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Aussie Rebound Squashed after 1Q'13 GDP; USD/JPY Tumble Resumes

Aussie Rebound Squashed after 1Q'13 GDP; USD/JPY Tumble Resumes

Christopher Vecchio, CFA, Senior Strategist


The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) has picked itself off of the floor the past two sessions, but gains for the greenback have been thus far limited to against the Australian Dollar. The British Pound and the Japanese Yen are outperforming the rest of the majors today, while the Euro is barely holding ground amid a mix of worse than expected data ahead of tomorrow’s European Central Bank Rate Decision.

On the Australian Dollar: the world’s former darling commodity currency’s demise resumed overnight after the 1Q’13 GDP report showed weaker than expected growth, likely cementing another rate cut at the policy meeting on July 2. The day before, the Reserve Bank of Australia held its key rate at an all-time low of 2.75%, but made clear that if data continued to soften, the inflation environment would allow for another cut. I’m still expected at least 50-bps cut from the main rate by the end of the year.

On the British Pound: a stronger than expected PMI Services (MAY) capped off a ‘perfect’ reporting period (all three PMI reports beat expectations), providing much needed fundamental relief for the Sterling. 2Q’13 GDP tracking estimates have the UK economy continuing to grow at a meager rate, around +0.6%. Further gains in the Sterling are likely tempered until firm direction over the Bank of England’s policy is set in place once Mark Carney takes over next month.

On the Japanese Yen: the strength seen today by the Yen fits neatly with our expectation that retail positioning suggested further declines were likely. Nevertheless, the sell-off seems to be rooted in a lack of progress made with ‘Abenomics,’ as Japanese Prime Minister Shinzo Abe delivered a speech last night that failed to ease concerns over recent volatility across Japanese financial instruments, nor did it indicate when the next leg of stimulus could come.

Taking a look at European credit, mixed performance in the periphery has the Euro slightly lower. The Italian 2-year note yield has decreased to 1.334% (-2.6-bps) while the Spanish 2-year note yield has decreased to 1.855% (-1.2-bps). Similarly, the Italian 10-year note yield has increased to 4.099% (+0.7-bps) while the Spanish 10-year note yield has increased to 4.406% (+0.5-bps); lower yields imply higher prices.


JPY: +0.46%

GBP: +0.25%

CAD: -0.08%





Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.05% (-0.72% past 5-days)


Aussie_Rebound_Squashed_after_1Q13_GDP_USDJPY_Tumble_Resumes_body_Picture_1.png, Aussie Rebound Squashed after 1Q'13 GDP; USD/JPY Tumble Resumes

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Aussie_Rebound_Squashed_after_1Q13_GDP_USDJPY_Tumble_Resumes_body_x0000_i1028.png, Aussie Rebound Squashed after 1Q'13 GDP; USD/JPY Tumble Resumes

EURUSD: No change: “Failure to achieve the 38.2% Fibonacci retracement (Jul’12 low to Feb’13 high) at $1.3075 has further gains in question. Nevertheless, the technical structure is near-term bullish, and the rejected break of the Head & Shoulders neckline suggests there may be another thrust higher left before an eventual breakdown. Accordingly, I’m bullish above 1.2930, but looking to sell rallies into 1.3200.”

Aussie_Rebound_Squashed_after_1Q13_GDP_USDJPY_Tumble_Resumes_body_x0000_i1029.png, Aussie Rebound Squashed after 1Q'13 GDP; USD/JPY Tumble Resumes

USDJPY: No change: “The compressing nature of the 8-/21-EMA the past several days suggests that a near-term top may be in place, at least through the early part of June. A break of the ascending trendline off of the April 2 and April 30 lows has the bottom rail of the rally dating back to November in focus, coming in at ¥98.60 today. Accordingly, as long as pressure on US equities persist, we favor the USDJPY lower in the near-term, a view that is augmented by retail traders attempting to catch the bottom in the recent slide.

Aussie_Rebound_Squashed_after_1Q13_GDP_USDJPY_Tumble_Resumes_body_x0000_i1030.png, Aussie Rebound Squashed after 1Q'13 GDP; USD/JPY Tumble Resumes

GBPUSD: No change: “Despite failure on Friday, the turnaround late-day led to a Hammer forming in the 8-/21-EMA “catch” zone, and price action today has seen the pair trade through the 21-EMA at $1.5220/25. This would be the first close above the 21-EMA since May 9. A close >1.5280 should indicate a Double Bottom has formed, with potential for the pair to reach 1.5500 at some point the next week or two.”

Aussie_Rebound_Squashed_after_1Q13_GDP_USDJPY_Tumble_Resumes_body_x0000_i1031.png, Aussie Rebound Squashed after 1Q'13 GDP; USD/JPY Tumble Resumes

AUDUSD: Rebounds have been shallow below the ascending trendline off of the October 2011 and June 2012 lows, suggesting that a top in the pair is in place, going back to the July 2011 high at $1.1071. Although there was some upside the first few days of this week, the AUDUSD once again finds itself down after a bounce, and price has fallen back to the 50% Fibonacci retracement from the May 2010 low to the July 2011 high, at 0.9572. Considering that there has been little buying attraction here, a break below – in what would also be a break below major lows set a year ago this past week – would represent another material breakdown in the AUDUSD, with 0.9380/90 and 0.9210/20 eyed lower.

Aussie_Rebound_Squashed_after_1Q13_GDP_USDJPY_Tumble_Resumes_body_x0000_i1032.png, Aussie Rebound Squashed after 1Q'13 GDP; USD/JPY Tumble Resumes

S&P 500: No change: “The S&P 500 has traded back to former channel resistance, which contained the US equity market from late-February to early-May (drawn off of the February 25 and April 18 lows, to the April 11 high). The support coincides with the 21-EMA currently, forming a zone of support from 1639 to 1650. In conjunction with a descending trendline off of the May 22 and May 28 highs, it appears a triangle may be forming for a push higher. Bulls’ hopes would be squandered below 1634.” Now, the S&P 500 has fallen to the 38.2% Fibonacci retracement of the April low to May high at 1629.4 and has held; a close below this level would open the door for a deeper retracement to 1580/85.

Aussie_Rebound_Squashed_after_1Q13_GDP_USDJPY_Tumble_Resumes_body_x0000_i1033.png, Aussie Rebound Squashed after 1Q'13 GDP; USD/JPY Tumble Resumes

GOLD: No change: “If the US Dollar turns around, however (as many of the techs are starting to point to), then Gold will have a difficult gaining momentum higher. Indeed this has been the case, with Gold failing to reclaim the 61.8% Fibonacci retracement of the April meltdown at $1487.65, only peaking above it by 35 cents for a moment a few weeks ago.” Price is back under 1400, and if US yields keep firming, a return to the lows at 1321.59 shouldn’t be ruled out.

--- Written by Christopher Vecchio, Currency Analyst

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