Currencies | Jan 31 2013
By Kathleen Brooks, Research Director UK EMEA, FOREX.com
Don’t forget that you can now follow Forex.com’s research team on Twitter: http://twitter.com/FOREXcom
The markets are generally in consolidation mode today after some strong gains last week. European stock markets have mostly hovered around flat since the open; however they have eked out some positive moves as we get towards mid-morning in the European session. USDJPY is below 90.00 after the yen managed to claw back some losses. EURUSD has been in a fairly tight range while GBPUSD broke below 1.5750, which was prior support on Friday when the dismal GDP figures were released. There does not appear to be any unifying themes dominating markets today. The risk on/ off theme that dominated in 2012 has faltered in 2013 and instead fundamentals have come back into focus.
AUD and CAD punished by the FX market
Currencies are getting punished for weak economic fundamentals and the prospect of more rate cuts. This has weighed heavily on the AUD and CAD. The AUD started to decline in mid-January on the back of weak investment data, the decline then accelerated when labour market data showed an increase in the unemployment rate. The CPI data for Q4, which came in below expectations, cemented the view that the Aussie economy is continuing to suffer and we may see the RBA react by cutting rates further in the coming months. Likewise, the CAD’s depreciation started when the BOC was more dovish than expected and explicitly pushed back market expectations for a rate hike, this was followed by some weak inflation data.
Re-learning the drivers of the Aussie
Interestingly there has been a fundamental shift in the drivers that move the Aussie. In the past AUDUSD was driven by Chinese data, the SPX 500 and iron ore prices – all barometers of risk sentiment. Now the Aussie is moving on the back of domestic factors. This could be a temporary shift, but it could reflect a couple of things 1, China’s continued plan to move to a domestic-demand economic system, that jeopardises Australia’s terms of trade in the long term; 2, fears that the mining sector was getting over-heated and the rest of the economy could not pick up the slack if there was a slowdown. Thus, we could see further declines in AUDUSD. From technical perspective, 1.0385 – the 200-day sma – is a key support zone. Below here opens the way for a move back to the 1.0150 lows from October. From a fundamental perspective, we expect this cross to remain sensitive to price data and to the outcome of the RBA’s meeting on 5th Feb. The market expects the RBA to remain on hold; however a surprise cut and/ or dovish rhetoric that suggests the RBA’s cutting cycle is not over would be very bearish for the Aussie.
Looking at the Australian interest rate swaps curve, expectations of lower rates in Australia have been growing since the middle of 2012, and they have turned even lower since the release of the employment data earlier this month. However, currently the market has about 1 rate cut priced in for this year. Is this enough? This is what we are looking for from the February RBA meeting. If one cut is enough, and the economy is expected to pick up later this year then we may see a rebound in the AUDUSD. However, the weakness of the domestic economy may keep the RBA’s tone cautious, thus weighing on AUDUSD. On balance, we think the RBA will maintain a dovish to cautious stance; the RBA has room to cut rates and may well cut them further if the domestic economic situation does not improve.
The BOC changes its tune
The CAD came under pressure from a dovish BOC last week. This seems to be the chief reason for CAD declines. The problem for the CAD is that Canada was expected to be one of the first major economies to hike rates this year; however the BOC has nipped this in the bud after its meeting last week. Growth is holding up fairly well, but in an environment of “currency” wars, the prospect of a rate hike could cause a huge jump higher in a currency, which could hurt the economy. Thus, this could have been a defensive move by the BOC. In his Monetary Policy Report last week, Governor Mark Carney referenced that exports remain below their pre-recession peak and partly blamed this on the strength of the CAD. Carney justified his dovish stance by saying that the inflation outlook is still subject to “significant risks”. Unlike the Japanese authorities, it is unlikely that Canada is going to state a level in USDCAD that it would like the market to reach. But, if the Canadian price data remains moderate and the BOC remains dovish then we could see a return to 1.0400. However, expect a sharp reversal if Canada’s data starts to pick up, as the BOC may have to revise plans for future monetary policy tightening. Key long term support lies at 0.9950 – a cluster of daily smas.
USDJPY drivers switch to the US
Elsewhere, the US takes centre stage this week with durable goods sales today, the FOMC meeting on Wednesday and rounding the week off with payrolls for January and the manufacturing ISM survey. Thus, USDJPY may be driven more from the USD side than the JPY side in the near term. Strong US economic data could push this cross above 91.00 – 91.25 is the high from Friday. However, the FOMC is more of a risk as there are four new voting members. Their decisions will be scrutinised, and any signs of hawkishness could be the rocket fuel this cross needs to get it to 95.00 in the medium-term.
Chart 1: AUDUSD and interest rate expectations for the next 6 months.
The relationship between the two has recently tightened and helped to push AUDUSD below key trend line support at 1.0450.
Source: Forex.com and Bloomberg
Chart 2: USDCAD (inverted) and Canadian rate expectations in the next 6 months.
Rate expectations have stabilised, however, they haven’t moved any lower, which suggests that USDCAD could have gone too far too fast. Thus, we could see a reversal around 1.0100 – which is looking like a double top on the daily chart. Support lies at parity and then 0.9950.
Source: Forex.com and Bloomberg
Re-published with permission. All views expressed are the author's and not by association FNArena's.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that FOREX.com is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. FOREX.com is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Services Authority (FSA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan. Please read Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/about/publications/character-risks.jsp).
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
