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Australian Dollar Standout Ourperformer in Otherwise Quiet Tuesday Trade

Australian Dollar Standout Ourperformer in Otherwise Quiet Tuesday Trade

2012-02-07 12:00:00
Joel Kruger, Technical Strategist
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  • RBA catches markets off guard and leaves rates on hold
  • Central bank maintains dovish tone but Aussie well bid on news
  • Euro/Aussie cross rate drops to yet another record low
  • RBA decision in question and we feel was mistake to not cut
  • Greek talks linger on; still no agreement; increases risks of default
  • SNB Jordan reaffirms central bank commitment to defend 1.2000 floor
  • German data worse than expected

The decision by the RBA to leave rates on hold at 4.25% has been the highlight of day thus far, after the central bank caught market participants off guard and did not cut by 25bps as was widely anticipated. Although the central bank kept their accompanying language on the dovish side, the fact that they kept rates on hold was certainly taken as a huge Aussie bullish development, and opened the door for a surge in the commodity currency across the board. The Euro/Aussie cross plummeted to yet another record low, as this rate continued to ignore the violently stretched longer-term technical studies which show the price dropping dramatically from over 2.1000 back in 2008 to the 1.2000 area thus far.

Relative performance versus the USD Tuesday (as of 12:35GMT)

  1. AUD +0.43%
  2. GBP -0.15%
  3. EUR -0.20%
  4. NZD -0.21%
  5. CAD -0.32%
  6. JPY -0.33%
  7. CHF -0.40%

While we do not recommend fighting this trend at present, we do believe that the decision today was a mistake and the central bank should have gone ahead and cut rates. The RBA has been very stubborn with its policy and willingness to adapt to the current global economic downturn and we once again feel that the central bank is at risk of falling behind the curve. Australian economic data as highlighted by recent employment and retail sales prints have been far from encouraging, while the housing market is also showing signs of cooling. This in conjunction with a Eurozone crisis and Chinese economy which is also at risk for an accelerated slowdown should in our opinion warrant a more aggressive accommodation from the central bank. We felt it was a mistake several months back when the RBA failed to cut rates, and sure enough they eventually responded and indeed began to cut. Here again we feel that it was a mistake to leave policy on hold, and eventually the impact of the decision will catch up with the Australian economy.

Elsewhere, the Greek deal deadline has come and gone and we still seem to be no closer to any formal agreement. The longer this takes, the greater the chances for a default and this could continue to weigh on the Euro going forward. At the same time, we feel that the risk correlated markets have also not responded appropriately to the ongoing economic crisis, and are at risk for a serious bout of liquidation over the coming sessions. US equities seem to be overdone at current levels, and we look for the major equity indices to soon roll over as uncertainty creeps back in and safe haven options become far more attractive. For now however it is a game of wait and see, and while we clearly do not recommend buying into risk correlated markets, we can also not yet advise selling risk as markets are not yet confirming, despite our less than optimistic outlook.

Moving on, the EUR/CHF cross rate found some bids in Europe after SNB Jordan was out proclaiming the central bank’s firm commitment to defend the 1.2000 floor. However, the ensuing rally was not too convincing with the market failing to mount an immediate challenge on 1.2100. Looking ahead, testimony from Fed Chair Bernanke will likely be the key event in North America, with the economic calendar quite light. US equity futures are tracking moderately lower ahead of the North American open.

ECONOMIC CALENDAR

Australian_Dollar_Standout_Ourperformer_in_Otherwise_Quiet_Tuesday_Trade_body_Picture_5.png, Australian Dollar Standout Ourperformer in Otherwise Quiet Tuesday Trade

TECHNICAL OUTLOOK

Australian_Dollar_Standout_Ourperformer_in_Otherwise_Quiet_Tuesday_Trade_body_eur.png, Australian Dollar Standout Ourperformer in Otherwise Quiet Tuesday Trade

EUR/USD: Although gains in this market have been quite impressive in recent days, the price action is still classified as corrective with the market locked in a broader underlying downtrend. From here we would still leave the door open for additional upside to test the 100-Day SMA by 1.3340, but any additional gains should be well capped below 1.3500 on a daily close basis in favor of the formation of the next major lower top ahead of bearish resumption. Ultimately we see risks for a move back below the 2012 lows at 1.2620 and towards the 1.2000 area over the coming months. A daily close back under 1.3025 would suggest that a lower top is now in place and open a more immediate bearish resumption.

Australian_Dollar_Standout_Ourperformer_in_Otherwise_Quiet_Tuesday_Trade_body_jpy2.png, Australian Dollar Standout Ourperformer in Otherwise Quiet Tuesday Trade

USD/JPY:The market could once again be looking to carve an interim base after setbacks stalled shy of the record lows from October by 75.55. A bullish reversal day from last Friday has shown some decent follow through and a daily close back above 77.00 will do a good job of alleviating immediate downside pressures and reintroducing longer-term basing prospects. Inability to establish back above 77.00 will however keep the focus on the downside and on a retest of the record lows.

Australian_Dollar_Standout_Ourperformer_in_Otherwise_Quiet_Tuesday_Trade_body_gbp2.png, Australian Dollar Standout Ourperformer in Otherwise Quiet Tuesday Trade

GBP/USD: The latest break back above 1.5800 now compromises a multi-week consolidation, with the pair now looking to break towards next key resistance by 1.6000. However, despite the upside move, we see any additional gains from here as limited and would look for a topside failure somewhere ahead of 1.6000 in favor of a bearish resumption. Daily studies confirm and look stretched and selling rallies above 1.5900 over the coming sessions is the preferred strategy. A close back under 1.5750 will also suggest that the market has peaked out for now in favor of bearish resumption.

Australian_Dollar_Standout_Ourperformer_in_Otherwise_Quiet_Tuesday_Trade_body_swiss1.png, Australian Dollar Standout Ourperformer in Otherwise Quiet Tuesday Trade

USD/CHF: Although our overall outlook remains intensely bullish, the market is in the process of some interday consolidation before the next major upside extension beyond 0.9600 and towards parity. However, with the latest consolidative declines now finally testing the 100-Day SMA, any additional downside should be limited in favor of a fresh upside extension. Ultimately, only a daily close back below 0.9000 would give reason for concern. Alternatively, a close back above 0.9250 would alleviate immediate downside pressures and reaffirm outlook.

--- Written by Joel Kruger, Technical Currency Strategist

To contact Joel Kruger, email jskruger@dailyfx.com. Follow me on Twitter @JoelKruger

To be added to Joel Kruger’s distribution list, send an email with subject line “Distribution List” to jskruger@dailyfx.com

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