CROSS COUNTRY: MIDDAY SNAPSHOT & ANALYSIS OF SELECTED CROSS RATES
The USD remains very well bid in the US session with the greenback even positing marginal gains against the Yen as we head into the London fix. The main driver of price action continues to be an escalation in risk aversion on the back of a number of negative developments over the weekend and into Monday, led by the news that GM and Chrysler may need to consider filing for bankruptcy. S&P has said that the bankruptcy risk for the “Big 3” remains high and that changes in GM management alone will do nothing to change the rating agency outlook. However, President Obama has allowed the automakers an additional period to negotiate with creditors and unions. Other upbeat comments from the President on the oulook for the sector have failed to bolster equities of yet. Meanwhile the latest downgrade by S&P of Hungary’s long term debt to BBB- from BBB has also helped to prop the buck. ECB’s Wellink expressed concerns over the undercapitalization of banks and suggested that reserves need to be built up in good times so that banks can better deal with times of financial stress. The latest infusion of fear into the markets also has traders once again looking at the VIX with the volatility index jumping to trade back over 45% on Monday. An official aid to Sarkozy has commented on the USD saying that it would be better for the global economy if the USD were to not fall too much. The aid also goes on to say that currencies will not be discussed at G20. ECB Trichet is on the wires but offered nothing new in term of his outlook saying that economic activity will remain weak in 2009. In Norway, Norges Bank Governor Gjedrem has warned against the lure of the krone as a “safe haven” currency saying that the local financial markets are way too thin to be well suited for safe-haven investors. This in conjunction with terrible retail sales data has contributed to the krone’s status as the weakest currency on the day. On the data front, Dallas Fed manufacturing came in at -49.0 versus the previous -57.3 print. Looking ahead, all eyes will be focused on Bank of Canada Carney at 17:50GMT. Traders will look for hints of future monetary policy moves and any indication of a willingness to adopt quantitative easing.
ANALYSIS OF SELECTED RATES
Aud/Nzd: We have been doing a lot of Kiwi selling of late with the currency showing overbought across the board. This cross is also now well oversold and dips should be used as opportunities to buy back into the broader up-trend. Setbacks have reached and slightly exceeded the 61.8% fib retracement off of the 1.1935-1.2935 Dec-Mar move, while also just kissing the major 38.2% fib retrace off of the 1.0640-1.2935 Oct-Mar move at 1.2070 on Monday. We do not expect the cross to be able to sustain below this level given the highly oversold daily readings. Look for a medium-term higher low to carve out at current levels above 1.2000 ahead of the next major upside extension back towards the 2009 highs at 1.2935. Strategy: BUY @1.2060 FOR A 1.2490 OBJECTIVE, STOP @1.1860. Stops to be trailed to cost (break-even) on a break back above 1.2200. Recommendation to be removed if not triggered by NY close (5pm EDT) on Monday.
Fundamental Catalyst – The cross has been selling off over the past few weeks on some form of stabilization in global equity prices and a mild resurgence in risk appetite. However, this is not expected to last and we are already seeing some signs of a resumption of the familiar theme of heightened risk aversion and deteriorating investor sentiment. Australia is by far the more stable and better performing economy and should stand to benefit from the broad based flight to safety.
Written by Joel Kruger, Technical Currency Analyst for DailyFX.com
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