Australian FOREX Daily Oulook 22/07/2005

22/07/05 (05:00 GMT)

• Dollar fell across the board on an eventful day which seemed straight out of a Hollywood thriller. The markets were jolted by the unexpected announcement from China to re-value the Yuan and remove its fixed peg to the dollar in favour of a basket of currencies while the London bombings added to the volatility in the market. The Yuan has gone from 8.3 to 8.1; however this step is more likely to be symbolic than effective. This event has mixed repercussions for the dollar with a sell off in Central Banks holdings likely but it also has long term positives for the US economy. The Fed would no doubt be very happy with its recent heavy criticism finally bearing some fruit. Meanwhile U.S. data continued to be strong with jobless claims slipping lower and leading indicators rising higher than expected.
  

• Euro once again found a strong supporting factor to help it in remaining firm above the 1.20 mark. The fact that China is looking to diversify its current dollar holdings into a basket of currencies would no doubt lead to the Euro benefiting the most. This event has changed the sentiment for the Euro to a bit less negative however for the Euro to make a substantial rally a decisive break above the pivot 1.23 mark is required which could only come about on its fundamentals outshining the Greenback’s. Earlier data was a bit positive with French consumer spending and Italian retail sales coming in better than expected.

• Yen managed to skyrocket by 300 points on the Yuan revaluation issue. However it has given back nearly half its gains due to increased chances of Japanese officials intervening to stiffen its gains. But this has fit in well with the Japan’s plans as well, as the Yen was already on a very weak footing and not around its 104 highs a few months back. Yen would be one of the major currencies in Chinas proposed basket and this increases the Chinese buying power for imported Japanese goods which are very popular. However a failure of local fundamentals to pick up from its sluggish state could send the Yen back to its recent lows.

• Pound experienced yet another day of volatile exaggeratory movements primarily due to another terrorist scare in London. Earlier the much stronger than expected retail sales outcome due to heavy discounts offered coupled with the broad based decline of the Greenback on the Yuan story helped it inch back above 1.76. However the strong technical resistance in this region as well as the London events led to a massive sell off. Expectations of a rate cut in next months meeting persist and sentiment remains in negative territory.
  

• Australian Dollar rallied strongly and broke resistance around 0.76 with ease as Australia is one of the nations that stands to gain the most from China’s move. This has increased China’s buying capacity which translates to the further increase in Aussie exports and would help reduce trade deficit with Chinese imports becoming more expensive. Also the growing importance of Australia as a trading partner could lead China to include the Aussie dollar with a substantial weight in the basket of currencies. For now, resistance exists on any moves above 0.77.

EUR/USD – Yesterday’s low was 1.2099 and high was 1.2253.
The pair closed at 1.2157.

The Euro like others rallied sharply on the Yuan revaluation news. Strong selling interest within the 1.22 region prevented it from gaining further, however sentiment has become neutral as a result of this and near term direction remains a bit mixed. Immediate resistance is seen in the 1.2240-55 zone with the break above likely to bring into focus the pivot resistance mark of 1.23 with a stronger selling interest above that mark. A decisive break above could make it hard for the dollar to reverse its recent losses. Decent support has now moved up to the 1.2090-1.2110 zone. Any foray below that mark towards 1.20 should lead to decent buying interest with the break below likely to accelerate losses for the Euro.

Key resistance is seen at 1.2255 followed by 1.2315 while support starts at 1.2105 followed by 1.1990.

USD/JPY – Yesterday’s low was 109.86 and high was 112.82.
The pair closed at 110.55.

Yen has pared back half of its gains as prospects of Japanese intervention increase following the Yuan story. It has stabilized around 111 for now with decent dollar buying interest around 110.50 with the break below likely to bring into focus the very strong support zone at 109.75-90. Resistance has now moved down to 112 with any break above likely to lead to strong selling interest until further news from China. A break above 113 could shift the momentum back in the dollars favour; conflicting moves are likely till the market is able to comprehend yesterdays events.

Key Resistance is seen at 111.90 followed by 112.75 while support starts at 110.45 followed by 109.80.

GBP/USD – Yesterday’s low was 1.7398 and high was 1.7613.
The pair closed at 1.7535.

This pair experienced the most volatile moves due to the events in London, but for now has stabilized in the technically mixed interest region of 1.75. Irrespective of the dollars general direction selling interest should intensify on any moves above 1.76. If the Pound fails to break above this mark then it risks further acceleration of losses. Mild support has moved up to the 1.7475-90 region, with a decisive break below likely to accelerate its losses towards 1.74 but bottom pickers are expected to buy on any dips below this mark.

Key Resistance is seen at 1.7605 followed by 1.7655 while support starts at 1.7475 followed by 1.7405.

AUD/USD – Yesterday’s low was 0.7561 and high was 0.7665.
The pair closed at 0.7639.

The Australian Dollar has benefited the most apart form the Yen and easily broke above strong resistance mark at 0.76. For now mild resistance exists in the 0.7650-65 resistance zone with strong selling interest on any break above 0.77. This region is crucial and a decisive break above could shift the sentiment back in the Aussies favour. Support has moved up to the previous strong resistance mark of 0.7555 with buying interest continuing to remain firm on dips below 0.75.

Key Resistance is seen at 0.7675 followed by 0.7715 while support starts at 0.7555. followed by 0.7490.

Kunal Sharma
Forex Analyst

Easy Forex Pty Ltd. (Australia)
E-mail: kunal@easy-forex.com

Australian Financial Services License 246566

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