Dollar weaker on diverging policy expectations

Since the turn of the year, AUD/USD has been trading within a triangle pattern. Currently resistance resides just above current levels near 1.0160/70, while support can be found just below parity at 0.9980/90. Technically speaking, since the trend prior to this consolidation pattern was higher and a triangle pattern is considered a continuation pattern, then it is reasonable to expect a breakout to the upside over the coming days. More specifically, it appears we have just completed wave-d within the triangle pattern, consequently the finally pullback towards 1.0050/1.0100(wave-e) should be viewed as a buying opportunity before a breakout higher. Keep in mind a direct move higher is still plausible and would not invalidate the pattern or our view as we still anticipate higher prices in the week(s) ahead. Depending upon the actual point of breakout, the measured move objective on a move higher is approximately 1.05 to 1.06.

Next week sees a plethora of high impact data in the land down under which could potentially spark such a move. On March 1st there is the Feb. PMI-Manufacturing, RBA meeting, Jan. Retails Sales and 4Q Current Account Balance, the 2nd sees 4Q GDP and Jan. New Home Sales and the 3rd sees Feb. PMI-Services, Jan. Building Approvals and Jan. Trade Balance (dates are local to Australia ).

Higher commodity prices here to stay?
Risk aversion reared its ugly head this week as jitters of spreading turmoil in the MENA (Middle East and Africa ) region jolted market participants. Flows poured towards safe haven assets which saw precious metals and US treasuries surge higher – XAG/USD made record nominal highs around $34.33/oz. this week. Crude oil was the biggest beneficiary of MENA unrest with close to +10% (WTI) weekly gains on heightened fears of supply disruptions out of Libya.

While safe haven flows have been noted as the main source to the recent commodity boom, accommodative monetary policy has played a more significant role in the broader uptrend. Low global policy rates have significantly accelerated commodity price gains in the last decade relative to the slower pace of acceleration witnessed in the decade prior when global policy rates were broadly higher.

Recent developments have seen a number of central banks consider tightening sooner rather than later, mainly the ECB and BOE. However, the efficacy of renewed hiking cycles in controlling global commodity prices is debatable. Global growth outlooks have been improving but remain hampered by rising geopolitical and economic uncertainties. The extent of monetary policy tightening that both the UK and Euro-zone would be able to absorb considering their respective situations – negative GDP prints in the UK and EZ periphery issues – is likely on the lower end of the spectrum. Furthermore, target rates in the U.S. and Japan are likely to remain near zero for the entirety of 2011 and will likely see depressed policy rates for developed economies for the remainder of the year. We think this may continue to support commodities with the pace of price acceleration to depend on external risk events. Judging from what we’ve seen with Egypt and now Libya in just a matter of weeks, the possibility for a continuation in rapid commodity price gains cannot be dismissed.

Key data and events to watch next week
United States: Monday – Jan. personal income & spending, Jan. PCE deflator, Feb. Chicago PMI, Feb, NAPM-Milwaukee, Jan pending home sales, Feb. Dallas Fed manufacturing activity index, Fed’s Dudley to speak Tuesday – Jan. construction spending, Feb. ISM manufacturing and prices paid, Fed Chairman Bernanke to give semiannual testimony at Senate Wednesday – Feb. ADP employment change, Fed’s Beige Book, Fed’s Bernanke to give semiannual testimony at House Thursday – Weekly initial jobless claims and continuing claims, 4Q F nonfarm productivity and unti labor costs, Feb ISM services, Fed’s Bernanke and Kocherlakota speaks Friday – Feb employment report, Jan. factory orders, Fed’s Yellen speaks

Euro-zone: Monday – German Jan. import price index, EZ Jan. CPI Tuesday – German Feb. unemployment change and rate, German Feb. final manufacturing PMI, EZ Jan. unemployment rate Wednesday – EZ Jan PPI Thursday – Feb final German and EC services PMI, 4Q prelim EZ GDP report, EZ Jan. retail sales, ECB announces interest rates & press conference Friday – ECB’s Noyer, Weber, Draghi & Orphanides speak in Paris

United Kingdom: Tuesday – Feb. Nationwide House prices, Feb. manufacturing PMI, Jan. net consumer credit, mortgage approvals Wednesday – Feb. construction PMI Thursday – Feb. hometrack housing survey, services PMI

Japan: Monday – Jan prelim industrial production, retail trade, large retailers’ sales, Feb. small business confidence, Jan. vehicle production, housing starts, construction orders Tuesday – Jan jobless rate, household spending Thursday –4Q capital spending

Canada: Monday – 4Q current account, Dec. and 4Q GDP Tuesday – Bank of Canada rate announcement Wednesday – Jan. industrial product price and raw materials price index Friday – Ivey PMI

Australia & New Zealand: Monday – NZ trade balance data, AU 4Q inventories, AU Jan private sector credit, Feb. NBNZ activity outlook and business confidence Tuesday – NZ 4Q terms of trade, AU Feb. AiG performance of mfg index, AU 4Q current account balance, net exports, AU Jan. retail sales, NZ ANZ commodity price, RBA announces cash target rate, RBA commodity price index Wednesday – AU Jan HIA new home sales, AU 4Q GDP Thursday – AU Jan building approvals, trade balance, AU Feb. AiG performance of service index

China: Tuesday – Feb. manufacturing PMI Thursday – Feb. services PMI

Brian Dolan is chief currency strategist at www.FOREX.com.

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. 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. 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.

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