As we mentioned it in our last post (here), Australian fundamentals surprised traders last week and pushed the Aussie higher against most of the currencies. AUDUSD broke its 100-day MA at 0.9080 last Thursday and hit a 3-month high at 0.9133 on Friday before it ended the week below the 0.9100, helped by the better-than-expected employment reports in the US (Non-Farm payrolls came in at 175K in February vs. 149K cons.).
Below, there is a chart that we like to watch quite a bit every morning at the office: the AUDJPY spot rate (black bar) overlaid with the S&P500 index (red line). By simply looking at this chart, it gives me an idea of the Asian session and tells me if it is worth reading what went on overnight. As you can see it on the chart below, the Aussie was up 4.5% last week, sending the US equity market to new highs (S&P500 was up 2.5%, and hit a record high of 1,878 on Friday).
However, Chinese’s figures over the weekend scared the carry traders and brought back the AUDJPY below the 94.00 level after its (almost) 5% increase. China’s exports unexpectedly fell 18% YoY in February, swinging the trade balance into a deficit of $23bn (vs. $32bn surplus in January). In addition, the annual inflation rate declined to 2.0%, its lowest level in 13 months.
We believe that the bounce we saw on the Aussie may have offered new short entries, as gains were expected to be limited by traders. Even if the RBA has kept its cash rate steady at a historical low of 2.5% since August last year and rising inflation rate has dashed rate cut hopes in the short term, policymakers were clearly not comfortable with the ‘Aussie recovery’ we saw last fall (September-November). Therefore, the Australian dollar is sort of capped on the topside, which gives traders good opportunities to start shorting the pair as soon as it comes close to the 0.9150-0.9200 area.
The market is now getting prepared for Australian employment data early tomorrow. A 15K increase in employment is expected, however the market seemed to have been a way too ‘optimistic’ in recent months. As a reminder, the Australian economy lost 3,700 jobs in January, pushing the unemployment rate from 5.8% to 6%, its highest level in a decade. The pair is now trading below the 0.9000 level, and the next support stands at 0.8900 on the downside. The pair will probably test it before the release of the figures overnight, and if we don’t see some really strong fundamentals tomorrow, AUDUSD could be sent back to the 0.8800 in the short term.
We are still bearish in the long term, as weakening signs of its main trading partner China will push Glenn Stevens to go for another rate cut session (Q2-Q3). In addition, with the Fed tapering this year and the board expected to start raising rates in mid-2015, the 10-year AU-US yield spread will continue to narrow and put the Aussie under pressure. The graph below (daily period) shows the 10-year spread (in purple) overlaid with the AUDUSD spot rate (in orange). Our MT target on AUDUSD stands at 0.8500, a level we saw back in the summer 2010.