This text is from blog famous currency strategist Joel Kruger .
MINOR SETBACK – There is a renewed optimism in the market that has been propping risk correlated assets over the past week. It seems as though a combination of a Greece resolution and relief that the US might be able to avoid a fiscal cliff, have been the primary drivers of this risk on trade. However, I do not retain such warm feelings, and still believe that there is a great deal of uncertainty surrounding both of theses themes (and others…ie China, commodity bloc, emerging markets) that should warrant a few added layers of reservation at a minimum. Still, the price action can not be ignored, and with currencies rallying against the buck, it is important to have a better understanding of the potential direction over the coming sessions, so as not to be discouraged.
Forex technical analysis video made by Joel:
USD SELLING ONLY CORRECTIVE – Technically, despite this latest currency surge, the broader trend still favors a resumption of USD buying in my view. Given EUR/USD is the most actively traded pair, and generally correlates well with other USD pairs, we should use it as a reference point. The medium-term trend in EUR/USD is still convincingly bearish, with the market looking like it is in the process of carving the next major lower top below 1.3200 (September peak) ahead of a fresh downside extension back towards the 2012 low at 1.2040. As such, while we could still see additional gains over the coming sessions (ideally the market is not able to establish a daily close above 1.3000), these rallies should ultimately remain very well capped below 1.3200. Given that the medium-term trend is still bearish, selling rallies is still therefore the preferred strategy.
RBA RATE DECISION IN FOCUS – Moving on, the focus will start to shift more directly on the Australian Dollar, with the RBA rate decision due next week. Although economic data out of Australia and China have been on the better side of expectation in recent weeks, I would not take this as a bullish endorsement of these economies. In fact, upon closer examination, economic data is still highly concerning and would suggest that the RBA will in fact need to go ahead and cut rates to 3.00% next week. Today’s Australian capex data offers a perfect example of just how deceiving things can be. On the surface, the data did manage to come in better than expected. However, below the surface, things start to get a little messy.
WHAT LIES BENEATH – First off, the data still does show an ongoing deterioration from the first and second quarters. As we break things down further, building and structures investment gained by less than forecast, while plant and equipment spending unexpectedly rose (not a good combination). Meanwhile, although the resource sector dominated quarterly spending, manufacturing investment slumped quite dramatically. Throw in materially downgraded investment plans for the mining sector, and comments from Rio Tinto that it would slash spending to the tune of AUD5B by the end of 2014, and this only reinforces the fact that the mining boom could be bubbling, while other non-mining sectors are at the same time struggling to make up the difference.
THE CLIFF DOWNUNDER – For locals, worries over a US fiscal cliff are far in the distance, while the realities of an Australian “growth cliff” are more pressing. OIS is pricing in added risk for a rate cut next week (from 60% to 71%), while renowned RBA rate watcher Terry Mcrann has already been out in favor of a cut, saying it would be the “no regrets” option for the RBA. I suspect that all of this should start to weigh on the Australian Dollar going forward, and with that in mind, it is also worth highlighting a recent WSJ article where RBA Edwards warns that purchases of Australian government bonds by foreign central banks and sovereign wealth funds are about to peak, with these institutions reaching their limits on Aussie exposure. So while AUD/USD trades above 1.0400, and could even scare with an added push towards 1.0600, the chips are stacked against the currency and we should soon see increased downside pressure which results in a more aggressive depreciation in the pair back below parity in the days ahead.
