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Risk On: Yen, Dollar Tumble as Investors Crowd into Aussie, Euro, Kiwi

Risk On: Yen, Dollar Tumble as Investors Crowd into Aussie, Euro, Kiwi

Christopher Vecchio, CFA, Senior Strategist


The Australian, Canadian, and New Zealand Dollars continued their streak of outperformance against their major counterparts in the overnight session on Thursday, thanks to strong lending data out of China which suggests that the new government has propped up the financial sector as one of its first major initiatives. In the case of the Australian Dollar, the Chinese financing data has proven to be a greater influencer than Australia’s own March labor market report, which disappointed roundly.

Lending in China exploded in March, with New Yuan Loans surging to $1.02T versus $900B expected, from $620B in February, amid the People’s Bank of China expanding its M2 money supply by +15.7% y/y, well-above both the prior of +15.2% y/y and the consensus forecast of +$14.6% y/y. Taken in context of China’s confusing and misleading trade data, there is one discernible trend: domestic demand is starting to improve in the world’s second largest economy. If Chinese data is trending positive now, there is little reason to be bearish on the Australian Dollar: the labor market has made positive strides the past several months (ignoring recent outliers); inflation remains anchored while growth continues to accelerate; and the Reserve Bank of Australia’s easing bias has dissipated, with no cuts expected the rest of the year.

The Euro is also stronger today, rising to its strongest level since February 28 versus the US Dollar. Figures released today showed that the Greek Unemployment Rate climbed to 27.2% in January from 25.7% in December, further diminishing the likelihood that the Greek economy beings to recover later in the year or early-2014, as many Euro-zone leaders have suggested. Regardless, the EURJPY has climbed to its highest level since January 2010, and the Spanish 10-year bond yield hit its lowest level since November 2010.

Taking a look at European credit, continued compression in peripheral yields has provided support for the Euro. The Italian 2-year note yield has decreased to 1.417% (-1.1-bps) while the Spanish 2-year note yield has increased to 2.041% (+0.4-bps). Likewise, the Italian 10-year note yield has decreased to 4.267% (-3.6-bps) while the Spanish 10-year note yield has decreased to 4.598% (-1.8-bps); lower yields imply higher prices.

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NZD: +1.03%

CAD: +0.53%

CHF: +0.47%





Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.32% (-0.38% past 5-days)


Risk_On_Yen_Dollar_Tumble_as_Investors_Crowd_into_Aussie_Euro_Kiwi_body_Picture_7.png, Risk On: Yen, Dollar Tumble as Investors Crowd into Aussie, Euro, Kiwi

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Risk_On_Yen_Dollar_Tumble_as_Investors_Crowd_into_Aussie_Euro_Kiwi_body_Picture_6.png, Risk On: Yen, Dollar Tumble as Investors Crowd into Aussie, Euro, Kiwi

EURUSD: The Bullish Falling Wedge off of the February 1 and March 25 highs, which broke out positively last week thanks to ECB President Draghi’s comments that there is “no plan B” for the Euro, continues to pay dividends for Euro bulls, and looks to as the middle of April approaches. After breaking the 38.2% Fibonacci retracement from the Jul’12 low to the Feb’13 high at 1.3075, which presented a point of pause as expected, price has surged to its highest level in over a month. The 1.3245/3325 zone (80-pips) should be substantial resistance above, where prices consolidated above in late-December then failed to push through following the inconclusive Italian election results. Declines should be supported by the 8-EMA at 1.3015/20.

Risk_On_Yen_Dollar_Tumble_as_Investors_Crowd_into_Aussie_Euro_Kiwi_body_Picture_5.png, Risk On: Yen, Dollar Tumble as Investors Crowd into Aussie, Euro, Kiwi

USDJPY: No change: “After the USDJPY cleared the descending trendline off of the March 12 and March 20 highs, at 95.00/15, price sky rocketed right up to the topside rail at 99.30/55. This is the same channel resistance that proved to be the top in mid-February and early-March. While topside risks are still in play, with the psychologically significant ¥100.00 figure eyed, sideways price action or a move to fill the week’s opening gap are possible. Accordingly, dips into 97.50 and 96.60 are look to be bought on pullbacks.”

Risk_On_Yen_Dollar_Tumble_as_Investors_Crowd_into_Aussie_Euro_Kiwi_body_Picture_4.png, Risk On: Yen, Dollar Tumble as Investors Crowd into Aussie, Euro, Kiwi

GBPUSD: No change as prices moves as previously forecasted: “While the Bearish Rising Wedge move proved to be a fake out, an upward sloping channel has materialized off of the early-March lows. Recent price action from last Thursday suggests a pennant may have formed on the 1H and 4H time frames, with a test of 1.5440 due by Monday. I remain long-term bearish, but for now, I am neutral.”

Risk_On_Yen_Dollar_Tumble_as_Investors_Crowd_into_Aussie_Euro_Kiwi_body_Picture_3.png, Risk On: Yen, Dollar Tumble as Investors Crowd into Aussie, Euro, Kiwi

AUDUSD: No change as price moves as previously forecasted: “After several failed tests of 1.0475/500, the AUDUSD has broken through today to test the topside limit of the 1.0475/535 zone, in which the descending trendline off of the July 2011 and January 2013 highs lays alongside several key Fibonacci extensions rooted in the rally from the March 4 low. With retail traders fading the AUDUSD’s advance, a break of this key region to the topside is probable, with a clean test of 1.0580/600 in sight. A weekly close above said level could open the door for a move towards 1.0850 in the 2Q’13.

Risk_On_Yen_Dollar_Tumble_as_Investors_Crowd_into_Aussie_Euro_Kiwi_body_Picture_2.png, Risk On: Yen, Dollar Tumble as Investors Crowd into Aussie, Euro, Kiwi

S&P 500: The past several weeks I’ve maintained: “This is not a ‘technically strong move. The float higher continues, towards the all-time high at 1576.1, but might be cut short in the 1565/75 zone, where two key Fibonacci extensions lay. Accordingly, the recent pushes up towards this all-time high have seen repeated denials, and conviction certainly appears to be waning.” This view was nullified yesterday upon the break of the 1576.1 level, with new all-time highs set just short of 1600. Overall, I remain very skeptical: between the weak March labor market report, the growing impact of the US budget sequestration on the real economy, and an increased number of Fed policymakers calling for an end to QE3 later in 2013. However, with respect to the technical structure, now that the 61.8% extension off of the late-December and late-February swings broken, the 100% extension comes in at 1625.

Risk_On_Yen_Dollar_Tumble_as_Investors_Crowd_into_Aussie_Euro_Kiwi_body_Picture_1.png, Risk On: Yen, Dollar Tumble as Investors Crowd into Aussie, Euro, Kiwi

GOLD: No change: “Gold broke below trendline support off of the January 2011 and May 2012 lows at 1650 last week, prompting a sharp sell-off into 1600, where price broke out in mid-August before a rally into the post-QE3 high at 1785/1805. However, with oversold conditions persisting on the 4H and daily timeframes, a rebound should not be ruled out; each of the past two daily RSI oversold readings has produced a rally in short order. Resistance is 1625 and 1645/50. Support is 1585 and 1555/60. It should be noted that Gold has entered a major support zone from the past 18-months from 1520 to 1575.”

--- Written by Christopher Vecchio, Currency Analyst

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