The broad based USD correction is under way once again on Thursday, with all major currencies tracking higher against the buck, including the Yen. The star performer on the session has undoubtedly been the Australian Dollar which has surged well over 1.50% against the Greenback on the day thus far.
MORNING SLICES
FUNDYS
The broad based USD correction is under way once again on Thursday, with all major currencies tracking higher against the buck, including the Yen. The star performer on the session has undoubtedly been the Australian Dollar which has surged well over 1.50% against the Greenback on the day thus far. The catalyst for the outperformance has been driven off yet another better than expected unemployment release, which once again helps to fuel investor sentiment in the higher yielding currency. Risk appetite in general appears to be much healthier on Thursday as global equity prices firm up and commodities begin to rally. There has been a great deal of talk revolving around an imminent announcement on a bailout package for Greece with a press conference set for 15:45GMT at the EU Leader’s Summit. However, traders should also be paying attention to the latest from China, where the government is reportedly ordering its currency reserve managers to withdraw from risky dollar assets and shift into core debt guaranteed by the US government. This move, if true, would suggest that the Chinese government is now looking to protect itself against the threat of a fresh wave of troubles within the global macro economy. Some mixed data out from China and some slightly weaker secondary New Zealand data, failed to factor into price action in Asia.
[B]Relative Performance Versus USD on Thursday (As of 10:45GMT) –
[/B]1) AUSSIE +1.56%
2) KIWI +1.07%
3) CAD +0.41%
4) EURO +0.13%
5) SWISSIE +0.10%
6) YEN +0.07%
7) STERLING +0.06%
In European trade, Swiss inflation has come in firmer than expected, while the Riksbank has left rates on hold at 0.25% as was widely expected. We have however been seeing some demand for the Scandi after the Swedish central bank statement took on a slightly more hawkish tone. Also out in Europe was the ECB Monthly Bulletin which produced no additional insights.
Aussie bulls have been very hard to defeat over the past several months and part of the reason undoubtedly stems from the economy’s ability to consistently produce economic data with better than expected results. However, we often wonder how much of the strength of the Australian Dollar is driven by the ability for data to exceed expectations, rather than on the actual data itself. In the charts below, we try to make our point more clear with a side by side comparison of unemployment data out of Australia and the United States over the past several months.
A closer look at US unemployment data shows that analyst estimates are closely aligned with actual results. However, in Australia, the results have been much more interesting and somewhat misleading. The unemployment data in Australia has either well exceeded or matched expectations over the past several months, without ever disappointing. As such, we have a hard time taking results in Australia as seriously, with analysts consistently producing estimates that are well off of the actual readings. This has set up an artificial environment in which the Australian Dollar is arguably always in a position to benefit from the data.
While we do not dispute some of the relative outperformance in the Australian economy, we would also recommend that investors take the price action in Aussie with a grain of salt. After all, how realistic is it to see expectations consistently exceeded, and if this is the case, what can be said of those analysts producing these estimates?
Looking ahead, US retail sales (0.3% expected), initial jobless claims (456k expected) and continuing claims are all due at 13:30GMT, followed by business inventories (0.4% expected) at 15:00GMT. US equity futures point to a higher open, while commodities are also bid.
GRAPHIC REWIND
TECHS
EUR/USD It is difficult to determine where we go from here in the short-term, with the market correcting from oversold levels on Tuesday before stalling out by the 10-Day SMA (by 1.3800), which seems to be offering itself as a solid form of resistance over the past several days. We retain a bearish bias and would look for the 10-Day to once again cap ahead of some consolidation and an eventual renewed bout of weakness through 1.3585. A close back above the 10-Day SMA would however delay and open the door for additional corrective gains potentially towards 1.4200 before bearish resumption.
USD/JPY Last Thursday’s violent pullback certainly dents our shift in outlook in which we had been projecting significant upside over the medium-term. However, the market has still not managed to close below 89.00 and it will be interesting to see how things play out from here. In some ways, the recent whipsaw price action makes it a little easier to call. A break back below 88.55 will confirm bearish resumption, while above 91.30 should accelerate gains to the topside and put the constructive outlook back in play. Until then we remain sidelined.
GBP/USD The market has finally taken out the key October lows just over 1.5700 to likely open the door for some medium-term setbacks over the coming weeks. However, daily studies are now looking quite stretched and there is a risk for additional corrective gains before any renewed weakness. The 10-Day SMA comes in by 1.5800, and we would expect to see any rallies well capped by the latter in favor of a bearish resumption. Only a close back above the 10-Day would delay outlook.
USD/CHF The latest break back above 1.0500 suggests that the market has now carved out a major base that exposes some fresh medium-term upside towards 1.1000 over the coming days. However, given the intensity of the run-up over the past few days from 1.0200 towards 1.0800, a short-term corrective pullback and consolidation can not be ruled out. Nevertheless, we would look to use any dips into the 1.0500 region as a formidable opportunity to build on existing longs in anticipation of a fresh higher low.
FLOWS
UK clearer selling Gbp/Usd and buying Eur/Gbp. Model funds selling Eur/Usd. Real money offers in Aussie into rallies. Local accounts selling Usd/Cad.
TRADE OF THE DAY
Eur/Aud: The market has retraced sharply in early trade on Thursday, with the cross collapsing in a matter of hours all the way back to the 78.6% fib retrace off of the recent 1.5415-1.5955 move. However, any additional setbacks from here are seen limited, with our core bias favoring the formation of a major base at current levels, given the overextended longer-term cyclicals. As such, we are looking to take advantage of these sharp pullbacks in anticipation of the decline being very short-lived and potentially the last shot to establish a very compelling position so close to what could be a long-term low at 1.5415. POSITION: LONG @1.5525 FOR AN OPEN OBJECTIVE; STOP 1.5325. POSITION SIZE IS 3X TOTAL EQUITY.
PORTFOLIO OVERVIEW
P&L Update and Overview: Many of you have been asking for a way to better track trading results and open positions. In response to these requests and in an effort to be fully transparent, a simulated portfolio has been created to track our results on a daily basis. We are pleased to announce that our model generated returns of 50% in 2009. The return on equity curve seen below has now been reset for 2010.
[B]Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
If you wish to receive Joel’s reports in a more timely fashion, e-mail [email protected] and you will be added to the “distribution” list.
If you wish to discus this topic or any other feel free to visit our Forum page[/B]