FX Trading Australia Market Weekly Outlook 23/05/2

23/05/05

FX Trading Australia – Weekly FOREX Market Summary

Comment

After a few months of uncertain direction the markets have finally had a clear trend to ride and they have seized it with both hands. Dollar had another great week which saw most majors going towards their yearly lows against a resurgent Greenback and its performance is all the more impressive given the unexpected sharp drop in foreign capital inflow.

The most striking thing about Dollar’s rebound is that it has been in an environment where the market knows Yuan revaluation is getting closer and Asian nations with their bucket full of Dollars would be looking to reduce their holdings in a gradual manner. Also U.S. interest rates are bound to pause after another 50 bps hike at 3.5% with 4 % the target seen by many even if the Fed would not acknowledge that. Manufacturing sector is showing signs of weakness as suggested by regional data while rate hikes coupled with cyclical patterns could lead to a slowdown in the Housing sector. And amid this, deficits remain on the high side with Greenspan admitting that Chinese Yuan revaluation is not likely to help in the reduction of deficits.

Thus in spite of these bearish factors why is the Dollar sitting on the verge of having a substantial rally that could reverse a fair bit of its steady 3 year loss against all majors?. The weakness in other regions is one of the reasons while the U.S. as of now, has better growth prospects for this year compared to other regions. We are at a stage in the global economy where an economy is being judged by lesser negatives around it rather by its positive factors. The recent environment of sudden spikes in oil prices has a greater detrimental effect on economies around the world than initially anticipated.

The U.S. in spite of its heavy reliance on oil has handled the high prices better than other regions and its economy especially corporations have shown a stronger resilience than their European counterparts. The simple fact is U.S. GDP is forecasted to be twice as much as the Euro-Zone for this year while unemployment rate is half of that of the zone which is sitting at 50 year highs.

However this weakness in the Euro is a blessing in disguise as it allows it’s fledging manufacturing industry some breathing space. Exports have started picking up and are bound to pick up substantially if the euro breaks below 1.20. ECB officials last year have been on record in saying that 1.20 is acceptable but 1.30 for the Euro is something they are not comfortable with.

The steady rise in the Pound, Aussie and the NZ Dollar has also been on the back of steady rate hikes, booming housing markets as well as general robust economic conditions. However all three are facing rate cuts next year as well as significant cyclical pullback in the housing market.

Thus the Dollar starts this week on a strong note with data expected to be in its favour and a solid outcome expected for Q1 GDP & Consumption data. Lack of any news in the Yuan issues, weak data from other regions and upbeat hawkish comments from U.S. Fed could send the Dollar towards levels seen around last September on all majors.

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 yearly lows and has broken below the recent strong support around 1.26. A clear break below the support zone at 1.2540 and into the 1.24 region could accelerate losses for the Euro. However decent sized bids lie around the 1.25 area. A break below could have broader repercussions and a massive shift in sentiment on its crosses as well. On the upside, 1.2625 is the first resistance mark followed by a stronger one around 1.2715 with any move above it leading to strong offers. U.S. data is eyed for further clues.

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 108.75-90 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 but offers also exist in the 109 region which holds mixed interest. On the downside, Dollar bids are strong around 107.15 followed by 106.55, 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 while the economy seems to be headed towards a sluggish state. Key support levels have broken below as speculators have liquidated their long positions with disdain. 1.8225 holds mild support for now with the next distant support seen around 1.8140 with a break below likely to accelerate losses for the Pound with mild support around 1.8075. On the upside mild resistance lies around 1.8355 followed by strong offers on any break above 1.8425.

AUD/USD – The pair is taking from other majors while the fall in commodity prices due to the strength in the Greenback is keeping the Aussie under a bit of pressure. The support zone around 0.7530-45 has held well so far but a break below 0.75 could lead to the acceleration in losses with 0.7440-55 the only strong support zone till 0.72. On the upside, resistance lies around 0.7605-15 with very strong resistance in the 0.7655-70 zone.

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

Australian Financial Services License 246566

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