US Dollar, Yen Lead Majors as RBA Sinks Aussie; AUD/USD Below $0.9200
ASIA/EUROPE FOREX NEWS WRAP
The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is near its daily highs as it continues its impressive outperformance since June 17, having gained nearly +3.50% since then, while only posting two down days in the process. While the Japanese Yen was a prime reason the USDOLLAR surged over this time frame, today the drivers of bullish USD price action are the Australian and New Zealand Dollars, on the back of renewed concern that the commodity/carry trade will continue to unwind over the coming months.
In its policy statement released early this morning, the Reserve Bank of Australia noted that “commodity prices have declined further but, overall, remain at high levels by historical standards,” and that the “Australian dollar has depreciated by around 10 per cent since early April…It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.” This apparent dovish bias refreshes our core outlook that we should expect to see another 50-bps cut from the RBA’s main rate by the end of the year, which should remain a significant bearish influence on the Aussie; and as such, the Australian Dollar is the worst performer.
Heading North and West, European trade today has yielded little positivity around the regional currencies, although recent price action suggests that the British Pound, the Euro, and the Swiss Franc might be poised to extend their recent rallies against the Yen. More specifically, despite the bullish technicals engulfing the Euro (save the EURUSD), pressure is on the single currency today ahead of the European Central Bank policy meeting on Thursday thanks to faster deflation in the May PPI report.
Taking a look at European credit, yields across the continent (save Greece) have slumped; and in context of the ECB’s policy meeting on Thursday, given the divergence with the Euro, there is perhaps positioning for a dovish bias from President Draghi (this fits in with the soft PPI reading today). The Italian 2-year note yield has decreased to 1.760% (-3.5-bps) while the Spanish 2-year note yield has decreased to 2.004% (-4.2-bps). Similarly, the Italian 10-year note yield has decreased to 4.394% (-1.8-bps) while the Spanish 10-year note yield has decreased to 4.578% (-0.8-bps); lower yields imply higher prices.
RELATIVE PERFORMANCE (versus USD): 10:45 GMT
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.24% (+0.90%prior 5-days)
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TECHNICAL ANALYSIS OUTLOOK
EURUSD: On Wednesday I said “I’d look into $1.3070/80 (38.2% Fib July 2012 low to February 2013 high, 50% Fib April low to June high) for resistance for the next short opportunity.” Price has approached and sold off at this level the past three days (with some slight overreach towards 1.3100), suggesting that a Bear Flag might have formed on lower time frames. Risk should be contained to the June 25 high at 1.3150, looking for a break below 1.2970 to yield a move towards 1.2770/800.
USDJPY: Price has unfolded as expected, having noted earlier “a near-term bullish bias is warranted as long as price holds 96.65/80; a medium-term bearish bias is warranted as long as price holds 99.25/35.” With 99.25/35 broken, the technical structure shifts medium-term bullish so long as 96.75 holds lower. Ultimately, now that the downtrend from the May 22 has been broken, the Symmetrical Triangle suggests a continuation towards 99.80/100.00 and 100.40/75.
GBPUSD:Overall, the pair is trading back to support in an ascending channel off of the March 12 and May 29 lows; a test of 1.5100 is called for over the coming weeks. Further US Dollar strength is contingent upon sentiment remaining that the Fed will taper QE3, and the more evidence that builds on the fundamental side, the greater the probability that the ascending channel that has guided price the past three months is only a Bear Flag. Big picture: the GBPUSD broke the uptrend off of the 2009, 2010, and 2012 lows, signaling the beginning of a greater selloff towards 1.4200. Any rallies in the pair look to be sold; price could climb to 1.5290 (50% Fib March low to May high) on a rebound now that the GBPUSD has broken through RSI trend support off of the March 12 and May 29 lows.
AUDUSD: No change: “Fresh selling has provoked an even steeper decline in the AUDUSD, with the pair falling towards the 38.2% Fibonacci retracement off the 2008 low to the 2011 high at $0.9141. While fundamentally I am long-term bearish, it is worth noting that the most readily available data shows COT positioning remains extremely short Aussie.” Bullish divergence on the daily chart has formed once more, suggesting that consolidation or perhaps a small rally back towards 0.9330/420 is due; or another quick, sharp drop is necessary to clear the technical discrepancy.
S&P 500: Last week I said “a bearish bias is appropriate unless 1605/08 is broken.” Indeed, the post-FOMC swing high was broken and the S&P 500 held the daily RSI 38/45 zone which has capped selloffs since the beginning of the year. Significant resistance is overhead though at 1635/40 (23.6% Fib Feb low May high, 61.8% Fib May high June low). Today is more or less a neutral day, as the Inside Day following yesterday’s Inverted Hammer warrants a look lower should 1625/27 hold.
GOLD: No change from Friday: “Gold has fallen into the 10/20 RSI support region, where price has held on numerous probes lower ultimately producing a short-term rally. More recently, daily RSI has only dipped into this region in mid-February and mid-April…Basing just below $1200/oz shouldn’t be dismissed, as at 1189.91 lies the 100% extension of March high/April low/April high move, as well as the 61.8% extension of the October high (post-QE3 announcement)/April low/April high move at 1192.” The rally off of Friday’s low has produced +7.36% so far, eclipsing the rebound seen from late-May to early-June, when Gold rebounded by +6.36%.
--- Written by Christopher Vecchio, Currency Analyst
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