Fighting against the Aussie…

An interesting development overnight was the Australian Q2 inflation data which is approaching the higher band of the 2-3% RBA target range. Australia’s trimmed mean CPI, the indicator the RBA officials look at which excludes volatile items that are included in CPI, rose from 2.6% to 2.9% in the second quarter (expected at 2.7%). The news lifted the Aussie to 0.9450 against the greenback as it slowed down the market’s expectations of another rate cut further this year.

AUDUSD started to recover from its last-week ‘losses’ after RBA Governor Stevens didn’t mention anything about the exchange rate overvaluation at a charity lunch in Sydney on Tuesday. As you can see it on the chart below, the increase in the 2-year AU-US yield spread (in blue) has pushed AUDUSD (yellow bars) to higher levels and the pair is now flirting with its resistance at 0.9460. A breach of that level could easily bring us to the next resistance area 0.9475 – 0.9500 (which corresponds to levels we saw in the beginning of the month).
We remain bearish on the Aussie and we think that a bounce back above 0.9500 could be another interesting level to start shorting the pair with a stop loss above 0.9560. Our medium term target remains at 0.9200.

AUD-Spread

(Source: Reuters)

Another graph that we like to watch is AUDJPY. As you can see, the pair is approaching its first strong resistance at 96.00 (currently trading at 95.90). It seems that the market has been rejecting AUDJPY above this level over the pas few months, and for those who are not convinced on the AUDUSD trade, it could be also interesting to enter a short position on AUDJPY at current levels, with a stop loss above 96.60 and a first target at 94.60.

AUDJPY-23Juy

(Source: Reuters)

FOMC minutes review, what’s next for the Dollar-Bloc currencies?

Yesterday, the Fed released its minutes of the last FOMC meeting (March 18-19) and we saw that the US policymakers were less hawkish than expected, easing rate hike speculation. Despite the last two NFP good prints and unemployment rate standing slightly above the ‘once-to-be’ 6.5-percent threshold (6.7% in March), the recovery is still fragile according to Fed officials who surprised traders and investors by showing that the central bank was more supportive of keeping its Fed Funds rate at low levels (0-0.25%).The US Dollar index broke its support at 79.75 and is now trading at 79.40, boosting most of the currencies.

As you can see it below, the US 10-year yield (orange) eased by 7 bps to trade at 2.65%, pushing the price of Gold (purple) back to 1,320 and helping the Yen (green) to continue its ‘strengthening episode’. Since last Friday’s high of 104.12, USDJPY has depreciated by 2.4% and seems on its way to test its support at 101.20. At the same time, the 10-year yield is down 15bps from 2.80%.

USYields

(Source: Reuters)

Is there more room on the upside for the Dollar-Bloc currencies?

AUD: The Aussie continues its positive momentum with Australian March employment report smashing expectations of a 5K increase to print at 18,100 (Jobless rate edged down by 0.2% to 5.8%). The Australian Dollar is now trading above 0.9400, levels we saw back in October. We believe that the inflation figures coming up at the end of the month (April 23rd) will determine the stance of monetary policy and if Governor Stevens could threaten the market once again of a rate cut if he judges that the Aussie is ‘uncomfortably high’. If we have a look at the chart below, the last ‘Aussie recovery’ was stopped after a 10% increase when it hit its 200-Daily SMA at around 0.9750 with the RSI indicator (14 days, 30-70) showing an overbought signal. In the second recovery episode, the pair is up 9.3% since the end of January and seems on its way to test the 0.9500 level. However, the overbought RSI may have been perceived by traders as a good time to start shorting the pair.

AUD-10-APr

(Source: Reuters)

NZD: The Kiwi also appreciated sharply against the greenback and is up 8.65% since the end of January, trading at 0.8700 (August 2011 level). The Reserve Bank of New Zealand raised its Official Cash Rate (OCR) by 0.25% at its last meeting in March after holding it at a historical low of 2.5% for three years. Traders have been looking at the Kiwi as an interesting buying opportunity after Governor Graeme Wheeler announced that he expected to ‘raise the benchmark interest rate to about 4.5% in the next two years’ in order to curb inflation. Moreover, the unemployment rate declined to a 5-year low of 6.0% in the last quarter of 2013, while the economy expanded by 3.1% (down from 3.5% in Q3) and NZ’s current account deficit narrowed to NZD 7.55bn (or 3.4% as a share of GDP) through the twelve months through December (lowest ratio since Q1 2012).

The RBNZ will probably leave its OCR unchanged on April 23rd, which could hurt the Kiwi in the short term as some traders will start considering to take profit after the sharp appreciation. We would stay aside of the Kiwi at the moment and wait for further reaction from RBNZ policymakers on the strong exchange rate. The next resistance on the topside stands at 0.8840, which is the pair’s all-time high (Aug 1st 2011).

Kiwi

(Source: Reuters)

CAD: The surprise came from Canadian macroeconomic figures that completely reverse the bearish trend on the Loonie against the greenback. In its last meeting back in January, Bank of Canada lowered its inflation forecast stating that it expected the total inflation rate to remain at 0.9% in the first half of 2014, down from its previous forecast of 1.2%. As policymakers stated that they expected inflation to remain ‘well below target’, Governor Poloz turned the monetary policy to a dovish stance and the market was starting to price in a rate cut in one of the following meetings (currently at 1% since September 2010). However, the sudden increase in CPI (from 0.7% in October to 1.5% in January, then 1.1% in February) in addition to the better-than-expected indicators (GDP figures, Retail sales, Trade balance, Employment report…) brought back traders’ interest on the Loonie.

However, We think that the bearish trend on USDCAD is coming to its end and we will see 1.0800 as a good level to start buying the pair for a bounce back towards 1.1000 at first. USDCAD broke it 100-daily SMA yesterday (1.0900) and found support at 1.0850; technical indictors RSI is starting to show some oversold signals therefore some investors will see the 1.0800 – 1.0850 range as a buying opportunity.

USDCAD

(Source: Reuters)

Quick Review on the Aussie (ahead of the employment figures)

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).

(Source: Reuters)

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.

(Source: Reuters)

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.

(Source: Reuters)