FX Trading Australia Market Weekly Outlook 16/05/2

FX Trading Australia – Weekly FOREX Market Summary

Comment

There shouldn’t be any major surprise expressed over the Dollar’s sharp turnaround if events of the past few weeks are seen in the broader context of cyclical and historic economic patterns. Dollars steady decline over the last few years has been on the basis of its high Twin deficits which are unsustainable and expected to affect U.S. growth potential dragging the Dollar down with it. While not much has changed in those regards, what has changed is the potential of other regions namely the Euro-Zone to take over the mantel of being the single largest currency from the Dollar and the U.S.’s high yield advantage.

The relatively smooth transition by member nations to adopt the Euro led to euphoria over the growth prospects of the Zone which led the Euro to appreciate from 0.85 to 1.35 in 3 years. But several chinks have emerged in the Euro-Zone’s armour with continuous stream of weak data outcomes. What looked like a minor cyclical downturn is threatening to have huge ramifications for the economy with unemployment at post WW2 levels. Companies are suffering from high oil and high raw material prices thus leading to low hiring while this is leading to low consumer spending.

A few other factors affecting the Euro-Zone are the voices of discontent from politicians on the policies of the ECB. While the ambitious plan of expansion for the Euro adopting countries particularly in the East could lead to countries pushed in sooner than is viable economically for political gains. As history has shown us, unity is maintained when things looks rosy but could quickly dissipate on signs of worsening conditions.

Speculators driving the Pound aggressively in recent times on the prospect of rate hikes got a bolt from the blue on the dovish tone of the BoE’s quarterly inflation data. This means that they are greater chances of the rates staying on hold or even reduced, rather than the other way around. Recent slowdown in consumer spending is also worrying along with the now familiar steady decline in House prices.

The Yuan story has subsided after China’s Central Bank Gov. pouring cold water on hopes of a revaluation in the near term. Meanwhile deflationary conditions loom over the Japanese economy exports declining. But the Japanese officials remain optimistic on the pick up in growth while the increase in U.S. consumer spending should also help the Japanese economy.

Dollar’s sharp rally has sent commodity prices slipping with Gold breaking below the pivot mark of $420 while oil prices broke below $50 pb. The Commodity bloc has slipped accordingly with the New Zealand Dollar suffering the most losses on the back of an increase in deficit as well as bearish comments from the Finance Minster on the nation’s economic outlook.

Thus in the current scenario of strong U.S. data and weakness in other nations coupled with Fed remaining on the measured path as the Dollar heads towards significant yield advantage or closing the gap with high yielders, left the market with no choice other than backing the Greenback. The risks, of course are dovish comments from Fed officials in regards to the rate outlook and a slow down in corporations & consumer spending.

Key Economic Releases

USA

Euro-Zone

Japan

U.K.

Technical Scenario

EUR/USD – The pair’s losses have accelerated as sentiment has shifted considerably in the Greenback’s favour. It has gone towards its 7 month lows and has broken below the 1.26 mark with first line of support seen at 1.2575-90. A clear break below targets decent sized bids starting from 1.25 up to 1.2550. For the Euro to have any hopes of another strong rally upwards it is crucial for the 1.25 mark to hold. A break below could have broader repercussions and a massive shift in sentiment on its crosses as well. On the upside, 1.2695 is the first resistance mark followed by a stronger one around 1.2755 with any move above it leading to strong offers. In case of some bearish news for the Greenback 1.29 should be the ceiling for this pair.

USD/JPY – The pair is hurt by dual events of broad Greenback strength as well as the Yuan revaluation issue toning down. Dollar has broken through levels of strong offers and has broken above 107.50 with mild resistance around 108. Very strong resistance exists in the 108.55-70 zone which targets the highs so far this year for this pair. A clear break above 109 which is a crucial mark could accelerate losses for the Yen. On the downside, Dollar bids are strong around 106.55 followed by 105.50, however it remains at risk of slipping on any Yuan revaluation story.

GBP/USD – The pair has seen the biggest shift in sentiment against it as its biggest supporting factor i.e. prospect of high interest rates is looking very uncertain. Key support levels have broken below as speculators have liquidated their long positions with disdain. 1.85 has been broken below with mild support in the 1.8440-60 zone. A break below the very crucial and pivot region of 1.8375-1.8425 which has held strongly for most of last year could accelerate losses for the Pound. On the upside, mild resistance exists around 1.8570 followed by stronger one around 1.8655-70.

AUD/USD – The pair is taking from other majors while the fall in commodity prices due to the strength in the Greenback has led to the fall of two curial support marks around 0.7655 and 0.76. The next focus is on the lows for this year around 0.7540 with decent sized bids around 0.75 with a decisive break below that mark likely to lead to acceleration of losses. On the upside, resistance lies around 0.7685-0.77 with very strong resistance around the 0.7755 mark.

Kunal ‘Kris’ Sharma
Forex Analyst
E-mail: kris@easy-forex.com

Australian Financial Services License 246566

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