Aussie/Cad Cross Surprisingly Stands Out on NFP Friday; Looking to Sell

FUNDYS

There is not a lot to talk about ahead of the European open, with the markets locked in some tight consolidation over the past several hours and seemingly content on waiting for the big release later today in the form of US non-farm payrolls. Currencies had been decently bid in Thursday trade, with the Euro being well propped by some upbeat comments from ECB President Trichet who said that the recent economy had been better than expected, and that he did not expect to see a double dip scenario.

Relative Performance Versus USD Friday (As of 9:30GMT)

1. KIWI+0.24%
2. EURO+0.12%
3. STERLING +0.08%
4. AUSSIE-0.01%
5. YEN-0.12%
6. CAD-0.18%
7. SWISSIE-0.21%

For now, traders should continue to keep a close eye on price action in the better bid Yen and Swiss Franc, with both currencies still trading near their recent highs against the USD. Famed doom and gloomer Roubini has been on the wires suggesting that should things get ugly, the USD Yen and Swissie pose better investment opportunities that gold. Elsewhere, according to a report in the China Securities Journal, China’s foreign exchange reserves are roughly allocated to 66% USD, 26% EUR, 5% GBP, and 3% JPY. This is always an important statistic, with China being the largest holder of foreign exchange reserves in the world. Meanwhile, European data releases were mostly in line with expectations with the only standouts coming from a softer UK services PMI and stronger Eurozone retail sales. On the official circuit, ECB Wellink was out suggesting that the central bank should start to consider normalizing monetary policy, while ECB Nowotny was more specific suggesting a path towards liquidity, collateral quality, and then a move to raise interest rates. ECV Draghi was also out on Friday adding that while the recovery exists, the state of the markets is still very fragile.

Looking ahead, the key risk for the day comes in the form of the US non-farm payrolls (-105k expected) release due at 12:30GMT. As things have been correlating (more difficult to predict of late), an upside surprise in the NFP data will likely result in USD, Yen and Swissie selling in favor of broader currency gains as market price in risk and increased prospects for a sustainable global recovery. However, a let-down in the NFP number will most likely have the opposite impact, with currencies coming under pressure against the USD, Swissie and Yen on the demand for lower yielding and safe-haven securities. In this scenario, we see the Yen benefiting the least, and the Swissie potentially benefiting the most as traders start to move away from long Yen positions in favor of a sounder safe haven play in the Swiss Franc. The Swiss economy has been looking significantly better than Japan’s and this makes the Franc a safer play.

Also out on Friday is ISM non-manufacturing (53.5 expected) due at 14:00GMT. On the official circuit, Fed Lockhart is slated to speak in Tennessee at 14:00GMT. US equity futures are flat, while on the commodity front, oil trades lower by some 0.50%, while gold is marginally higher. It is well worth noting that liquidity is expected to dry up rapidly following the release of US data as traders head for the exits to take in their final chance of sunshine for the long holiday weekend.

GRAPHIC REWIND

TECHS

EUR/USD:Despite the latest bounce back above 1.2800, the structure sill remains bearish with the market below the 18Aug 1.2925 high. A lower top is sought out below this key short-term resistance, to be confirmed on a break back below 1.2585 over the coming days. While a break back above 1.2925 would delay our bearish outlook, it will not force a shift, with additional rallies then seen well capped ahead of 1.3100. Nevertheless, overall price action remains quite choppy and we do not recommend any positions in either direction at current levels.

USD/JPY:While the market trades below the 20-Day SMAs on a close basis, the downtrend remains intact and deeper setbacks below 83.60 can not be ruled out. A close above the 20-Day SMA will be required at a minimum to offer some form of relief to downside pressures. The market has not closed above the 20-Day SMA since mid-June when the pair was trading over 90.00. A break below 83.60 will open a test of next key psychological barriers by 83.00.

GBP/USD:The market looks poised for a fresh drop following the latest bout of consolidation, with a lower top now confirmed by 1.5600, following the break back below 1.5370. Below 1.5370 now exposes a more meaningful drop to test next key medium-term support by the 100-Day SMA in the 1.5100 area. Ultimately, only back above 1.5700 would negate bearish bias and give reason for pause.

USD/CHF:Has finally managed to take out the yearly lows from January by 1.0130, with the market easily dropping below this level to 1.0065 thus far. However, any additional declines below 1.0065 are seen limited, with medium-term studies looking stretched. As such, we would be more inclined to be looking for opportunities to buy at current levels. For now, a break and close back above 1.0265 will be required to relieve immediate downside pressures.

FLOWS

Swiss name on the offer in Aussie ahead of 0.9150; model funds and US prime name on the bid. Talk of stops above 84.75 in Usd/Jpy. M&A related demand for Aud/Cad.

TRADE OF THE DAY

Aud/Cad: We said that we wouldn’t look to force anything given the expected drying up of liquidity due to the US long holiday weekend, but the price action in this cross is too compelling, with the market potentially looking to break to a fresh 2010 high beyond the current 2010 highs from January at 0.9635. Daily studies are now overbought, and the 78.6% fib retracement off of the major November 2009-June2010 move comes in by the current yearly highs in the 0.9630’s. As such, we do not expect rallies to extend much further, and while we would fully expect to see a break beyond 0.9635 at this point as markets tend to overshoot, any additional gains are not seen sustainable over the shorter term, with the greater likelihood for a bearish resumption. We have place our entry well above the current 2010 highs and projected ATR high to give us the best possible entry should the position trigger. Again, we are not looking to force anything here so will be happy to move on to the next trade if we don’t get a trigger on Friday. SELL @0.9675 FOR AN OPEN OBJECTIVE; STOP 0.9775. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE ON FRIDAY.

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

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