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Opening Comment 05.06

Opening Comment 05.06

2010-05-06 05:24:00
Joel Kruger, Technical Strategist
Global equities have been dropping intensely, while commodities have also come under pressure led by crude losses. There are however some currencies which have held up quite well on a relative basis, with Sterling, Aussie, and now Kiwi, retaining a strong bid tone against the Euro, despite the elevated risk aversion and flight to safety trade. 
The New Zealand Dollar is the star performer on the day and stands well above the other currencies after a much stronger and shocking unemployment result fueled some heavy buying in the single currency, with many investors reconsidering their outlook for an RBNZ, which had recently indicated that it would be on hold for a longer period of time than had been thought. The latest data release has dramatically increased the likelihood for a more near-term rate hikes from the NZ central bank and as such, the currency has benefitted materially despite broader global macro themes which might normally weigh. 
Sterling has also held up quite well, as evidenced by the heavy selling in Eur/Gbp, with the pound managing to find some bids on the crosses, even with the threat of a hung parliament and declining oil prices. Meanwhile, the Australian Dollar has also managed to hold its own, despite a weaker round of data in the form of soft retail sales and a wider than previous trade deficit. 
The level of confidence in the Euro is staggeringly low, and European officials will need to do something to offer some form of support and reassurance in the coming hours, otherwise, there is a very real risk to continued depreciation. The ECB is set to meet later in the European session at 11:15GMT, and while it is more than widely anticipated that the central bank will leave rates on hold at 1.00%, all eyes will be on the post-decision Trichet press conference, which is sure to attract more than the usual amount of listeners. 
Overall, it is the interesting divergence in what had been familiar correlations that leaves us scratching our heads. The relative strength in the commodity bloc currencies continues to confound, with market participants seemingly apathetic to the fresh wave of broad based risk selling in relation to their long commodity currency plays. While we realize that the direct pressure right now is on the Euro, the fact that an exodus from the higher yielding and riskier currencies has not manifest as it has in the past, suggests that the notion of decoupling  is very much alive. Many of these investors apparently feel that the slowdown in the US and Eurozone will not heavily impact the economies of Australia, New Zealand and Canada. 
However, we remain very skeptical of this strategy and continue to see these currencies as highly overvalued and very much exposed to some relative weakness over the medium and longer-term. In our opinion, it is only a matter of time.  
Looking ahead, Swiss CPI (0.8% expected) is due at 7:15GMT, and this release could influence price action in a Eur/Chf cross which has been suspiciously flat-lining from several days on what can only be central bank intervention in light of the massive moves in the market. UK services PMI (57.0 expected) and UK official reserves then follow at 8:30GMT, with German factory orders (1.4% expected) capping things off at 10:00GMT, ahead of the 11:45GMT ECB event risk. US equity futures and commodity have paused for a breather and trade flat ahead of the European open. 

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

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