75. Last Thursday and Friday’s impressive rally reaffirms our outlook and only a close back under 88.00 would ultimately negate and give reason for pause. 

GBP/USD Although the market remains locked in an intense downtrend, daily studies are in the process of unwinding from oversold levels. The risks from here are for some additional corrective relief, but ultimately, any gains should now be well capped ahead of 1.5200, where a lower top is sought out ahead of the next major drop below 1.4780.

USD/CHF The rally has finally stalled out for now ahead of 1.0900, with the market in the process of correcting from overbought levels. The risks from here are for some additional weakness back towards the 1.0500 area, from where a fresh higher low will be sought out ahead of the next major upside extension beyond 1.0900.

FLOWS

Fix related Gbp/Usd demand; Swiss bank on the offers. Spec accounts looking to buy Aussie and Kiwi on dips. Local names starting to bid up Usd/Cad. Large US investment name selling Eur/Usd towards 1.3700.

TRADE OF THE DAY

No Trade: No new recommendations at the moment and currently running open positions in Eur/Aud, Eur/Cad, and Gbp/Aud. We booked profit on our Gbp/Jpy long trade on Monday for 330 points.  
 

PORTFOLIO OVERVIEW

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