Australian FOREX Weekly Outlook 25/07/2005

Trading Forex Online with Easy Forex

25/07/05

FOREX – Australian Dollar Market Comment

Most majors ended the week around the same levels as it started it and one could be excused in thinking that an uneventful week passed by where in reality we witnessed a historic step, be it a small one, undertaken by China. Yuan was finally revalued and the decade long peg to the U.S. dollar was removed in favour of a basket of currencies which are yet to be announced.

The jury is still out there in terms of the actual effects of this move and who stands to gain the most from it. Well for starters it would lead to less demand for U.S. treasuries and increased demand for the currencies included in the basket. Apart from the Euro, currencies in the Asia Pacific region are likely to make up the bulk of the basket. This action has led to smiles all around with U.S. lawmakers no doubt pleased but won’t be completely satisfied with just a 2.1% revaluation. This small step is expected to be followed by a few more steps in this direction and until a realistic level is reached for the Yuan expect U.S. officials to maintain their rhetoric.

Now in terms of the dreaded U.S. Trade Deficit, it can be said with near certainty that the effect of this move would be negligible. In simple terms the Deficit is a huge mountain while this modest revaluation step is like a small stone, thus the latter is unlikely to budge the former. What it might do though is reduce the bilateral deficit with China as this has increased the buying power of the Chinese government and consumers alike. There is no doubt that China is opening up in pursuing assets previously unthought of, like the bid for American oil giant Unocal. China’s strategy up till now has been to be on the defensive by strengthening its economy and building reserves but its shifting gear by going on the offensive and it is in its best interests to have a stronger currency to increase its global buying power. But the American importers who are used to lower costs have already started looking for alternate lower costs providers. And they don’t have to look too far, with Retail Giant Wal-Mart shifting its textile operations to India, after all the demand for Chinese products has been more on cost than quality factors.

Dollar had yet another strong data week which can’t be ignored and continuous weak data results from other regions presented the market with an easy decision to buy back the Greenback towards the end of last week. Apart from poor fundamentals, geo-political factors are also turning sentiment against the Euro and the Pound. German elections are announced for September with even chances of Schroeder retaining his presidency. One of the main election issues would be the slow economic conditions and record post world war unemployment levels which would weigh heavily against the incumbent government. For the Pound the market is almost certain on a rate cut next month while the continuous terror threats is not exactly a confidence booster for an economy which is slipping rapidly into a sluggish state.

The effect of Yuan revaluation on the Yen has some mixed connotations but overall very positive effects are seen for the economy but the main benefit stems from the fact from the huge consumption of Japanese products by China is likely to increase further. For Commodity bloc, who have been hit by a decline in exports due to the higher value of their currencies, this revaluation step has come at the right time as it increases the buying power of China to satisfy its huge appetite for commodities.

Two event risks for the market include a sudden announcement by China of either yet another small revaluation step or the announcement of the selected currencies in the chosen basket and their percentage allocations. Another risk stems from the fact that terrorist events around the globe are increasing with the second London bombing attack perpetrators still at large. For these scenarios the market is likely to be caught off guard.

FOREX Related Key Economic Releases

Forex USA

Forex Euro-Zone

Forex Japan

Forex U.K.

EUR/USD – The pair has retraced all its gains post Yuan revaluation with strong offers above 1.2250 again proving too much to handle and a sell off towards 1.20 ensued, thus ending the week around the same levels as it started. Immediate support is seen in the 1.1930-45 support zone with decent buying orders around 1.19. A decisive break below could accelerate its losses which should bring into focus the crucial pivot support zone of 1.1850-75. The Euro has managed to make an impressive recovery from this level in the past and a break below would send it towards its lowest level in 2 years and would accelerate its losses with distant support around 1.1755. On the upside, 1.2145 holds immediate resistance with the 1.2145-1.2250 region holds mixed technical interest. Stronger resistance exists around the 1.2255 mark with decent offers lined up to 1.23. Very strong resistance lies in the 1.23 region but a deep foray into this region could shift the momentum in the Euro’s favour.

USD/JPY – The pair as expected experienced the most volatile moves post the Chinese decision with a 300 point rally breaking key support levels. In the end it took the very strong support zone of 109.70-85 to lead a reversal with pair back in the technically mixed interest region of 111. For now, mild Dollar bids persist around 110.45-60 with a break below likely to again bring into focus the support zone at 109.70-85 with strong Dollar bids around that region. Only a decisive break below that region could shift the weekly sentiment back in the Yen’s favour, with any foray below the 109 mark to accelerate its gains. Resistance has moved down to the 112.10-25 with a decisive break above likely to bring into focus the strong resistance zone at 112.95-113.10. Only a deep foray into the 113 region would shift the sentiment against the Yen otherwise direction is a bit mixed.

GBP/USD – The pair remains in deep negative territory and is failing to reverse its losses with immediate support seen in the 1.7320-35 region with decent bottom picking buying interest around 1.73 with a break below likely to accelerate its losses. Distant support is seen in the 1.7230-50 region with a break below risks broad liquidation and could lead bulls to throw in the towel. On the upside mild resistance lies in the 1.7475-90 zone with a break above bringing into focus the 1.7555 strong resistance mark with decent selling interest above. Any break into the 1.76 region would lead to strong offers which are lined all the way up to 1.77. Only a break above 1.77 would subside the risks of further losses for the Pound.

AUD/USD – The Australian Dollar in spite of its impressive rally would struggle to break decisively deep into the 0.77 region with strong selling orders intensifying within the 0.7750-0.78 region. Only a break above 0.78 raises hopes of a strong rally otherwise it would struggle to inch higher from here on. On the downside, support has moved up to the 0.7540-55 region with a break below brings into focus the very strong support and buying interest around the 0.7475-90 region. A decisive break below this zone would accelerate losses for the Aussie with distant support and bottom picking interest seen around 0.7390.

Kunal Sharma

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

Australian Financial Services License 246566

Easy-Forex makes no recommendations as to the merits of any financial product referred to in this website, emails or its related websites and the information contained does not take into account your personal objectives, financial situation and needs. Therefore you should consider whether these products are appropriate in view of your objectives, financial situation and needs as well as considering the risks associated in dealing with those products