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Commodity Currencies Take a Beating After RBA Cuts to Record Lows

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ASIA/EUROPE FOREX NEWS WRAP

The Reserve Bank of Australia made history last night cutting its key benchmark interest rate to an all-time low at 2.75%, a 25-bps rate cut from 3.00% that generally surprised market participants. According to Bloomberg News, of the 29 economists surveyed, 21 had expected a hold; and the Credit Suisse Overnight Index Swaps were pricing in a 52% chance of a 25-bps cut. Needless to say, the bit of surprise has provoked some shuffling out of the Australian Dollar today, which has fallen to under $1.0200 against the US Dollar.

The timing of the RBA cut is interesting because of the data due this week: the May Chinese Trade Balance on Wednesday; April Australian labor market data on Thursday; and the April Chinese Consumer Price Index on Thursday. The RBA has tended to show its hand ahead of key data, as history shows. Back in June 2012, the RBA kept its key rate on hold despite an expectation for a 25-bps, and over the next three days, the trifecta of GDP-labor market-trade data all beat expectations. Thus, with a relatively unanticipated 25-bps cut today, I would be expecting weak Australian and Chinese data over the next few days, all of which could underpin a move in AUDUSD towards $1.0000 by the end of May.

Elsewhere in FX today, the Euro is the top performer as German Factory Orders for March beat expectations and raising hope that the economic slowdown in the core is exaggerated. But it is worth pointing out that a significant detractor from German firms’ competitive edge – the Japanese Yen’s weak exchange rate – truly didn’t materialize until late-March/early-April, when the Bank of Japan announced its full throttle easing policy. Thus, the impact of a higher EURJPY exchange rate, which is likely to stay elevated near or above ¥130.00 (barring significant fundamental distress in Europe) hasn’t been quite felt yet by exporters for a long period. I’m not inspired by this German data, and neither is the Euro it seems – after all, it is working on a second consecutive Inside Day versus the US Dollar.

Taking a look at European credit, a rebound in peripheral bonds has helped keep the Euro elevated today. The Italian 2-year note yield has decreased to 1.232% (-5.7-bps) while the Spanish 2-year note yield has decreased to 1.516% (-2.3-bps). Similarly, the Italian 10-year note yield has decreased to 3.858% (-5.4-bps) while the Spanish 10-year note yield has decreased to 4.052% (-2.9-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:45 GMT

EUR: +0.30%

CAD: +0.17%

JPY: +0.05%

GBP:-0.05%

CHF:-0.18%

NZD:-0.60%

AUD:-0.70%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.06% (+0.91%past 5-days)

ECONOMIC CALENDAR

Commodity_Currencies_Take_a_Beating_After_RBA_Cuts_to_Record_Lows_body_Picture_7.png, Commodity Currencies Take a Beating After RBA Cuts to Record Lows

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TECHNICAL ANALYSIS OUTLOOK

Commodity_Currencies_Take_a_Beating_After_RBA_Cuts_to_Record_Lows_body_Picture_6.png, Commodity Currencies Take a Beating After RBA Cuts to Record Lows

EURUSD: The EURUSD is working on a second consecutive Inside Day today after the German data, but a lack of bullishness has failed to produce a break towards Friday’s highs. I maintain that “there’s clearly significant selling interest above 1.3200, as a Double Top has formed coinciding with price contained twice at the 66 level in RSI. The high for May came on the first trading day of the month (just like in February), so technically I have a bearish bias. With respect to the Inside Day forming today, however, I am neutral. In either case, a print above 1.3245 would negate the bearish bias, while a move below 1.3030 (last week’s low) should spur further selling.”

Commodity_Currencies_Take_a_Beating_After_RBA_Cuts_to_Record_Lows_body_Picture_5.png, Commodity Currencies Take a Beating After RBA Cuts to Record Lows

USDJPY: No change: “As has been the case in the USDJPY pullbacks throughout 2013, the most recent sell-off in the pair saw the 8-/21-EMA structure compress close to the point of flipping to bearish, but price firmed and turned higher ahead of such an event. Accordingly, a move back towards 100.00 is in the cards, and a less-dramatic Bullish Ascending Channel appears to be forming once more. I like USDJPY higher now that US data has started to improve, and a move above 99.95 would warrant a long entry in the pair for a quick move towards 102.00.”

Commodity_Currencies_Take_a_Beating_After_RBA_Cuts_to_Record_Lows_body_Picture_4.png, Commodity Currencies Take a Beating After RBA Cuts to Record Lows

GBPUSD:The GBPUSD is working on a second consecutive Inside Day as price holds near the top rail in the ascending channel that’s been in place off of the March 12 and April 4 lows. Although near-term momentum has turned higher for the Pound, rejuvenated US data could be the spark for a return towards channel support, likely found near 1.5400 (mid-April swing highs) by the end of next week. While channel support today comes in at 1.5290/310, a move towards these levels seems unlikely at present time. It’s also worth noting that the recent consolidation could be a Bull Flag, which is given credence by the net short positioning of retail traders. In either case, I’ll be watching for a move above 1.5600/10 or below 1.5475/500 before a trade is taken.

Commodity_Currencies_Take_a_Beating_After_RBA_Cuts_to_Record_Lows_body_Picture_3.png, Commodity Currencies Take a Beating After RBA Cuts to Record Lows

AUDUSD: The RBA rate cut spurred a break of the 1.0200/20 level noted yesterday, and sellers have indeed been inspired to continue the push towards yearly lows just above 1.0100. The near-term bearish bias would be negated if price trade above 1.0385, the topside limit of the Bearish Evening Star candle cluster. It is worth noting that price and RSI are falling into levels where support has been found before; a break here would be cataclysmic. It is also worth noting that the uptrend off of the June 2012 and March 2013 lows broke today, suggesting a retest of 0.9850/900 might be in the cards over the coming weeks.

Commodity_Currencies_Take_a_Beating_After_RBA_Cuts_to_Record_Lows_body_Picture_2.png, Commodity Currencies Take a Beating After RBA Cuts to Record Lows

SP 500: No change: “The headline index remains strong although there is some theoretical resistance coming up (this is unchartered territory, so forecasting price relies heavily on valuations, mathematical relationship, and pattern analysis). As first noted in mid-April, 1625 should be a big figure where sellers come in: channel resistance off of the February 25 and April 18 lows (drawn to the April 11 high) aligns neatly with the 100% Fibonacci extension off of the December 28 (fiscal cliff) and February 25 (Italian election) lows. It’s hard to be bearish risk right now, but it is worth noting that the divergence between price and RSI continues, suggesting that few new hands are coming into the market to support price (recent volume figures would agree).”

Commodity_Currencies_Take_a_Beating_After_RBA_Cuts_to_Record_Lows_body_Picture_1.png, Commodity Currencies Take a Beating After RBA Cuts to Record Lows

GOLD: No change: “Price has rebounded nicely following the dramatic sell-off in the beginning of April, yet remains contained by the crucial 61.8% Fibonacci retracement at 1485/90. This “Golden Ratio,” if achieved with a weekly close above, would suggest that a major bottom is in place, setting up for a rally back towards 1565/70 at a minimum. If the US Dollar turns around, however (as many of the techs are starting to point to), then Gold will have a difficult gaining momentum higher.”

— Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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Analys från DailyFX

EURUSD Weekly Technical Analysis: New Month, More Weakness

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What’s inside:

  • EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
  • Resistance in vicinity of 11825/80 likely to keep a lid on further strength
  • Targeting the low to mid-11600s with more selling

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Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.

Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.

Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).

Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.

For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.

EURUSD: Daily

EURUSD Weekly Technical Analysis: New Month, More Weakness

—Written by Paul Robinson, Market Analyst

You can receive Paul’s analysis directly via email bysigning up here.

You can follow Paul on Twitter at@PaulRobinonFX.

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Euro Bias Mixed Heading into October, Q4’17

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Euro Bias Mixed Heading into October, Q4'17

Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.

EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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British Pound Reversal Potential Persists Heading into New Quarter

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British Pound Reversal Potential Persists Heading into New Quarter

Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.

GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, please fill out this form

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