Australian Dollar At Risk for Substantial Declines As China Slows
- Aussie continues to show signs of underperformance
- RBA Minutes fairly positive but currency still offered
- Lower China equities factor into the price action
- Downbeat comments from BHP contribute to additional declines
- Fed speak later in the day should factor into price action
- US equities still look vulnerable at current levels
- Eurozone back in spotlight as concerns over Portugal emerge
- UK CPI higher than expected; CBI mixed
The Australian Dollar has been one of the most interesting currencies to watch over the past few sessions, with the risk correlated, higher yielding market unable to extend gains despite a healthy appetite for risk. We think the price action is actually quite telling and could be warning of a near-term pullback in risk sentiment given how well this currency has served as a proxy for risk in recent years. Despite a fairly positive RBA Minutes overnight, the currency is once again showing relative underperformance, with the market likely weighed down by a disappointing performance in Chinese equities.
Relative performance versus the USD Tuesday (as of 11:30GMT)
Also adding to weakness in the Australian Dollar have been some downbeat comments from the world’s biggest miner, with BHP warning that iron ore demand from China will likely flatten out . We still contend that a third phase of the global recession is now starting to materialize in China, and this will weigh heavily on Australia, other commodity bloc economies and emerging markets going forward. We therefore recommend keeping a close eye on cross rates like EUR/AUD, which has been beaten down in recent years and could be on the verge of a major structural shift and bullish reversal. Look for a push back above 1.2620 to confirm this outlook and likely accelerate gains back above 1.3000.
Moving on, the economic calendar on Tuesday is rather busy, but most of the attention will probably be placed on Fed speak later in the day when Fed Chair Bernanke and Fed Kocherlakota offer added insights into the future direction of monetary policy. US equity markets are also worth watching and we continue to contend that these markets are well overdone at current levels and subject to a significant bearish reversal. Look for a break and close below Monday’s lows to confirm our bias. Finally, concern and uncertainty are back on the rise in the Eurozone with an Irish Times piece warning that Portugal may be the next country to face a sovereign debt restructuring. This already follows downbeat comments from Pimco relating to the Eurozone and further adds to stress in the region. On the data front, most of the attention was in the UK where CPI came in hotter while CBI readings were mixed. The releases failed to materially factor into price action but could pose a bigger challenge ahead of the government budget tomorrow.
EUR/USD: The market has been well supported on the latest dip towards key support at 1.2975 and the subsequent bounce back above 1.3100 delays bearish prospects and opens the door for additional consolidation over the coming days. The key levels to watch above and below come in by 1.3300 and 1.2975 respectively and a break and close above or below will be required for clearer directional bias. In the interim we remain sidelined.
USD/JPY:The market is doing a good job of showing the potential for the formation of a major cyclical bottom after closing above the weekly Ichimoku cloud for the fist time since July 2007. This further solidifies basing prospects and we could be in the process of seeing a major bullish structural shift that exposes a move towards 85.00-90.00 over the coming weeks. At this point, only back under 77.00 would delay outlook and give reason for concern. However, in the interim, it is worth noting that gains beyond 84.00 over the coming sessions could prove hard to come by with shorter-term technical studies needing to unwind from their most overbought levels in over 10 years before a bullish continuation. As such, we would caution buying breaks above 84.00 for the time being and instead recommend looking for opportunities to buy on dips towards 80.00-82.00.
GBP/USD: The market has been mostly confined to trade between the 100 and 200-Day SMAs since early February and until we see a clear break on either end, we will continue to see some choppy range trade. Key levels to watch above and below come in by
1.6000 and 1.5600 respectively and we will wait for a break on either end to establish a clearer directional bias.
USD/CHF: Setbacks have stalled for now just ahead of 0.8900 and the market could finally be looking to carve the next medium-term higher low ahead of a bullish resumption and eventual break back above 0.9660. The latest break back above 0.9300 helps to confirm bullish outlook and should now inspire further gains over the coming days. Ultimately, only a drop below 0.8930 negates and gives reason for pause.
--- Written by Joel Kruger, Technical Currency Strategist
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