This text is from blog famous currency strategist Joel Kruger .
STACKED WITH EVENT RISK – We have a busy week ahead of us with the economic calendar stacked with a solid distribution of event risk. While I don’t believe that any one of the outcomes from these event risks will have a meaningful impact on the medium/longer-term direction in the markets, the event risks could however act as a catalyst for the next big short-term move. For me, the key level to watch is the 1.2800 level in EUR/USD. A break and daily close below 1.2800 will likely open the door for a more material sell-off in the Euro and other currencies against the buck. On the other hand, inability to establish below 1.2800 will keep the broader markets locked in consolidation mode.
ALL EYES ON RBA – The first big event risk for the week comes in the form of Tuesday’s RBA rate decision. At this point it is a very tough call whether the central bank will leave rates on hold or accommodate further. Nevertheless, the decision itself will most probably influence the broader global macro landscape. With Australia being viewed as a risk correlated/China correlated economy, any decision here will be interpreted as either broader risk off or broader risk on. If the RBA does in fact stay pat, market participants will view this as a risk positive on the grounds that there is no need for further accommodation. However, if the RBA goes ahead and cuts rates, the move will likely result in a reduction in risk appetite (Aussie sells off) given the fact that the central bank fears that things are not great and still could get worse.
SELL AUD/USD ON RALLIES ABOVE 1.0400 – In my opinion, the RBA should cut rates at tomorrow’s meeting, as I contend that the Australian economy is still very much at risk for further deterioration. Many contend that the Chinese economy has bottomed, but I am still projecting additional weakness, which ultimately should weigh more heavily on Australia, and the emerging market economies. As far as trading is concerned, my recommendation is to look for opportunities to sell AUD/USD between 1.0400 and 1.0500 if given the chance. Ideally, AUD/USD will retain a bid tone into tomorrow’s meeting which will present an opportunity to fade the Aussie strength. Worst case scenario, you sell between 1.0400-1.0500 and the RBA stays on hold. But even in this situation, any additional Aussie rallies are viewed as fleeting, with the technical outlook also highly bearish.
SO WHAT ELSE IS GOING ON? – Moving on, the US election is also in focus, and it seems as though an Obama victory would translate into a risk on reaction, while a Romney win would fuel uncertainty and open the door for some risk off trade. Later in the week, we get the ECB and BOE central bank decisions, and here too we could see some additional volatility. But as I have said already, I wouldn’t expect any of the above event risks to on their own, have any meaningful impact on the medium and longer-term time horizon. Finally, keep a close eye on USD/JPY. While I remain highly constructive with my outlook and look for a near-term retest and break of the 2012 highs at 84.20, I also would not rule out the possibility for some short-term consolidation or even a bit of a pullback before the next major up-leg.