Euro dips used as position building opportunities

FUNDYS

It has been a tale of 2 sessions on Tuesday, with the USD finding some bids early on, and currencies selling off in Asian trade, before turning around sharply in Europe, with the USD coming back under intense pressure. Some of the notable gainers include the Euro, Swissie and Sterling, with the Euro and Sterling finding some bids on better than expected PMI data, while the Franc remains eternally well bid and has rallied to test the record highs from 2008 (USD/CHF lows). But to truly attribute the latest USD selling to economic data would be foolish (especially in light of significantly weaker Eurozone retail sales and some downbeat comments from ECB Ordonez), with most of the price action more likely originating from the increased likelihood that the Fed will implement a second round of quantitative easing.

Relative Performance Versus USD Tuesday (As of 10:45GMT)

1. EURO+0.68%

2. SWISSIE+0.45%

3. STERLING+0.28%

4. CAD+0.26%

5. KIWI+0.11%

6. YEN-0.06%

7. AUSSIE-0.86%

The Australian Dollar on the other hand is by far the weakest currency on the day thus far, and should continue to be for the remainder of the day after the Reserve Bank of Australia surprised markets by leaving rates on hold at 4.50%, while also offering a far less than hawkish accompanying statement. Although the central bank conceded that higher rates would be appropriate at some point in the future, comments that the “financial markets were still uncertain” and “overall credit growth remained subdued” were enough to send chills down the spines of Aussie bulls.

CHART 1

Technically, the pullback in the currency is certainly warranted, with daily studies rolling over from overbought after the antipodean rallied most impressively against the buck over the past five weeks. Rallies have stalled about a hundred points off the key multi-year highs from 2008 by 0.9850, but as we have mentioned in our analysis, the Australian Dollar sits by longer-term cycle highs and is at risk for a material pullback over the medium and longer-term. The fundamental catalyst has yet to fully reveal itself, but we anticipate that today’s rate decision could start to paint that picture with an economy that is becoming more aware of just how reliant it is on a shaky global outlook.

One must not overlook some other key developments over the past few hours that only help to reaffirm the case for additional Aussie weakness. On the data front, Australian retail sales have come in softer than expected, while at the same time, China services PMI has dropped in September. Aussie bulls have been very quick to discount problems in the U.S. and Eurozone, on stronger local fundamentals and a very upbeat China outlook. Although it is only one day’s worth of economic data, the results are sure to force some reconsideration of positioning.

Another major development has been the latest Bank of Japan rate decision which had opened some decent selling in the yen (in Asian trade) after the BOJ also surprised markets by easing monetary policy further, effectively lowering rates to 0.0% (0.0%-0.10%) and concurrently stepping up asset purchases. The BOJ cited a strong yen and slower global economy as the reasons for the Japanese slowdown and deterioration in corporate sentiment.

There has been a very apparent pattern over the past several days of early USD buying, followed by a reversal and stronger USD selling into the latter half of the day. We have talked about the overbought nature of the euro and the need for the market to correct, but have also discussed a critical sequence that needs to be broken in order for a full on correction to play out. The key level to watch today comes in by 1.3665, with a daily close below this level required to force a shift in the structure. Otherwise, the bull trend remains intact and eyes next critical topside barriers by 1.4000.

Looking ahead, U.S. ISM non-manufacturing data (52.0 expected) due at 14:00GMT is the only major release in North American trade. On the official circuit, Treasury’s Miller speaks at 13:00GMT, while Treasury’s Warren follows a while later at 19:20GMT. U.S. equity futures point to a mildly higher open, while commodities are well bid with gold breaking to yet another record high over $1325. At this point, the moves in gold are well overdone on a short-term basis and would recommend the establishment of a short position by $1325. The daily RSI is above 80 and very overbought.

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