FX Trading Australia Market Weekly Outlook – 21/02

Dollar appeared directionless towards the end of last week with no surprises as crucial events for the week were within market’s expectations. Greenspan repeated his rhetoric and maintained the hawkish tone for rate hikes. The prospect of high interest rates is biggest supporting factor for the Dollar at the moment, but not even Fed officials are sure about the real target but are likely to be between 4-5%. Inflation data on Wednesday would be keenly eyed to see if it can match the sharp rise in PPI.

Structural deficiency worries still persist for the U.S. economy but cyclical factors are supporting it. One of the arguments for the Dollar’s rise at the start of the year had been its better growth prospects than compared to the Euro-Zone. However the Zone’s economy led by Germany and France has shown solid resilience and growth forecasts have increased. Official rhetoric from the Euro-Zone has simmered down, not just because of Euro’s pullback from its lofty heights but also due to the increase in Consumer spending and domestic demand.

One thing is certain many Central Banks across the globe would be looking to reduce their Dollar holdings over the course of this year. Some of them have held unusually large holdings over the years and a reduction is a natural progression in keeping with the reality of the existing situation. Asian nations led by Japan could be at the forefront of this move perhaps more during the latter half of the year.

The commodity bloc maintained his status as the market’s favorite with the New Zealand Dollar setting its eye towards all time highs and the Aussie looking to break over 0.80. But the question is do these two economies have the stomach to bear this higher rate against the Greenback in the long run? Possibly not, with warnings from Central Banks and possible intervention likely if they continue on their current uptrend especially if other majors don’t follow suit. Already, the Reserve Bank of Australia’s Gov. MacFarlane has said the deficit poses a risk and economy is bound to slow down. IMM positioning results suggest speculators are record net long on the Aussie with a risk of broad liquidation if it can’t breach 0.80 in the near term.

Economic Releases

Another light data week, with U.S. markets closed on Monday and key U.S. data kicking of from Tuesday with the release of the Consumer Confidence for February expected to stay around unchanged levels. Wednesday has the crucial CPI data with expectations of an inch higher given the unexpected rise in PPI while the minutes of the Fed’s meeting should be on the same lines as Greenspan’s testimony. Thursday has Durable Goods orders expected to decline slightly while the revised 4Q GDP estimate on Friday should see an upward revision.

For the Euro-Zone, key data starts from Tuesday with French CPI which is expected to be slightly lower while Consumer Spending should stay steady. Breakdown of German GDP will provide clues for the weak spots in the economy while the Zone’s Trade Balance is expected to inch higher. Wednesday has German IFO business climate survey release with expectations of further inch higher keeping with the recent trend. Friday has German GFK Confidence report & French Biz Confidence Indicator both are expected to inch higher while French PPI should like the rest of the region come in higher due to high oil & energy prices.

For Japan, key data starts from Wednesday with the release of Tertiary & All Industry Activity index with expectations of a decline in both. The Merchandise Trade Balance data should shrink for January. Thursday has Nationwide Department Store sales release with expectations of a decline as consumer spending remains stiffened. Friday has Tokyo as well as National CPI both expected to decline as prices remain depressed.

For the U.K., key data starts from Wednesday with the CBI Industrial Trends survey with expectations of a slight improvement. Also on tap are the minutes of BoE’s meeting which should be on expected lines. Friday has the revised 4Q GDP figure with upward revision likely given the rise in exports.

FOREX Technical Scenario

EUR/USD – The Euro has found good support and buying interest above 1.2950 but the attention is focused on its upside potential with strong resistance in the 1.3125-50 zone. A break leads us to next resistance level at 1.3210 with only a broad Dollar fall likely to see further gains otherwise it is likely to pull back. It is likely to be range bound but a break below 1.2950 could accelerate losses.

USD/JPY – The Yen has seen sentiment shift against it but technical picture remains mixed in the 105 region, any Dollar foray above 106.25 should attract selling interest with stronger one above 106.75. On the downside decent Dollar bids lie around 105 with stronger ones in the 104.25-50 zone.

GBP/USD – The Pound has held firm on the back of steady data in the last few weeks and has closed around 1.8950 which was a strong selling area just recently. Still very strong option barriers and offers lie in the 1.8975-1.9025 zone. A break above leads us to another strong resistance zone of 1.9055-75. On the downside 1.8850 holds mild support with a decent one around 1.8745 and very strong support in the 1.8640-55 region. In ability to break above 1.90 could send this pair into a broad range.

AUD/USD – The Aussie would have been above 0.7950 by now but for cautionary comments from RBA’s Gov, nonetheless it has pulled up strongly after the initial fall indicating very strong support and buying interest above 0.7775-0.78 but a break below targets the second line of support at 0.76. Strong option barriers continue to exist from 0.79 all the way to 0.80 which has prevented it to gain further so far. But its continuous ability to stay above 0.78 could eventually push it higher towards 0.80 be it in a slow and gradual manner.