Australian FOREX Weekly Outlook 20/08/2007

Federal Reserve cut fund rate to induce liquidity. BoJ rate decision to move markets

20/08/07

last week’s currency trading review

The Dollar rallied for the most part of the week as market uncertainty and drop in global stock prices ensured ongoing risk aversion. Economic data took a back seat to moves in equity prices, in which investors looked to as an indication of market stability. The Federal Reserve was heavily involved throughout the week, first continuing to inject funds and ended the week by discounting the fund rate by 0.5% in an attempt to induce further liquidity which brought to end a succession of session highlighted by USD strength. The Euro in similar fashion was governed by moves on equity markets and other majors. By mid week the Euro was experiencing it worse slide against the USD in over 6 months, weighed heavy upon the EURJPY being sharply sold off. The EURUSD closed last week at 1.3486 having opened at 1.3695. The Japanese was the most influential currency in the FX market throughout the week as ongoing risk aversion in wake of the credit crunch insured the Japanese Yen was relieved of much of its pressure in funding high yielder’s. Significant carry trade unwinding ensured the AUDJPY and the NZDJPY fell 9% and 10% respectively. The USDJPY closed last week at 114.30 having opened at 118.56. The GBP also suffered as the highest yielding currency of the G7 nations, spiraling downwards against the Japanese Yen, bringing the GBPUSD down with it. In data news BoE minutes on Wednesday showed a unanimous vote for keeping rates unchanged, which further weighed against the Sterling. The GBPUSD opened at 2.0220 to close at 1.9822. The AUD saw the RBA Monetary Policy Statement released in hawkish fashion yet did little to hinder the sell off on the high yielding currency. That being said the AUD held firm above key psychological levels of 0.8400 in the early part of the week, and it wasn’t until breaking through the level in which markets witnessed widely volatile sell off. The AUD closed last week at 0.7741 having opened at 0.8422.

The forex trading week preview

In the States the severity of the credit crunch was confirmed by the Fed Fund rate cut late last week, with plenty of attention to surround the credit markets. In data news, Durable Goods and New Home Sales are out on Friday. We will provide our previews and reviews of these data releases in the daily summary.

In the Eurozone the most eagerly watched piece of data will be in the form of the ZEW survey with reports suggesting a sharp decline on Tuesday. Other data will include Friday’s PMI release. In the UK will await the GDP release on Friday. . We will provide our previews and reviews of these data releases in the daily summary.

In Japan arguably will release the most influential data release with the BoJ rate announcement on out on Thursday.We will provide our previews and reviews of these data releases in the daily summary.

In Australia a very quiet week is scheduled with currency expected to trade on other majors. We will provide our previews and reviews of these data releases in the daily summary.

CURRENCY PAIR IN FOCUS

AUD/JPY With recent credit market turmoil from the US being felt globally, carry trades have been unwound as a response. With the AUD/JPY a leader on the way up when carry trades were in full swing, it was expected it would be the leader on the way down once risk aversion set into the markets. As such, the AUD/JPY last week was sold off in what was one of the most volatile weeks in years in the FX market, and the end may not be near! The AUDJPY has broken key support at 90.00 but has climbed back over it recently. Look for the 90.00 level to act once again as support with resistance situated around the 93.50-94.00 area.