USD Rally Stalls Out for Now; Can the Buck Extend Gains from Here?
The Greenback recovery has stalled out for the time being and markets have been mostly consolidating since the North American close. Many have now been talking about the return of the Chinese markets tomorrow following their new year holiday and this could be an important theme into the middle and end of the week. China has been riddled with rising inflationary pressures and has been forced to react through a tighter monetary policy. Another rate hike from the PBOC could therefore be around the corner and generally, these moves are not taken as an overall global macro risk positive. There is an inverse correlation between China rate hikes and overall growth, and we would expect to see currencies come broadly under pressure against the US Dollar should the PBOC move again over the coming days. In this scenario, the Australian Dollar would be most at risk, while the other commodity currencies would suffer as well.
The Australian Dollar has actually been very well bid of late, with the market trading just under some critical post float record highs from late 2010 at 1.0260. But in our opinion, the relative strength is highly suspect and data out of the region certainly has not been all supportive of late. The latest retail sales showing was concerning, while NAB business conditions released on Tuesday have also been much weaker than previous. Granted, NAB business confidence was better, but overall, we are certainly seeing some form of a top in the Australian economy (as reflected through RBA monetary policy as well). The question now becomes when and not if the antipodean will undergo a major round of selling.
Elsewhere, the Pound continues to be a relative outperformer and is once again one of the stronger currencies thus far on Tuesday. The strength in the single currency has come from some better than expected BRC retail sales and RICS house price data, and a recent shadow MPC vote which resulted in a 5-4 decision to hike rates. There are however some solid offers in Cable ahead of 1.6185 and the market would need to break back above 1.6300 to open the door for fresh upside. Still, we do see the potential for the UK currency to outperform against many of the other major currencies over the coming weeks.
Looking ahead, the economic calendar in Europe is once again quite light with Swiss unemployment (3.8% expected) due at 6:45GMT, followed by German industrial production (0.2% expected) at 11:00GMT. Things pick up a bit into North America with US NFIB small business optimism out at 12:30GMT, followed by Canada housing starts (173.5 expected) at 13:15GMT. US IBD/TIPP economic optimism is then out at 15:00GMT. On the official circuit, Fed Lacker speaks on the topic of the economy at 13:45GMT, while Fed Lockhart speaks a little later in the day at 18:00GMT. US equity futures and commodity prices are flat and consolidate their latest moves.
EUR/USD:Right now it is all about the weekly chart with the market putting in a bearish doji weekly close two weeks back and now putting in a bearish gravestone-like close this past week. This helps to increase potential for a major reversal with a medium-term lower top now sought out by 1.3860 ahead of the next major downside extension. For now, look for a daily close below 1.3540 to accelerate declines, while any rallies into the 1.3750 area should be well capped. Only back above 1.3860 delays and gives reason for pause. Intraday rallies are expected to be well capped ahead of 1.3800.
USD/JPY: Despite the latest setbacks below 82.00 which had put the pressure back on the downside, the market remains well bid on dips towards 81.00. Last Friday’s price action was highly constructive, with the market putting in an intense bullish outside day which consumed the previous 4 daily ranges. From here, we look for continued upside back towards 83.70 over the coming sessions, with a break above to accelerate towards more critical resistance at 84.50. Any setbacks should be well supported ahead of 81.50 with only a daily close back below 81.00 to negate.
GBP/USD: Bearish reversal formations don’t get much prettier than the one seen last Thursday with the market putting in a bearish outside day after stalling out just ahead of key psychological barriers and range resistance by 1.6300. The formation is almost too pretty, but a break and close below 1.6120 on Friday helped to confirm topping and should open the door for a more significant pullback towards the 1.5800 area over the coming sessions. Look for any intraday rallies to be well capped ahead of 1.6200 on a close basis, with setbacks seen accelerating on a drop back under 1.6035.
USD/CHF: Although the market remains under some intense pressure with the latest declines stalling just shy of the late 2010 record lows at 0.9300, inability to establish fresh record lows followed by a break back above 0.9500 leaves us constructive with our outlook from here. Friday’s daily close above 0.9540 confirms and should help to accelerate gains. Any intraday setbacks should now be well supported ahead of 0.9450.
Written by Joel Kruger, Technical Currency Strategist
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