AUDUSD, Risk Trades Likely To Struggle In Near Term

October 3 2010 by Spencer McKay in Forex Release |No Comments

The two major events of today’s session had already taken place before most of Europe had even hit their desks. The first came as the RBA announced a shock on-hold decision at their latest rate meeting, a result that means the cash target will remain at 4.50% for a fifth straight meeting. Market consensus had been looking for a hike of 25bps to 4.75% so the actual decision certainly caught FX markets on the wrong foot, leading to a quick 80 pip dip lower in AUDUSD immediately after the release and further sluggish trading to lows of 0.9542. The statement did still suggest that the RBA retains its tightening bias, revealing that although rates are “appropriate for the time being… it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target”. We feel that the most likely point for that next stage of tightening to occur is the November meeting. Meanwhile the BoJ also provided some interesting surprises, although the FX reaction would suggest they were not as surprising as the RBA news. The Japanese central bank replaced the existing rate target of 0.1% with a range of 0.0 – 0.1%; effectively easing monetary policy. The bank did not go so far as to implement changes to its purchases of JGBs however, instead leaving the purchase target at JPY1.8trn Although USDJPY enjoyed a rare spike to 83.85, it was short-lived, and rumours circulate that the market has become quite long on USDJPY upside in the past few days which is keeping a lid on the spot prices for now. With these two dovish central bank events and lingering worries about EU peripheral states playing on the mind of the market, we expect risk aversion to keep a lid on EURUSD and other risk trades in the near term.

14:00 USD ISM non-mfg index (Sep), 52.4 eyed; last 51.5.

The Risk Today: EurUsd Since we touched the top of the 4-month uptrend channel, EURUSD has been unable to generate any more upside momentum, and as a consequence, the stalled rally has resulted in the steeper 1-month uptrend channel being broken to the downside. It’s a bit premature to be calling for an all-out reversal (especially as we’re so comfortably above the 200-day moving average 1.3182), but expect the pair to meet very decent supply on any attempts to rally back towards its recent highs. First area of supply will be the back side of the 1-month uptrend around 1.3750, then this week’s opening high of 1.3809. The powerful 4-month uptrend resistance is also not far away at 1.3835, backed up by the 1.3850 resistance level – as such we feel that the combination of these significant levels cluttered overhead will be sufficient to call a near-term top on EURUSD. We feel that current levels are still attractive for short entry, preferring a stop just through 1.3850 (a resistance level in play since Feb & Mar this year). The obvious destination for intraday short positions is likely to be 1.3560 (30 Sep low), with the potential for an extended correction towards 1.3466 (38.2% fibonacci retracement of 1.6038 – 1.1876), and 1.3380 (28 Sep low). Should the correction be short-lived and the rally revived through our earlier resistance levels, then next resistance will be 1.3957 (50.0% fibonacci level of the entire sell-off from 1.6038), then the psychologically massive 1.4000 level.

GbpUsd GBPUSD is still being limited by supply at 1.5875 which is keeping pressure on the lower edge of our 1-month uptrend channel around 1.5800. The bears have already managed to puncture this trendline support a few times since the end of last week so our money is on the uptrend support breaking down before the range ceiling does. Should the uptrend channel be breached, then expect a quick trip down 1.5670, with the possibility of further downside to 1.5605-30 (22 & 23 Sep lows and 50-day moving average). Should the range floor hold, then it’s highly likely we stay in range-trading mode for a more prolonged period; Friday’s high at 1.5923 is the range ceiling, with formidable resistance still residing at 1.6000 beyond.

UsdJpy The BoJ easing overnight has allowed USDJPY to enjoy a rare spike higher, but clearly the move did not capture the market’s imagination all that much, as the brief spike through 83.85 resistance (touching a high of 83.99) has since been pummeled back lower. USDJPY’s tight 83.15 – 83.85/84.00 range therefore lives on, although we have been impressed with how robust the 83.15 floor has been; eliciting bounces on three separate occasions. As such we see a potential triple bottom formation on the hourly chart (albeit a small one). Although the heavy trading this morning makes it look very unlikely this pattern will ever become activated, we would be willing to go long should we get another break above 83.85, and aim for a target of 84.55 (measured as the depths of the bottoms applied to the point of break-out). It’s worth clarifying however that this bullish strategy is an ultra short-term play for us; we still feel it is inevitable that when (rather than if) this period of range-trading and consolidation subsides, we have another go at the 82.87 low from 15 Sep (before the BoJ first stepped in to drive the pair higher). Rallies higher are likely to meet supply at 83.85 (range highs), then 85.40 (24 Sep high), 85.90 (ceiling of supply since mid-August), 86.50 (5 Aug high), 86.90, and 88.07.

UsdChf The downside is once again under threat in USDCHF as the persistent supply has forced a break below 0.9708 (last Thursday’s lows and short-term support) and the bearish engulfing candlestick on the daily chart last week still hangs ominously over the price action. Unfortunately, current levels do not look attractive for fresh short position entry, so we are waiting to see either a bounce higher or a break lower before we get back onboard. Supply is likely to lurk around 0.9845 (Friday’s high), then 0.9920 (26 Nov 2009 low) before massive selling interest kicks in back towards parity. Indeed, that sweet spot approaching 1.0000 is exactly where we intend to jump in on the short bandwagon again (scaling in from 0.9960) as our position would then be protected by resistance at 1.0120 (20 Sep high), 1.0185 (17 Sep ceiling), then 1.0278 (10 Sep high) and 1.0340 (last seen on 24 Aug). The only levels of support eyed are the lower edge of the current downtrend channel at 0.9645 and the nearby 0.9639 low from 17 March 2008. These two levels in unison should hold the pair on a first visit, but we’d be happy shorting on a break below there (if it occurs) and holding on tight for a trip into the unknown below!

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